Service Level Agreement (SLA): What it is and Why you need one

Contractual negotiations with a service provider and/or vendor, are not always the most fun part of doing business (more like never), however, once you manage to negotiate a win-win agreement, your business will thank you for it. It is crucial to establish a tangible mechanism for monitoring the provision of services and verifying adherence to the agreed-upon terms throughout the contract period so that your business relationship remains fruitful and with as little friction as possible and such mechanism is precisely the Service Level Agreement (SLA).

The service-level agreement (SLA) is a crucial element of vendor contracts and/or service agreements, easily found particularly in the field of technology and outsourcing. As a rule, we use SLAs to define the expected level of service from the vendor/service provider by specifying all the metrics used to measure performance, along with the remedies or penalties in case the agreed-upon service levels are not met. The SLA consolidates information about all contracted services and their expected reliability into a comprehensive document. It clearly outlines the metrics, responsibilities, and expectations, ensuring that both parties have a shared understanding of requirements and cannot claim ignorance in the event of service issues.

By clearly stating metrics, responsibilities, and expectations, an SLA ensures that both parties have a shared understanding of the requirements. In the event of service issues, neither party can claim ignorance as the SLA serves as a reference point. It plays a significant role in aligning the objectives of the engagement with the technology or business objectives. It should be noted that any substantial contract without an associated SLA leaves room for intentional or unintentional misinterpretation. Therefore, incorporating an SLA is vital for establishing clarity, accountability, and alignment in the contractual relationship.

It is essential to have an SLA associated with any significant contract as it minimizes the risk of intentional or unintentional misinterpretation and ensures alignment with the technology or business objectives of the engagement. Furthermore, meticulous attention must be paid during the drafting process to ensure that the SLA avoids any shortcomings that could result in a significant discrepancy between the reported measurement of service delivery and the actual on-the-ground reality.

Importance of SLAs

1. Ensure the parties are on the same page:

An SLA serves as a means to ensure transparency and accountability between both parties. It acts as a crucial documentation that outlines the agreed-upon metrics, responsibilities, and expectations in case any issues arise with the service. The accessibility of the SLA to both parties prevents any claims of unawareness regarding the agreed-upon standards or expectations. With a well drafted SLA in place, the potential for misinterpretation from either party can be eliminated, providing so protection for both parties.

2. Provide metrics:

The SLA sets forth the specific metrics for measuring service levels. These metrics serve as guidelines for both parties to assess the effectiveness of the service and determine if it aligns with the contractual obligations. It is crucial that the SLA clearly states and quantifies these metrics to avoid any ambiguity or disputes regarding the fulfillment of key performance indicators (KPIs). By establishing measurable and unambiguous metrics, the SLA ensures that both parties have a shared understanding of the criteria for evaluating service levels, leaving no room for debate.

3. Recourse for unmet obligations:

In addition to defining standards and expectations, SLAs also provide a framework for addressing unmet obligations. They serve as a roadmap, outlining the next steps and consequences if either party fails to meet the agreed-upon standards set forth in the contract. When obligations are not fulfilled, the SLA establishes clear consequences, which may include legal penalties or financial restitution. By clearly defining these repercussions, SLAs play a crucial role in holding both parties accountable for their responsibilities.

4. Improves business relationships:

An effectively implemented SLA enhances the service provider-customer partnership, ensuring commitments are managed and met. It cultivates productive relationships, boosts brand reputation, and attracts new business opportunities.

Important metrics to be included when you negotiate an SLA

When incorporating metrics into SLAs, careful consideration is necessary. Simply because something is measurable does not automatically qualify it as a suitable metric. SLA metrics should be easily understandable and require minimal effort for accurate data collection. Additionally, the chosen metrics must be under the direct control of the service provider to ensure accountability.

Determining the appropriate number of metrics is equally important. Too many metrics can lead to overwhelming data that is difficult to analyze, while too few may not provide sufficient evidence of contractual fulfillment. Moreover, each metric should have a reliable and reasonable baseline against which it can be measured. These baselines may be adjusted during periodic SLA reviews to ensure ongoing relevance and accuracy.

The specific SLA metrics required can vary based on the nature of the services provided. It is important to keep the monitoring scheme as simple as possible to prevent confusion and excessive costs for both parties involved. When selecting metrics, it is advisable to evaluate your operations and prioritize the most important aspects. Complex monitoring schemes and associated remedies are less likely to be effective, as there may not be sufficient time for thorough data analysis. Whenever possible, prioritize metrics that can be easily collected through automated systems, as manual collection can be costly and unreliable.

