Service level Agreements: Important Aspects - An Analysis

In the 21 century, marked by rapid advancements in Information Technology, increasing digitization, and the growing use of Artificial Intelligence (AI) across global economies, modern-era companies commonly employ Service Level Agreements (SLAs) to uphold customer service standards and outline specific remedies or deductions in case those service parameters are not met.

Below are the broad contents of SLAs:

• Expectation from vendor by service-recipient.
• Metrics to measure service delivery vis-à-vis expectations.
• Remedial measures if service delivery expectations do not meet expectations.
• Penalties if service delivery do not meet expectations.

Example of an SLA

A Ltd. which is a service provider of IT support services viz. LAN set-up, internet access and hardware service support enters a contract with P Ltd. which is into trading of garments at PAN-India level. One of the points in the SLA mentions that A Ltd. shall provide 24X7 service support to P Ltd. This means that even if there is a support requirement by P Ltd. related to say LAN issue on a Sunday or a public holiday, then too A Ltd. shall also render services to their client i.e., P Ltd. In case of default by A Ltd., where metrics are not adhered to, remedial measures including penalty would be levied based on terms of the SLA.

Requirement for having SLA

SLAs summarize the basic tenets of a contract and hence form an integral part of the contract. An SLA pulls together information on all the contracted services and their agreed-upon expected reliability into a single document.

"SLAs clearly state metrics, responsibilities, and expectations so that, in the event of issues with the service, neither party can plead ignorance, and helps avoid litigations."

SLAs clearly state metrics, responsibilities, and expectations so that, in the event of issues with the service, neither party can plead ignorance, and helps avoid litigations. Any significant contract without SLAs is open to deliberate or inadvertent misinterpretation. SLAs protect both parties in the agreement.

SLAs should align with the technology and business objectives of engagement with the management. Misalignment will have a negative impact on pricing, quality of service delivery, and customer experience resulting in litigations in the future and consequent loss of business.

With SLAs in place, there is a mutual understanding between clients and service providers/vendors with regards to service expectations, allowing team members to know the issues faced and which needs to be addressed, manage customer expectations from vendor's side, and various benefits in terms of structured approach to solve day-to-day problems faced by client's business.

In modern business scenarios, it is a necessary and non-negotiable instrument to ensure the success of business transactions for day-to-day operations with minimum hassles.

Benefits of SLAs

• Ensures strong client relationships: SLAs try to address concerns over risks which invariably improve trust among clients and help ensure strong client relationships for vendors.
• Formalization of processes: Business environments involve formality, whether it is India or abroad, and SLAs add to this requirement by having a formal and documented process-cum-metrics for performance delivery and measurement.
  Example: No vendor would like to entertain issues multiple times a day on the same problem which will reflect badly on their service expertise. SLAs help having cogent conversations based on agreed upon terms in writing.
• Boost to productivity and team morale: SLAs ensure that business requests which are critical to operations are attended first to ensure minimal impact on operations. This ensures productivity as employees know what is critical to address, when and how to address it, and continued operations ensure success and boosts the team's overall morale.

SLAs Vs. KPIs: Difference

1. Difference in metrics: SLAs define a future course of action between vendor and clients i.e., it involves external parties to the agreement. KPIs measure employee productivity within an organization, i.e., a measurement of the team and team members performance against agreed standards, i.e., it involves internal parties to agreed standards of operations.
2. Freedom to agreement on metrics: In the case of SLAs, an external element is always involved due to the participation of vendors in the agreement process. Additionally, the terms are typically reviewed by internal and/or external legal counsels. Therefore, there is flexibility to finalize SLAs through mutual consensus before sign-off. KPIs, being internal to organizations, have lesser degree of control as far as freedom to agree is concerned as it is between a head of the department or superior-subordinate agreement based on predefined parameters for internal evaluation and performance targets.
3. Scope: SLAs, typically, could be broader in scope as a vendor may be providing a host of services to a client. For example, SLAs for providing IT support services could involve services related to desktops, laptops, servers, mobiles as well as data security, data privacy and encryption services, on-line or off-line mode of services, services provided at head-office or PAN-India or even at a global level. KPIs, typically, are narrower in scope with specific metrics that will help ensure that processes and teams coordinate and deliver requisite internal targets on a periodic basis.
4. Reviews: SLAs need review either annually or on change of operational events necessitating re-visit of SLAs terms and metrics of performance between vendors and clients which again shall go through legal review process as done initially. KPIs need review as and when required since it is internal to an organization.

