Many organisations are undertaking digital transformation projects that integrate new technology into their business environment. A service level agreement (SLA) is a critical component of any successful long term IT project.

In this two part series, we look at how organisations can draft and implement effective SLAs. Part 1 looks at setting expectations, the initial risk assessment, and common structuring approaches. Part 2 examines service level measuring and reporting, addressing change management, and service credits and other remedies.

Why do I need an SLA?

Technology contracts often include a written SLA as a schedule to the main contract. The supplier’s performance against the service level standards in the SLA is measured and reported on as part of the ongoing performance management.

The SLA is like the ground rules for the service. It helps assess the success of service delivery and describes the financial consequences of service failure. From the customer’s perspective, an SLA aims to make the supplier accountable and encourage good performance. If the supplier fails to meet the defined level of service, the customer will usually be entitled to some form of remedy, such as a service credit.

Typical contents of an SLA

A typical SLA sets out:

• A description of all of the service levels that the supplier commits to meet or exceed

• How those service levels will be measured and reported on

• Corresponding remedies if one or more of the service levels are not met

• A process for changing or removing service levels

Well-drafted SLAs will define objective and measurable assessments of financial and non-financial performance that the supplier must meet. They also set out the responsibilities of the parties.

Setting expectations

Service level expectations can be set in a number of ways, such as by reference to the existing performance standards of the customer or the current incumbent service provider. Service level expectation can also be set to specific industry or market requirements, or to the customer’s requirements set out in a tender.

IT contracts often state that if no service levels are specified for a particular service, the supplier must achieve levels of performance that a well-managed, competent and experienced service provider would achieve when performing a similar service.

Sector specific service levels

More complex and strategic technology contracts tend to require more detailed SLAs. Service level requirements can also be sector specific. For example, the Central Bank of Ireland requires customers operating in the financial services industry to include clear quantitative and qualitative service levels in all material outsourcings.

Initial risk assessment

Standard-form SLAs

In the early stages of negotiations, a supplier will often propose its standard form of SLA. Indeed, a supplier may only be willing to offer its standard service levels for commoditised technology offerings, including many cloud-based products. The supplier will argue that its pricing is calibrated by offering this uniform level of service across all of its customers.

A customer should carefully review standard-form SLAs and ask itself if the service levels and consequences of service level failure are adequate in the context of the customer’s business objectives.

Some suppliers may be willing to offer different service levels at various price ranges, which will require the customer to navigate a trade-off between the service levels and cost.

Customer’s risk assessment exercise

In larger transactions, a supplier may agree to negotiate a customised service level scheme. If the market for the technology service in question is competitive, it is common to see suppliers being more flexible when it comes to agreeing to bespoke SLAs.

A good starting point when preparing a customised service level scheme is to ensure the service specification clearly articulates the scope and descriptions of the services. This in turn enables easier identification of appropriate service levels and remedies.

Once this scoping exercise is complete the customer can perform an initial risk assessment. Such risk assessment should identify key supplier obligations, and consider what the appropriate service level metrics should be. The initial risk assessment should also estimate the likely risk of the supplier failing to meet its obligations, and assess the possible losses it may suffer from that failure.

Defining effective service levels

An effective service level scheme requires careful planning to negotiate, structure and draft. Ideally, the service levels:

• Will be tailored to the particular requirements of the services in the context of the customer’s business objectives

• Can be reliably and objectively assessed in a way that has meaning for the customer

• Encourage desirable behaviours from the supplier

• Set realistic expectations and address matters that are within the supplier’s control

• Are contractually binding and not expressed as aspirational targets.

Common service levels may address the percentage of time a service is available to use, or the time it takes the supplier to start remedying a fault from the time of first reporting.

Why a targeted approach is best

SLAs can require significant resources and cost to implement and manage.

When negotiating service levels, parties should focus on the most important elements of the service and avoid an approach that tries to track and report on every contractual obligation or seek service level data that is difficult to measure or obtain.

A non-targeted approach that is too detailed or onerous to operate has a number of drawbacks. For example, a customer that includes all minor failures of the supplier can make the service level scheme awkward to manage and less effective as a contractual management tool. It can also trivialise the overall SLA and frustrate the relationship between the parties.

In a similar way, suppliers should be wary of very ambitious customer-set service level expectations, particularly where the supplier is providing the service for the first time.

The ideal service level structure

In our experience, a successful SLA usually addresses:

• A clear description of each service level metric being measured

• How that service level will be measured, including any example calculations

• The measurement period - weekly; monthly or another frequency. Different service levels may apply during business hours and outside of business hours

• Any exclusions that apply

• Priority definitions that define the importance of the service function

• Reporting process

• An escalation path for unresolved issues

• Clear definitions for any specific terms that are used.For example, “Fault”, “Downtime”, “Response Time” etc.

Conclusion - importance of setting the expectation

The SLA is an important contractual document that sets the expectation between the supplier and the customer in a digital transformation project. Not all SLAs are the same. Customers should ensure they undertake suitable due diligence and assessment of the SLA on a case-by-case basis. Drafting well-defined service levels will, over the term of the project, provide clarity on the parties’ relationship, encourage good performance and improve customer satisfaction.

Next time

In part 2 we will look at service level measuring and reporting, addressing change management, and service credits and other remedies.