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What is Service Level Agreement? Benefits, Types, Components

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What is SLA?

A service Level Agreement (SLA) is a contract between a service provider and its customers. It outlines the services and the service standards by which the providers will conduct these services.

On the other hand, a Service-Level Commitment (SLC) is a more general form of a Service Level Agreement. Whereas a Service Level Agreement is a two-way contract between both a service provider and its customers, an SLC is a one-way commitment that specifies what a service provider can guarantee its customers within a given time.

Why is SLA Important?

SLAs are important as they provide the cornerstone for data capture engagements. More specifically, through SLAs, service providers can manage the expectations of their customers, thereby defining circumstances under which they cannot be held liable. Moreover, customers can also turn to SLAs when selecting which vendor to engage with and sets forth the basis for rectifying service issues.

The SLA is usually a complementary agreement that service providers sign with their customers, along with a Master Service Agreement to set forth the general terms and conditions under such agreement.

A Brief History of SLAs

As IT outsourcing became emergent in the late 1980s, Service-Level Agreements have been pivotal in regulating such relationships. Since early in the day, SLAs have been critical in setting expectations of a service provider’s performance and establishing sanctions for missing targets and incentives for exceeding them. Back then, Service Level Agreement outsourcing were drafted for a specific project as outsourcing projects were often custom-made for a particular customer.

Later, SLAs evolved to accommodate new approaches by developing managed services and the cloud computing services era. Shared services replaced customized resources in devising new contracting methods. Thus, businesses used Service-Level Commitments to generate broad agreements to encompass all service providers’ customers.

Who Needs a Service Level Agreement?

Initially originating with Network Service Providers, Service-Level Agreements are now used in the vast range of IT-related fields, such as IT service providers, managed service providers, cloud computing, and internet service providers.

Furthermore, Corporate IT Organizations also uphold SLAs with their in-house customers or users in other departments within the organization. In this case, SLAs are primarily used to measure, justify, and compare their services with outsourcing vendors.

12 Key Components of a Service Level Agreement (SLA)

What needs to be included in a service level agreement? If this question arises in your mind, then you should check out the following key components:

  1. Agreement Overview
  2. Description of Services
  3. Exclusions
  4. Service Performance
  5. Redressing
  6. Stakeholders
  7. Security
  8. Risk Management and Disaster Recovery
  9. Service Tracking and Reporting
  10. Periodic Review and Change Processes
  11. Termination Process
  12. Signatures

1. Agreement Overview: The agreement overview outlines the fundamentals of the agreement, such as the parties in agreement, the start date, and a general introduction of the services provided.

2. Description of Services: An SLA must have a comprehensive description of all the services offered, under which circumstances they perform, and the turnaround times.

3. Exclusions: A list of excluded services should also explain limitations and avoid confusion and assumptions from the other party.

4. Service Performance: Both the customers and the service provider must agree on a specific performance measurement metric to evaluate performance levels.

5. Redressing: The compensation should also be defined, including the pay rate for service providers who cannot fulfill their obligations.

6. Stakeholders: An SLA must clearly define the parties involved and their respective responsibilities in the agreement.

7. Security: An SLA must also contain all the security measures that the service provider will undertake, including consensus on anti-poaching, IT security, and non-disclosure agreements.

8. Risk Management and Disaster Recovery: Risk management and disaster recovery plans and processes must also get laid out in the event of unforeseen circumstances.

9. Service Tracking and Reporting: The service tracking and reporting section encompasses the reporting structure, tracking intervals, and the stakeholders taking part in the agreement.

10. Periodic Review and Change Processes: You must routinely review the SLA and accepted Key Performance Indicators (KPIs) to prevent or rectify mistakes and make changes.

11. Termination Process: To avoid schedule conflicts, the SLA should also define the circumstances by which the agreement can be prematurely terminated or will expire. It is also essential to establish the notice period from each party.

12. Signatures: Ultimately, all stakeholders and authorized participants must make the agreement legal by signing the document.

what are the 3 types of Service Level Agreements?

SLAs can get classified into three different types based on the stakeholders in agreement namely

  1. Customer Service Level Agreement
  2. Internal Service Level Agreement
  3. Multilevel Service Level Agreement

1. Customer Service Level Agreement

A Customer Service-Level Agreement, also called External Service Agreement, is a contract between a service provider and external customers. This type of agreement includes:

● Comprehensive detail of the service to be expected by the customer;

● Provisions relating to service availability;

● Standards set for evaluating each level of service;

● Responsibilities of the parties involved;

● Escalation procedures; and

● Terms and conditions for cancellation.

