Contracts and agreements are major components of how successful business dealings work. This is especially true for businesses that work with vendors or outsource work. When this happens, a service level agreement is typically put into place to ensure the needed service supplied by the vendor is done effectively. Knowing the right SLA to use is incredibly important for business owners to avoid service level agreement legal issues. When making this decision involves complex legal concerns, it’s important to have guidance from a skilled business contract lawyer. At Feldman & Feldman, our Houston business attorneys develop a customized strategy for every negotiation that aims to gain the upper hand and establish terms that benefit your company most.
What Are Service Level Agreements?
A Service Level Agreement (SLA) is a type of contract that defines the level of service a business expects from a vendor or supplier. This is done by laying out the metrics by which the specific service needed is measured, as well as any remedies or penalties available in the event the agreed-upon metrics are not met. While typically SLAs are used between businesses and external suppliers, they are also used between different departments within one company.
SLAs are important to businesses because they consolidate all the information on the expected service and the agreed-upon expectations the business needs into a single document. These specific agreements clearly define the necessary metrics, responsibilities, and expectations to ensure that both the business and the vendor have a mutually understood description of the requirements. This is incredibly important because any significant contract that is created without an SLA can then be open to misinterpretation by either party.
SLAs should include all of the common components of any legally binding agreement, such as:
- Full list of the parties involved
- Specific start and end dates
- Inclusions
- Exclusions
- Penalties for failing to meet performance targets
- Locations and departments supported
- Remedial penalties for not meeting the terms
- Rewards or bonuses for overachievement
- Indemnities for both parties
- Grounds for breach and termination of the contract
A comprehensive SLA with all necessary components provides a strong foundation for a healthy and long-term relationship between a business and its vendors.
Indemnification Clause
One of the most important provisions to include within a service level agreement is an indemnification clause. An indemnification clause provision allows a vendor or service provider to agree to indemnify the business for any potential breaches of its warranties. The service provider will then have to pay the business for any third-party litigation costs that result from a breach of warranties.
The Different Types of Service Level Agreements
While there are several different types of service level agreements, the three most common types include the following:
Service-Based SLAs
Service-based SLAs are created by a business for common services that are offered. For instance, if an IT service provider for a business provides a specific service for all of its customers. In a service-based SLA, the service level of the specific service offered should be the same for all clients that use the service.
Suppose, in this example, the finance and human resources departments of a business are the customers using the service. In that case, the same SLA will be valid between the IT service provider and the two departments.
Customer-Based SLAs
A customer-based SLA is an agreement created by a business for one specific client that covers all the services they use. For example, if a business utilizes a specific IT provider for several different services, all of the different services used are then documented in one SLA to create a customer-based agreement.
Multi-Level SLAs
A multi-level service level agreement is created by a business for larger clients and covers multiple services, departments, locations, etc. These agreements are customized according to the specific needs of the client and allow for several conditions to be added into the same SLA to allow for the most suitable service possible.
Multi-level SLAs address contracts at various levels, including:
- Corporate level: Comprehensive discussion of all relevant aspects of the contract applicable to all clients subject to the agreement.
- Customer level: Discuss all potential service issues associated with one specific group of clients. However, this does not take into consideration the type of user service.
- Service level: All aspects that are attributed to a particular service with regard to a certain customer group are included, along with measurement goals and methods.
Best Practices for Creating Service Level Agreements
When creating SLAs, the best place to begin is by working with a business litigation and contract attorney. They will examine your circumstances and likely advise you on a number of best practices to implement. For instance, if we return to our IT provider example, a well-crafted SLA might include sections that:
- Address ticket severity by designating the appropriate level of resources to respond to different levels of IT issues.
- Detail expected response and resolution times, including how quickly technicians first contact clients, even during high-volume times.
- Describe how any failure in performance against the SLA will be addressed and escalated, to whom, and within what time frame.
- Establish methods for monitoring and adjusting the SLA’s performance based on how well it’s serving the needs of both client and vendor.
