Define Service Level Agreement: A Comprehensive Guide to SLAs

In the realm of service provision, clarity and mutual understanding are paramount. A cornerstone of this clarity is the Service Level Agreement (SLA). But what does “Define Service Level Agreement” truly mean? At its core, an SLA is a formalized contract between a service provider and a customer. This agreement meticulously documents the services the provider pledges to deliver, alongside the specific performance standards they are obligated to uphold.

While closely related, it’s important to distinguish an SLA from a Service Level Commitment (SLC). An SLC is generally seen as a more broadly defined, unidirectional promise from a provider regarding the service levels they aim to maintain for all customers. In contrast, an SLA is a bilateral agreement, customized and agreed upon by two specific parties – the provider and the customer – outlining their reciprocal responsibilities and expectations.

The Indispensable Role of Service Level Agreements

Why are SLAs so crucial in today’s service-driven economy? Whether dealing with network service providers, cloud service providers, or managed service providers (MSPs), SLAs are essential for effectively managing customer expectations. They provide a clear framework, setting boundaries and defining the circumstances under which a provider is accountable for service disruptions or performance shortcomings.

For customers, SLAs offer significant advantages. They serve as a tangible benchmark, detailing the expected performance characteristics of a service. This allows customers to compare offerings from different vendors more effectively and provides a formal mechanism for addressing and rectifying service-related issues.

Typically, an SLA is one of the foundational agreements in a service provider-customer relationship. Many providers also utilize a Master Service Agreement (MSA) to establish the overarching terms and conditions governing their engagements with clients.

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Key features found in a service-level agreement.

Key elements commonly included within a service-level agreement.

The SLA often becomes an integral part of the master service agreement, incorporated by reference to add a layer of detailed specificity. While the MSA sets the general stage, the SLA hones in on the precise services to be delivered and the metrics that will be employed to gauge their performance. Service commitments, within this context, clearly delineate the scope of services included in a particular service offering.

Historically, SLAs emerged to define support levels in traditional IT sectors – software, hardware, and networking companies supporting on-premises data centers and office environments. As IT outsourcing gained traction in the late 1980s, SLAs evolved into a vital governance tool for these relationships. They became the standard for setting performance expectations, outlining penalties for unmet targets, and sometimes even offering bonuses for exceeding them. Given the often-customized nature of early outsourcing projects, these SLAs were frequently project-specific.

With the rise of managed services and cloud computing, SLAs have adapted to these new paradigms. The shift towards shared services, as opposed to dedicated, customized resources, has led to the increasing use of Service Level Commitments (SLCs). SLCs provide broader agreements designed to apply across a service provider’s entire customer base, offering a more generalized service guarantee.

Who Needs a Service Level Agreement?

While often associated with network service providers in their early days, SLAs have become ubiquitous across a broad spectrum of IT-related industries. Today, IT service providers, MSPs, cloud computing platforms, and internet service providers (ISPs) are all frequent users of SLAs.

Even internal corporate IT departments are leveraging SLAs, especially those embracing IT service management (ITSM) principles. These internal SLAs are established with internal customers – users in other departments within the same organization. By creating SLAs, internal IT departments can quantify, justify, and benchmark their service delivery against external outsourcing options.

Deconstructing the Key Components of an SLA

To effectively define service level agreement, it’s critical to understand its key components. A well-structured SLA typically encompasses the following elements:

Agreement Overview: This introductory section lays the groundwork, identifying the parties involved (service provider and customer), the agreement’s effective date, and a general overview of the services covered.
Description of Services: This is the heart of the SLA, providing detailed descriptions of each service offered. It should cover all potential scenarios, including turnaround times. Service definitions should specify delivery methods, maintenance provisions, operational hours, dependency locations, process outlines, and a comprehensive list of technologies and applications utilized.
Exclusions: Clarity is key. This section explicitly defines services not offered, preempting misunderstandings and eliminating assumptions about service scope.
Service Performance: This component defines the metrics and performance levels that will be used to measure service delivery. Both client and provider must agree on a comprehensive list of metrics to objectively assess the provider’s service levels.
Redressing: Accountability is paramount. This section outlines the compensation or remedies available to the customer if the provider fails to meet its SLA obligations. This might include service credits or financial compensation.
Stakeholders: Clear roles and responsibilities are crucial. This section defines all parties involved in the agreement and their respective responsibilities.
Security: In today’s landscape, security is non-negotiable. This section details all security measures the service provider will implement. It often incorporates references to IT security policies and nondisclosure agreements.
Risk Management and Disaster Recovery: Business continuity is vital. This component establishes risk management processes and outlines a disaster recovery plan, ensuring clear communication and preparedness between both parties.
Service Tracking and Reporting: Transparency is essential for validation. This section defines the reporting structure, tracking frequency, and stakeholders involved in monitoring and reporting on service performance.
Periodic Review and Change Processes: SLAs are not static documents. This section establishes a process for regular review of the SLA and its KPIs, as well as a defined process for implementing necessary changes.
Termination Process: Clarity on ending the agreement is important. The SLA should define the circumstances under which the agreement can be terminated or will naturally expire, including any required notice periods from either party.
Signatures: Formalization is key. The SLA concludes with signatures from all stakeholders and authorized representatives from both parties, signifying their agreement to all terms and processes outlined.