2. Internal Service Level Agreement

An Internal Service-Level Agreement happens between an organization and internal customers, such as another organization, department, or site.

Although an organization could keep its SLA open with each of its customers, it can conceive a separate SLA for other customers, like the marketing and sales departments. For instance, through an SLA, the head of an organization’s marketing team can work with the head of the sales team to bring better results by enhancing marketing leads.

3. Multilevel Service Level Agreement

A Multilevel Service-Level Agreement divides an agreement into different levels, specific to accommodate a series of customers utilizing the service. For instance, although a Software as a Service (Saas) provider can offer the same basic services and support to everyone using a product, they can still develop different pricing schemes when buying the product that signifies the different service levels. The Multilevel SLA is an important tool to define and differentiate these various levels of services.

How to Validate SLA Levels

A Service-Level Agreement can run and get enforced when you have a clear-cut definition of the service provider’s service delivery levels. If the service provider fails to fulfill and provide the level of service stipulated in the SLA, then the client has a strong claim on the compensation as outlined in the agreement.
Presently, most service providers make their service-level statistics accessible through an online portal. With this, service providers allow customers to monitor and track whether the service level stated in the SLA is adequately fulfilled and maintained. If service providers are underperforming, the online portal also allows the customers to check if they are eligible for compensation.

To prevent biases and conflicts of interest, a third-party company usually controls these systems and processes. If this is indeed the case, you must also include the third-party company in the SLA negotiations. This inclusion enables the third-party company to grasp the service levels better.

Furthermore, there are also tools available to automate the capture and display of service level performance data.

SLAs and Indemnification Clauses

An Indemnification clause is a binding obligation made by one party, called the Indemnitor. This clause rectifies and fixes the damages, losses, and liabilities that affect the other party called the indemnitee or a third-party company. More specifically, the indemnification clause within an SLA will necessitate service providers to recognize that the customer will not be responsible for costs suffered from violations and breaches of contract warranties. Furthermore, through the indemnification clause, the service provider will also be required to pay its customers any litigation costs from third parties due to contract breaches.

A service provider can also undertake certain steps that the scope of indemnifications be limited, such as:

● Consulting an attorney;
● Limiting the number of indemnitees;
● Establishing monetary caps for the indemnity clause;
● Creating time limits; and
● Defining when the responsibility of indemnification starts

Establishing Clear SLA Metrics

As established, an SLA must include the service provider’s performance metrics. Since it can be difficult to select SLA metrics and criteria that will ensure fairness between the customer and service provider, the metrics must be within the service provider’s control. It would not be fair to hold the service provider accountable for not performing well on that certain criterion.

Furthermore, the accurate collection of the data from the Service Level Agreement metrics is essential; thus, having an automated data capture method would be best. Aside from this, the SLA should also stipulate a reasonable baseline for the service level measurement, which you can enhance with more available data on each metric.

A comprehensive SLA should also clearly establish customer expectations regarding the service provider’s performance level. An SLA may include the following metrics:

  • SLA should be written and be within reason to meet.
    Meaning, the customer must be rational in setting targets such that they consider a certain amount of ramp-up time for service providers to hit those numbers. Uptime is usually monitored and reported either by calendar month or billing cycle. During this time, you will compare the actual performance level of the service provider against specific performance benchmarks.
  • Both service providers and customers should monitor SLA goals closely and communicate their needs to ensure they meet SLA goals.
    One of the most important factors to monitor is time. More specifically, the time it takes the service provider to respond to a customer’s queries or requests and the time it takes a complication to be resolved should be tracked and measured.
  • If SLAs are unclear, the service provider might make assumptions on clients’ behalf resulting in problems.
    To address this pressing issue, KPIs can help determine how the contributions of service providers affect the entire performance of the business.
  • If SLAs are unreasonable, the service provider will never meet the clients’ demand, and both parties will end up suffering.
    Finally, setting unrealistic SLA metrics will most likely lead to disappointments. Customers need to be rational in stating their demands. Moreover, the service provider must also communicate their issues to arrive at a compromise that works.

What Happens if Agreed-Upon Service Levels are Not Met?

If a service provider fails to meet the service level stipulated in the SLA, the compensation and penalties in the SLA will take effect. Penalties can range depending on the agreement reached by both parties and include free reductions, service credits, or, worst-case scenarios, the premature termination of the contract.

Establishing clear, reasonable, and comprehensive SLAs is significant as they provide the foundation for any business engagements. Laying out SLAs is essential for the smooth and efficient flow of an agreed-upon service.

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