- Ensure the SLA is realistic and based on an assessment of current IT ticket demand and resolution.
Conducting an honest, accurate, and current review of what is needed, expected, and deliverable will help you build an SLA that works well from the beginning.
Revisiting the language and requirements of the document with updated performance data allows you to ensure the SLA keeps working for the duration of the business relationship.
Important Factors to Consider When Writing Your SLA
To appropriately tailor an SLA to your needs, your attorney will examine many factors. They will also ask you to consider critical questions to develop a document that anticipates issues and implements measures to address them. For example, you and your contract lawyer should discuss the range of service levels you will measure to determine a vendor’s performance, including the parameters for each level and methods to assess them.
Service Levels
The document should describe details such as response times, efficiency, capacity, and quality to be provided at each service level. In our IT scenario, you would want to include expectations for the availability of systems, telecommunications, and technicians. Clearly describing these expectations can prevent a mismatch when emergencies happen, and critical services are needed.
Measurement
The format for measuring performance against the SLA terms should also be described. The agreement must outline what will be measured, for what period, and against what standards. The contract should also detail any performance reports and how regularly they should be provided.
Measurement may include internal assessments but be based on external metrics to ensure the provider is meeting industry standards.
Performance Expectations
Only after you have established the service levels and how to measure performance can you discuss your expectations for performance. It is crucial that all parties agree as to what will be provided and what is needed before they can understand an appropriate response and resolution level. Starting with a requirement for 99% compliance with the SLA may force untenable agreements that are set up for failure.
Ideally, your contract will include minimum and target expectations, which may also have caveats in the event of natural disasters or other emergencies. The SLA could include a ramp-up period with increasing performance targets to allow the vendor to adjust to demand and test the validity of the agreement. Annually reviewing the SLA may show room to increase expectations if the vendor consistently delivers beyond the original scope of the contract.
Service Level Credits and Bonuses
In any service agreement, there will be unavoidable failures. A strong SLA will include provisions for when a vendor fails to deliver as promised in the form of credits to the client. Likewise, the SLA may include bonuses (such as a price increase) for the vendor when they consistently surpass performance expectations, which could take the form of price increases for the services, although these are rare compared to credits.
Discussions on this topic should include specific credits at each service level and any top limit for a monthly or annual period of service. The parties may even discuss a way to reduce credits to the client when the vendor delivers superior service for a designated time, such as six months or a year.
Termination
While the goal is a successful relationship, not every client-vendor collaboration works out. Part of writing an SLA is including language about its termination, whether planned or unplanned. If a contract has a definable end date, it should be clearly discussed, along with a process for ramping down service and closing the relationship.
When a party fails to uphold the agreement according to its terms, the SLA should clearly describe what situations call for mediation, such as falling below minimum performance levels with a reporting period, how many failures are allowed, and when these constitute a breach.
There should also be an understanding of which circumstances are grounds for immediate termination. This will vary but typically includes intentional breach, criminal activity, failure to pay within a specific time period, and regularly failing to meet service levels. It is critical to work with a contract attorney who has a deep background in this area since there is a four-year statute of limitations in Texas for filing contract dispute lawsuits.
Houston Contract Drafting Attorneys
Just like many other types of business contracts, SLAs can quickly turn into complex documents that require the need of an experienced Houston contract drafting attorney. Managing the legal complexities and “what if” scenarios can be frustrating, even if you have many years of experience in the business world. Ensuring your company has the protection it needs in its contract negotiations and agreements is essential to its growth and success.
Working with a contract drafting attorney is an important investment in your company’s future. Instead of leaving yourself open to legal actions or failing to cover all concerns in an SLA, you can rely on their knowledge and training to craft a document that serves the needs of all the parties involved. At Feldman & Feldman, our lawyers have decades of experience helping businesses of all sizes and industries negotiate contracts. If your business needs assistance with the drafting, negotiation, or review of a contract, contact us today to see how we can best assist you.