A list of 11 key elements typically found in a service-level agreement.

An example of key components relevant within a disaster recovery SLA.

When developing an SLA, leveraging templates can streamline the process. Many vendors offer their own SLA formats. However, users must first clearly define their business needs, customer experience expectations, and critical performance metrics. These metrics might include defect rates, network latency, and service-level indicators. Templates can provide helpful frameworks for structuring elements such as specific deliverables, required functionality, service types, quality of service (QoS) parameters, and response protocols for service disruptions.

Exploring the Three Primary Types of SLAs

To further define service level agreement, understanding its different types is crucial. SLAs are broadly categorized into three main types:

Customer-Based SLA: This is an agreement between a service provider and either an external customer (a client company) or an internal customer (another department within the same organization). It’s often referred to as an external service agreement when applied to external clients.

In a customer-based SLA, the agreement is negotiated directly between the customer and the service provider, tailoring the services and expectations to their specific relationship. For example, a company might negotiate an SLA with an IT service provider managing their accounts payable and receivable systems, detailing their unique requirements and service level expectations.

Key elements of a customer service-level agreement typically include:
- Precise details of the service expected by the customer.
- Provisions regarding service availability.
- Defined standards for each level of service offered.
- Clearly outlined responsibilities for each party.
- Established escalation procedures for issue resolution.
- Penalties for failing to meet agreed SLA metrics.
- Terms and conditions for contract cancellation.
Internal SLA: An internal SLA exists between different departments or entities within the same organization. For instance, an IT department might establish SLAs with other internal departments that rely on their services.

This means a company could have external SLAs with each of its clients and simultaneously maintain internal SLAs between departments like marketing and sales, defining expected operational performance and inter-departmental service levels.

Consider an example: A sales department generating $10,000 in monthly sales, with each sale averaging $500, and a 20% average closing rate, knows it requires at least 100 qualified leads from marketing each month.

To formalize this, the heads of sales and marketing could create an internal SLA stipulating that marketing will deliver 100 qualified leads to sales by a specific date each month. The SLA might also include provisions for regular status reports – for example, four weekly reports from marketing to sales – to ensure lead quality aligns with sales goals.
Multilevel SLA: A multilevel SLA is structured to accommodate varying service levels for different customer groups using the same service. This is particularly common in Software as a Service (SaaS) offerings.

For example, a SaaS provider might offer a baseline level of service and support to all subscribers. However, they might also offer tiered pricing plans that unlock enhanced service levels. These tiered service offerings are then incorporated into a multilevel SLA, allowing for customized service agreements based on customer needs and chosen service tiers.

Service Level Agreement Examples in Practice

Concrete examples further clarify how to define service level agreement in real-world scenarios. Here are a couple of specific examples:

Data Center SLA: A data center SLA is crucial for businesses relying on colocation or managed data center services. Key components often include:

Uptime Guarantee: This specifies the percentage of time the data center’s systems and network services will be available. For modern, enterprise-grade data centers, a minimum of 99.99% uptime is generally expected.
Environmental Conditions: The SLA should define acceptable environmental conditions within the data center, including HVAC (heating, ventilation, and air conditioning) standards, as well as oversight and maintenance protocols to maintain these conditions.
Technical Support: Customers need assurance of prompt and effective technical support. The SLA should guarantee the availability and responsiveness of data center staff to address any issues that arise, at any time.
Security Measures: Robust security is paramount. The SLA should detail cybersecurity measures to protect against cyberattacks and physical security measures to restrict data center access to authorized personnel. Physical security might include elements like two-factor authentication, gated entries, surveillance cameras, and biometric authentication systems.

ISP SLA: An ISP SLA defines the service level expectations for internet service providers. Common elements include:

Uptime Guarantee: Similar to data center SLAs, ISPs guarantee a certain level of uptime for internet connectivity.
Packet Delivery: This metric defines the expected percentage of data packets successfully delivered compared to the total packets sent, reflecting the reliability of the connection.
Latency: Latency refers to the delay in data transmission between clients and servers. An ISP SLA will typically define acceptable latency levels to ensure a responsive internet connection.