Challenges

• Tracking issues: SLA metrics used for tracking and measurement would invariably need to be backed by data which may be voluminous in the case of global organizations. This may pose challenges in tracking the issues and pinpointing actual cause and resolution of issues.
• Metrics alignment: SLA metrics must align with the capabilities and objectives of the clients and service providers to ensure success. Ever changing business scenarios require deep-thinking and practical approaches to design measurable and practicable SLA metrics which align with long-term goals and vision of organizations.
• Lack of flexibility: In today's business environment, the bottom-line is whether SLAs have met the expectations or not. There is no partial acceptability of services by customers: therefore, service delivery is perceived as either 0% or 100% by the service providers.
• Co-operation: Successful drafting of SLAs requires sign-off from top management on either side of the negotiating table; therefore, co-operation is necessary and can be challenging sometimes.

Framing correct SLAs

As a thumb-rule to setting SLAs, avoid arbitrariness in setting up the same and try to be as precise and concise as possible. It is important to measure the right performance metrics and capture the business processes so that SLAs can prove to be a yardstick to measure performance over a period. Finally, periodic review of SLAs in light of the changing business environment and needs helps to have relevant SLAs in the contract.

Let us learn more about the same below:

Starting point of SLAs

If the organization has a current set of SLAs, the best starting point is reviewing the same and jotting down the performance against existing metrics and then evaluating the need for improvements. The updated list of SLAs should align with the organization's goals and objectives and encompass all stakeholders who are relevant to the organization.

Feedback

Feedback from existing clients/customers should form an important consideration while reviewing SLAs. Pertinent questions must be raised viz.

• What is working well?
• Which areas need improvement?
• What can help to deliver and satisfy clients?
• Are we offering the right services or package of services to clients?

Draft

The next step is to draft the SLAs given above, taking into account the background and the feedback received. It is important to be precise and concise, eliminating irrelevant services that do not add value to clients. Most importantly, based on the feedback received, new areas of services should be added to ensure client/customer satisfaction and bring value to their businesses.

Support

A successful SLA sign-off needs consultation and consensus with the top management of both your organization and the client's. It is, therefore, important to get their buy-in and incorporate their vision during the drafting process so that the sign-off is smooth and less time-consuming on either side.

Best practices

Mastering the art of drafting SLAs is a journey and with each SLA draft, one improves incrementally. However, certain tips can be especially helpful, and may be termed as "Best Practices" for an amateur drafter of SLAs.

• It is important to have measurable SLAs so that team members on either side can track the same and ensure an efficient turnaround of objectives.
• One must ensure that measurements and reporting systems also incorporate exceptional situations viz. dependency on third-party, system down-time, possibility of delay from client's end etc.
• Simple and clear well-defined nomenclatures help keep the SLAs concise, precise, and brief.
• Break-down large complex SLAs into simpler and measurable SLAs.
• Update SLAs as frequently as possible to ensure that client's considerations are incorporated.
• High priority items must be identified, measured and tackled on a priority basis. For example, if it is an IT service provider, attending to printer-issues may not always be a high priority area but if the same becomes a recurring issue, it can turn into a persistent problem for the client, which may result in unnecessary escalations.
• Flexibility should be inherent in SLAs and help ensure reviews and updates.
• Customize the SLAs based on each client's requirements and business operations.

Types of SLAs

• Customer-based SLA: As the heading suggests, the SLA is a customer-centric template that focuses on simplicity and leverage, specifically for similar contracts where the same or similar industry-based customer services are provided to clients.
  Example: A customer-based SLA for all clients in the warehousing industry would have similar requirements.
• Service-based SLA: Similar to customer-based SLAs, service-based SLAs focus on similar type of services required by clients but across different industries. This helps in replicating the SLA template for a multitude of clients requiring similar services but across different industries.
  Example: A service-based SLA for resolution of printer-related issues which can remain consistent across different industries and could be used to help set up standard SLAs for resolution of tickets.
• Multi-level SLA: This template offers adequate flexibility to customize as per client requirements by addition of service conditions to address different customers within an organization. Such SLAs try to address customers across hierarchy from top-management to ground-level workers in operations, address issues at specific levels and at group levels, specific to a particular corporate entity within industries, and hence would be more granular compared to other two types of SLAs seen above.

"The SLA is a customer-centric template that focuses on simplicity and leverage, specifically for similar contracts where the same or similar industry-based customer services are provided to clients."

SLA metrics to consider for drafting

It is important that SLAs monitor appropriate metrics to ensure overall success. The right data is a pre-requisite to know if the service arrangement is serving both the parties to the SLA. Too many metrics may make the SLA unviable and different services may require different metrics for serviceability. Please note that the below are universally accepted industry metrics, and the same could cater to each client or industry-specific needs to prepare mutually acceptable SLAs.

