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Decoding Service Level Agreements (Silicon Valley × LexStart)

Updated: Apr 17

Silicon Valley: S02E07 - Monica explains to the team at Pied Piper that getting the first client is not going to be easy; you have to work on a single deal for months, finalizing every detail of the contract and the “SLA” over multiple rounds of negotiations.

Hearing the term, SLA, you, an entrepreneur-in-making, think: What is a SLA? Why is a SLA present in addition to a contract? Is there any need for it? If yes, what does it provide? How is it drafted?

Worry not! We bring to you a ready reckoner on SLAs or Service Level Agreements which would help you answer all your queries.

What is a SLA?

SLA or a service-level agreement is a contract between a service-provider and its clients which lays down:

  • Scope of the services to be provided.

  • The metrics against which the quality of the services is to be assessed (“Service Levels”)

  • The responsibilities and expectations of each party.

  • Any penalties to be imposed if the given Service-Levels are not met.

From the client’s perspective, SLAs specify the obligations of the service provider and set certain minimum thresholds with regard to the standard of the service. For the service provider, SLAs manage consumers’ expectations and ensure that the service provider is not held answerable for every minor hiccup.

Why is a SLA required in addition to a contract?

A SLA is required because it concretizes the expectations and responsibilities of the service provider and the client. It is a signed agreement and hence, no party can later on retract from the same. A contract typically governs the relationship between the parties, it contains the general terms and conditions of the agreement. Sometimes, a single contract is the basis of multiple services, such contract is called a Master Services Agreement. If more than one service is being provided under a Master Services Agreement, it becomes essential to enter into a SLA for each service and define the Service Levels, expectations, responsibilities and penalties for each of the services. This helps the parties reach the same level of understanding and prevents possible future disputes pertaining to performance of services.

Key Components of a SLA

A contract is already present, what more can be added in a SLA? The key components of a SLA are:

1. Specifics of the services being provided:

It is not sufficient to vaguely or generally mention the services being provided, the SLA should contain a detailed, if possible an itemized description of each service being provided. Any supplementary information which brings out the minute elements of the services should also be included. For instance, if you want the delivery of 100 laptops, specific details such as the kind of processor you require, what company’s motherboard you require, what should be the memory etc. would be included in the SLA. Apart from what services are to be included, if there is any doubt, then you may also mention what services are excluded. For instance, if a company provides you with their software, but not the maintenance services, then this may be included in the SLA. Typically, the expected turnaround time along with each service should also be mentioned.

2. Performance /Service levels:

For an effective and enforceable SLA, it is critical that the parties define the service standards in terms of quantifiable and/or comparable metrics; an arbitrary mechanism to measure the standard of service negates the entire purpose of drawing up a SLA. Metrics should be as granular as possible, in order to avoid confusion. There is no scope for vagueness or ambiguity while defining metrics.

3. Penalties:

Since SLAs document the services to be provided and also define the standards of those services, it logically follows that they also set out the penalties to be imposed in case the service provider falls short of the expectations that have been laid down. In rare cases, SLAs also provide for bonuses where the service provider exceeds the expectations. This is where service credits come in the picture. Service credits are pre-specified monetary sums which are deducted as penalties if the quality of services do not meet the Service Levels mentioned. They can either be capped or uncapped. They can be levied in different ways. For instance, some parties agree to deduct a predetermined percentage of the service providers’ profit if the quality of services do not meet the defined Service Levels.

What to Keep in Mind While Drafting a SLA?

We bring to you a checklist for a well-drafted SLA(in addition to the considerations for a contract):

  • Define the services for which the SLA is being drawn up.

  • Determine what can and cannot be measured.

  • Define the service standards expected of the service provider, in terms of quantifiable and/or comparable metrics.

  • Service response levels should also be laid down. For instance, if the service provider is providing IT maintenance, the target response time to fix a particular issue should also be captured in the SLA.

  • Provide for penalties. If you are the service-provider then you may also try to negotiate and get rewards or bonuses included for performance exceeding the Service Levels.

  • Escalation procedures, names of contact persons etc. should be laid down.

  • Clear responsibilities and expectations should be a part of Service Levels.

  • Make the SLA in consonance with the Master Services Agreement, as the general terms and conditions contained therein would govern the SLA as well.

  • If there are any exceptions to the SLA, list them down as well.

In addition to the above, service agreements also provide for details specific to the arrangements between the parties, like the terms of customer service, obligations of the client, service windows, etc.

To summarize, a SLA is a comprehensive document encompassing the entire understanding between the service provider and the client, and hence, it needs to be well-drafted in order to ensure a smooth business relationship between the parties.

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