Validating and Monitoring SLA Levels

To effectively define service level agreement and ensure its efficacy, validation is key. Regularly verifying the service provider’s adherence to agreed service levels is essential for SLA enforcement. If service levels consistently fall short of the SLA terms, the customer is entitled to claim agreed-upon compensation.

Calculate your provider’s estimated downtime per year based on SLA percentages. For critical systems, aim for at least 99.99% uptime.

Service providers often provide service-level statistics through online portals. These portals enable customers to actively monitor service performance against SLA metrics and track eligibility for compensation if service levels are not met. This transparency is a significant factor for customers when selecting a service vendor.

Often, specialized third-party companies are involved in independently monitoring and verifying service levels. In such cases, the third party should also be included in SLA negotiations to ensure they understand the service levels to be tracked and the methodologies for doing so.

Furthermore, various tools are available to automate the process of capturing and displaying service-level performance data, providing real-time insights and streamlining SLA management.

SLAs and Indemnification Clauses: Liability and Protection

An indemnification clause within an SLA addresses liability and protection. Indemnification is a contractual obligation where one party (the indemnitor) agrees to compensate another party (the indemnitee) for damages, losses, or liabilities incurred, potentially including third-party claims.

In an SLA context, an indemnification clause typically requires the service provider to acknowledge that the customer is not liable for costs arising from breaches of contract warranties. It might also obligate the service provider to cover the customer’s legal costs if third-party lawsuits result from the service provider’s contract breach.

Service providers can take steps to limit the scope of indemnification clauses, such as:

Seeking legal counsel to ensure clauses are appropriately worded and legally sound.
Limiting the number of indemnitees to direct parties involved in the agreement.
Establishing financial caps on the indemnification liability.
Setting time limits on the indemnification obligations.
Clearly defining the trigger point at which indemnification responsibility commences.

Defining SLA Performance Metrics: Measuring Success

SLAs rely on specific metrics to objectively measure a service provider’s performance. Selecting appropriate metrics is crucial – they must be fair to both the customer and the provider and, importantly, be within the service provider’s control and expertise. It’s unfair to hold a provider accountable for metrics they cannot directly influence. Metric selection should be a collaborative discussion before finalizing the SLA.

Accurate data collection is paramount for meaningful metrics. Automated data collection processes are highly recommended. The SLA should also establish reasonable baseline performance levels for each metric, which can be refined as more performance data becomes available.

SLAs use various metrics to define customer expectations regarding service quality and performance. Common SLA metrics include:

Availability and Uptime Percentage: Quantifies the duration services are operational and accessible to the customer, typically tracked monthly or per billing cycle. Uptime is a critical metric for most services.
Specific Performance Benchmarks: Allows for periodic comparison of actual service performance against agreed-upon industry or internal benchmarks.
Service Provider Response Time: Measures the time taken for the service provider to initially respond to a customer-reported issue or request. Larger providers often utilize a service desk to manage customer inquiries and response times.
Resolution Time: The time elapsed from when an issue is reported to the service provider until it is fully resolved.
Abandonment Rate: For phone-based services, this is the percentage of callers who hang up while waiting in a queue for assistance.
Business Results: Connects service provider performance to tangible business outcomes, using agreed-upon KPIs to assess the provider’s impact on the customer’s business performance.
Error Rate: The frequency of errors within a service, such as coding errors in software or missed deadlines in service delivery.
First-Call Resolution: The percentage of customer inquiries resolved during the initial contact, without requiring callbacks or escalations.
Mean Time to Recovery (MTTR): The average time required to restore service after an outage.
Mean Time to Repair (MTTR): The average time needed to fix a reported malfunction or inoperable component.
Security Metrics: Encompasses various security-related measurements, such as the number of unaddressed vulnerabilities. In case of security incidents, providers should demonstrate proactive security measures.
Time Service Factor: The percentage of queued customer service calls answered within a specific timeframe.
Turnaround Time: The time taken for the service provider to resolve a specific issue once it is received and acknowledged.

Additional metrics might include advance notification timelines for network changes that could affect users and general service usage statistics.

SLAs can specify different availability, performance, and other parameters for various components of customer infrastructure, including internal networks, servers, and supporting infrastructure like uninterruptible power supplies (UPS).

Key performance indicators and business metrics are closely related to benchmarks, all serving as tools to improve performance and assess SLA compliance.

Consequences of Not Meeting Agreed Service Levels

SLAs are not merely aspirational documents; they include agreed-upon penalties for service providers who fail to meet stipulated service levels. These penalties can range from financial remedies like fee reductions or service credits applied to future invoices, to more severe consequences like contract termination for repeated failures.