• Uptime: Uptime refers to the number of working hours when services are in place and working for the client, and measurability is in % terms e.g., 99% for 30 days for an 8-hour workday means 0.3 days or 2.4 hours in a month of down-time which may be acceptable in industries.
• Error rates: Error rates track service failures, which could be in terms of the percentage of time when services by the vendor could not be delivered, resulting in missing deadlines, delays in updates, negative interactions with the client, escalations to top management on either side, and defects in services.
• Response time: Response time refers to the acceptable time for a service provider to log and respond to the client's issue.
• Resolution time: Resolution time refers to the acceptable time for a service provider between log-in time and resolution of the issue raised by a client i.e., turn-around time.
• First call resolution rate: This means the percentage of resolutions by the vendor that are done in the first attempt itself, which speaks of the quick turnaround and good serviceability from the service provider's perspective.
• Updates and security: Data privacy by the vendor cannot be compromised under any circumstances, and regular updates in services provided, be it antivirus patches, ERP updates, or statutory compliances, must be adhered to, including local and global laws which are non-negotiable.

"It is important that SLAs monitor appropriate metrics to ensure overall success. The right data is a pre-requisite to know if the service arrangement is serving both the parties to the SLA."

Indemnification clause - Is the clause necessary?

A pertinent question to ask is whether the indemnification clause from vendor's side should be made a part of SLAs or the main contract?

In practical experience, vendors do include indemnification clauses as a part of SLAs. However, wider practice would be to make it a part of the general contract as well.

If included, the indemnification clause is an important part of SLA, given it provides compensation to the client in case of any loss or breach of serviceability which may include litigation costs, restoration costs because of breach of SLAs and could have vital impact on the business of the service providers. Therefore, the same must be drafted carefully if it is made a part of SLA.

Dispute resolution mechanism

The business world is a practical world, and it is necessary that disputes between clients and service providers are minimal. However, in the worst-case scenario, if there are major disputes, it is necessary to build safeguards within SLAs to resolve the disputes quickly.

SLAs may incorporate an escalation matrix whereby, based on the gravity of issues faced and turnaround time to address the same, the issues from vendor or client's side could be escalated to higher authorities at the service provider and/or recipient's level.

In case of very high-stake disputes, reference to arbitration by vendor or client at a mutually agreed place of dispute resolution by an experienced arbitration authority or expert could also be incorporated. The core idea should be to avoid litigation costs and time that arise in dispute resolution by courts, which will be harmful for the reputation and bottom-lines of organizations on either side.

"In case of very high-stake disputes, reference to arbitration by vendor or client at a mutually agreed place of dispute resolution by an experienced arbitration authority or expert could also be incorporated."

Whether graphs/charts can be a part of SLA?

SLA metrics would always be measurable and could be numeric, but charts and/or graphs would be helpful to emphasize or demonstrate a critical point of view or practice and if aggreable to both parties of the SLA.

ISO standards of SLA'

Drafting is a skill learnt by extensive reading and practical experience. The motive behind this article is to inculcate essential skills to draft SLAs which will be useful right from an articleship trainee to a seasoned practitioner in his/her field.

To draw insights into ISO level standards to refer to while drafting SLA agreements, below are useful standards applicable to SLAs accepted industry-wide:

• Standardized SLA templates need to be in existence in every organization and this should include the basics of contract drafting elements viz.
  • Definition of the document and its scope
  • Attention to details
  • Base level requirements essential for engaging and sustaining client relationships
  • Fire-fighting mechanism in case of escalations
  • Dispute resolution clauses necessary to save the engagements
  • Termination clauses

• SLA is a living document which needs to be kept up-to-date as per the changing business dynamics.
• SLA templates must include a clear definition of services, expected service quality in terms of measurable metrics, turnaround time (TAT), service costs which are easily quantifiable for the clients. Most importantly, for vendor and clients, there must be a clear description of how the service delivery is to be monitored, measured in terms of compliance requirements with expected service levels.

Conclusion

SLAs are core to most agreements between service providers/vendors and service recipients/clients in modern businesses and must be made keeping the fundamentals of contract management in mind.

SLAs not only prove useful as reference points to monitor and measure performance-based vendor management but can also be an effective risk management tool, through appropriate construction of SLAs and incorporation of clauses related to indemnity and arbitration in case of any losses and/or disputes in the long-run.

It is advisable to review SLAs with technical, legal, and commercial teams to ensure that they foolproof, and that any loose ends are addressed before execution/sign-off by either party.

References

1. https://iso-docs.com>products>service-level-agreement-sla-template-iso-20000?_pos=1&_sid=a669e364c&_ss=r
2. www.atlassian.com
3. www.cio.com.
4. https://www.ibm.com
5. www.servicenow.com