The types of metrics to monitor may vary depending on the service, and can include:

• Service Availability: It refers to the amount of time the service is available for use, or differently put service uptime. This metric is often measured and/or depicted in percentages such as 99.5 percent availability, or measured in time slots such as between 8 a.m. and 6 p.m. nevertheless, keep in mind that you never should promise a 100% service availability.

• Technical Quality: Metrics are available for assessing the technical quality of specific services. When it comes to services involving the development and delivery of digital applications, quality standards can be established in the SLA. These standards may be quantified using metrics like program size or the number of coding defects. In the case of outsourced application development, commercial analysis tools can be employed to measure technical quality by evaluating factors such as program size and coding defects.

• Security: it stands as a critical metric for maintaining the effectiveness of numerous IT services. In the event of an incident, security metrics play a crucial role in demonstrating compliance with SLAs. These metrics encompass aspects such as the number of unclosed vulnerabilities, regular anti-virus updates, and the implementation of other pertinent security measures. With the increasing regulations surrounding security, breaches in application and network security can result in substantial expenses. It is vital to measure controllable security measures like anti-virus updates and patching to establish that all reasonable preventive measures were taken, should an incident occur.

• Error Rates: Error rates encompass various metrics and serve as a measure of the frequency of defects or errors in significant deliverables. These errors can encompass coding errors, missed deadlines, production failures, and more. Error rates can be quantified through counts or percentages, reflecting the number or proportion of errors in major deliverables. This category may include production failures such as incomplete backups and restores, coding errors requiring rework, and missed deadlines.

The key objective of incorporating metrics is to motivate the desired behavior from both the client and the service provider. It is important to define metrics that align with the desired behaviors and test their effectiveness by considering how each party would optimize their performance. Therefore, when designing SLA metrics, it is essential to focus on factors that are directly under the control of the service provider. Penalizing the provider for delays caused by the client's performance shortcomings should be avoided. A recommended approach is to create a two-sided SLA that measures the client's performance on mutually dependent actions, ensuring a balanced evaluation and emphasizing the desired outcomes. This approach fosters accountability and encourages collaborative efforts to achieve the intended results.

When selecting metrics for your SLA, prioritize those that can be easily collected, preferably through automated and low-overhead processes. It is important to strike a balance between the effectiveness of desired metrics and the ease of their collection. Compromising in favor of metrics that can be effortlessly gathered is advisable, as manual collection efforts are unlikely to be sustainable in the long term. By opting for readily collectible metrics, you can ensure a smooth and efficient monitoring process for the duration of the SLA.

It is also very important to avoid an excessive number of metrics or those that generate an overwhelming amount of data. Such a situation can burden analysis efforts and create unnecessary overhead. However, having too few metrics may result in critical breaches being overlooked. It is crucial to find the optimal balance that enables meaningful measurement without overwhelming the process. By carefully selecting a reasonable number of relevant metrics, you can ensure effective monitoring and evaluation while avoiding unnecessary complexity.

Keep in mind that defining metrics is an essential step, but it is only the beginning. To ensure their effectiveness, metrics must be established at reasonable and achievable performance levels. In cases where historical data is limited, it is important to be flexible and prepared to review and readjust the metrics over time. This should be done through a predefined process outlined in the SLA. Regularly revisiting and fine-tuning the metrics allows for continuous improvement, ensuring that they remain relevant and aligned with the evolving needs of the service relationship. It is crucial to establish clear and unambiguous definitions for SLA metrics to prevent providers from taking advantage of loopholes or manipulating interpretations to meet targets without delivering the intended service quality. By ensuring that SLA definitions accurately reflect the intended service level, any potential misunderstandings can be avoided. This safeguards the agreement's integrity and guarantees that both parties have a shared understanding of the expected service standards, minimizing the risk of misinterpretation or misalignment.

Lastly, alongside defining the metrics, the SLA should encompass provisions for monitoring the services. This includes specifying the methods for data capture and reporting, determining the frequency of reviews, and identifying the stakeholders involved in the monitoring process. By considering these factors, you can select appropriate metrics that drive the desired behaviors, promote fairness, and effectively monitor the performance of the services as outlined in the SLA. This ensures transparency, accountability, and a systematic approach to evaluating and improving service delivery.