Customers can invoke these service credits when providers fall short of performance standards. Often, a percentage of the monthly service fees is designated as “at-risk,” and service credits are drawn from this at-risk portion when SLA breaches occur.

The SLA should clearly detail the calculation method for service credits. For example, a formula might link service credits to the duration of downtime exceeding SLA thresholds. Service providers may set a maximum cap on performance penalties to limit their financial exposure.

SLAs also include “exclusions” – situations where SLA guarantees and associated penalties are waived. Common exclusions include force majeure events like natural disasters or terrorist acts. This section is often termed a force majeure clause, excusing the provider from liability for events beyond their reasonable control.

Service Level Agreement Penalties: Ensuring Accountability

SLA penalties are the enforcement mechanisms that ensure contractual obligations are met. These penalties vary depending on the specific agreement and may include:

Service Availability Penalties: Focus on maintaining uptime for critical services like network infrastructure, data center resources, and databases. Penalties act as deterrents against service downtime, which can severely impact business operations.
Service Quality Penalties: Address performance guarantees, acceptable error rates in products or services, and resolution of quality-related issues.

Beyond service credits, other penalty types can include:

Financial Penalties: Require the vendor to directly reimburse the customer for pre-agreed damages resulting from SLA breaches.
License Extension or Support: Extend the term of software licenses or provide additional support services without charge as compensation. This could encompass development support, maintenance services, or enhanced technical assistance.

For penalties to be enforceable, they must be explicitly defined within the SLA’s language. However, some customers may find service credits or license extensions inadequate compensation for significant service failures. This can lead to questioning the ongoing value of a vendor that consistently fails to meet quality standards.

Therefore, a balanced approach to penalties, potentially combining different types, and even including performance-based incentives (like bonuses for exceeding service levels), can be beneficial.

Service-level agreements are indispensable when relying on external providers for critical systems, applications, and data. Here is an example of a cloud computing-specific SLA highlighting key requirements.

Key Considerations for SLA Metrics: Choosing Wisely

Selecting the right performance metrics for an SLA is crucial. Companies should consider these factors:

Metrics Should Drive Desired Behavior: The chosen metrics should incentivize both the service provider and the customer to act in ways that support the overall goals of the service agreement.
Metrics Must Be Controllable: Metrics should only reflect factors within the service provider’s reasonable control. Data collection for these metrics should also be straightforward. Avoid excessive metrics or data overload, but ensure enough metrics are included to accurately reflect service performance and avoid misrepresenting contract fulfillment.

For metrics to be meaningful, establishing a proper baseline with realistic and achievable performance levels is essential. Baselines should be revisited and potentially redefined throughout the agreement lifecycle, using the periodic review and change processes defined in the SLA.

SLA Earn Back Provisions: Rewarding Consistent Performance

An “earn back” provision in an SLA allows service providers to recover service-level credits if they subsequently achieve and maintain service levels at or above the agreed standard for a defined period. Earn backs emerged in response to the widespread use of service-level credits.

Service-level credits should be the primary and exclusive remedy for customers in cases of service-level failures. They function as a financial deduction from the total contract value when the provider fails to meet agreed performance standards.

If both parties agree to include earn back provisions, the specific process should be carefully defined during SLA negotiation and integrated into the overall service-level methodology.

When to Revise a Service Level Agreement: Staying Relevant

An SLA is a dynamic document and should be periodically reviewed and updated to reflect changing circumstances. Most organizations revise their SLAs annually or bi-annually. However, rapidly growing organizations may need more frequent reviews.

Knowing when to revise an SLA, and equally importantly, when not to make changes, is crucial for maintaining a healthy client-provider relationship. Scheduled meetings to review the SLA and ensure its continued alignment with both parties’ needs are best practice.

An SLA revision should be considered when:

Customer Business Requirements Change: For example, increased availability requirements due to launching an e-commerce website.
Workload Changes Occur: Significant shifts in service demand or usage patterns.
Measurement Tools and Processes Improve: Advances in monitoring and reporting capabilities.
Service Offerings Evolve: The provider adds new services or discontinues existing ones.
Provider Technical Capabilities Improve: New technologies or infrastructure upgrades enable faster response times or enhanced service delivery.

Service providers should proactively review their SLAs every 18 to 24 months, even if no major changes in services or capabilities have occurred, to ensure continued relevance and effectiveness.

Learn more about the importance of SLA compliance in IT and all about five-nines availability and what it means. Download our free service-level agreement template to get started planning the requirements associated with your organization’s DR activities.