What is a Service Level Agreement (SLA)?

The mighty service level agreement (SLA)

Businesses constantly supply and receive services for the purposes of commerce. They supply services typically with a view to receiving revenue, and procure services typically with a view to bolster their own operations.

One of the key issues that parties need to pay special attention to, when engaging in the supply/procurement of services, is service levels. Briefly, service levels set out the service standards that a supplier is required to meet.

It is important for parties to agree on service levels, as this leaves parties with little doubt as to what the supplier is obliged to provide, and what the customer is entitled to receive. This prevents either party from being short-changed, and reduces the risk of disputes arising.

These service levels may be documented in a service level agreement. Such documentation lends enforceability to these service levels.

In this article, we examine the top 5 issues to look out for in a service level agreement.

Issue 1: Service levels of the agreement

We start with the very subject matter that a service level agreement is intended to cover – the service levels.

Service levels are crucial in a supply of services construct, for the reasons stated above. Accordingly, parties should pay careful attention to the way that the service levels are expressed in a service level agreement.

Service levels should be set out in precisely and unambiguously, so that parties have clarity over their rights and obligations. Other matters that parties should consider when examining service levels include:

• Do the service levels truly reflect the agreement between the parties?
• Can the service levels be escalated or de-escalated? If so, is the mechanism for escalation/de-escalated clearly and precisely set out?
• Are there any “catch-all” phrases in the description of the service levels (e.g. “and all things necessary)? When contracting as the service provider, pay careful attention to such “catch-all” phrases, as they may unduly expand your scope of service.

Issue 2: The levels of agreement

Yet, it does not stop at examining the service levels. Service levels could mean little if either party is entitled to change them at will at little or no notice. In this regard, parties should ascertain if either of them have the right to change the service levels.

If so, it would be prudent to examine the mechanism for changing service levels. Matters that parties may wish to examine include:

• Is the other party’s consent required in order to effect a change in the service levels?
• How much prior notice must a party provide to the other, if it intends to change service levels?
• Are there any limits to the range of service levels that a party is entitled to change?

Issue 3: What is an SLA breach & consequences?

Service levels do not have teeth unless there are consequences for breaching them. When contracting as a customer, it would be prudent to request for certain remedies in the event that the supplier fails to meet the service levels. Typical remedies include:

• Liquidated damages (i.e. payment of a pre-agreed sum in the event that certain service levels are not met)
• Withholding of payments
• Suspension of the service engagement
• Termination

As seen from the list above, the range of remedies can potentially be wide, and some remedies could be more draconian than others. In determining what remedies to adopt, factors to consider may include:

• How far short the supplier had fallen from the requisite service levels?
• Whether the breach had happened before over the course of the engagement?
• How crucial the services are to your operations?
• How much is being paid for the services?

Issue 4: Service level agreement roles and responsibilities

Yet, sometimes it takes 2 hands to clap in order for services to be delivered effectively. Depending on the nature of the services, the customer may be required to undertake certain tasks in order for the service levels to be met. A service provider may at times (to borrow the words of Jerry Maguire) need the customer to “help me help you”.

Take computer maintenance services for example. A supplier may rely on a particular software to undertake its maintenance services. In such cases, the supplier may need the customer to take steps to ensure that its computer systems are compatible with that software.

Under such circumstances, parties should agree on their respective responsibilities for the purposes of the service engagement, and set out such responsibilities clearly in a responsibility matrix within the service level agreement.

Issue 5: Verification

Service levels could mean little if the customer has no way of verifying if they have been met.

While some service levels may be easy to ascertain, others may be more difficult to ascertain, particularly if these service levels relate to complex technical matters or if they relate to properties that cannot be detected immediately by the naked eye.

Where service levels are difficult to ascertain, parties may wish to consider agreeing to a fixed mechanism for the purposes of verifying if they have been met. In coming up with a mechanism, parties may wish to consider a range of factors, including:

Is a professional expert required to verify if these service levels have been met?

Who bears the costs of verification tests?

What must these verification tests show in order for service levels to be deemed to be met?

Conclusion

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*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.