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What is a service level agreement (SLA)?

An SLA generally supplements a Services agreement. It’s an agreement that states the services to be provided and defines the level at which they should be provided.

There are three types of SLAs:

  1. customer-based SLAs - between a service provider and its customers 

  2. internal SLAs - between two departments of a business 

  3. multi-level SLAs - where there are multiple service providers and end-users, who can be customers or internal departments

SLAs can be a formal legally binding contract or an informal agreement between parties, setting out the relationship in a given project. The latter is often used by public sector bodies.

Why have an SLA?

An SLA is useful for two reasons:

Providing clarity

By specifying what services will be provided and the standard of performance, the parties have a better idea of what to expect. This eliminates misunderstandings and minimises the likelihood of disappointment in the future. This helps establish a mutual understanding of the level of services to be provided.

Providing certainty

An SLA allows parties to hold each other accountable in the event that certain obligations aren’t fulfilled by specifying what happens in these instances. This provides the parties with peace of mind and can act as an incentive for them to abide by the agreement.

What does an SLA cover?

Generally, the terms of an SLA will cover:

  • the objectives the parties are seeking to achieve through the service 

  • details of the service to be provided and any relevant deadlines 

  • the performance standards (in the form of warranties and representations) and how they will be measured

  • any actions to be taken by the parties (eg weekly reporting)

  • the identity and responsibilities of the individuals or teams involved

  • the remedies and compensation if the expected standards aren’t met (eg service credit regime or a plan on how losses will be made up)

  • the parties’ right to terminate the agreement (eg if the standards of performance fall below an acceptable level consistently or there is a failure to pay)

One of the most important clauses in an SLA is the indemnity clause. This is where the supplier agrees to compensate the other party for their losses due to a breach of warranties or representations.

What is a service credit regime?

A service credit regime is a scheme to compensate the other party when the service provider fails to perform at the agreed level.

There are different ways to define when service credits should be given out:

  • it can be tied to the number of occasions on which the service provider failed to meet the service level 

  • it can be tied to how the performance is measured, eg where performance is measured in percentages, credit can be given for every 1% shortfall 

It’s important to ensure that the scheme is reasonable and encourages the supplier to provide a high level of service.

What kind of metrics can be used to monitor service performance?

This depends on the services provided and can include:

  • service availability - this is typically presented as a percentage, which specifies how often the service must be available for use

  • business performance - this is usually measured by how the service provider contributed to the other party’s key performance indicators 

  • defect rates - this may be counts or percentages of errors in performance

When picking metrics, you should take into account whether they’ll be effective and practical, measurable and unambiguous. A complicated system may provide the most accurate data for performance levels, but it may be ineffective and costly to operate. Where metrics are not measurable or ambiguous, it will be difficult to measure performance.


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