What is a Service Level Agreement (SLA)?

A Service Level Agreement (SLA) is fundamentally a formal contract established between a service provider and their client. This agreement meticulously documents the specific services the provider commits to deliver, and crucially, it defines the performance standards they are obligated to achieve. Think of it as a clear roadmap setting expectations and accountabilities for both parties involved in a service relationship.

It’s important to distinguish an SLA from a Service Level Commitment (SLC). While related, an SLC is generally broader and less formal than an SLA. The key difference lies in directionality and parties involved. An SLA is bidirectional, representing a mutual agreement and obligation between two distinct teams or organizations – the provider and the customer. Conversely, an SLC is unidirectional. It’s a statement by a provider outlining what service levels they aim to deliver to their customer base, often in a more generalized manner and not necessarily tied to a specific contract.

Why are SLAs Important?

Service Level Agreements are indispensable for various types of service providers. These include network service providers, cloud service providers, and managed service providers (MSPs). SLAs serve as a vital tool for effectively managing customer expectations right from the outset of a service partnership. They provide clarity and prevent misunderstandings by explicitly defining the scope and quality of service to be delivered.

Moreover, SLAs are crucial in delineating the circumstances under which a service provider is held liable, or conversely, is absolved of responsibility for service disruptions or performance degradation. This aspect provides a legal and operational framework for accountability and recourse.

Customers also significantly benefit from SLAs. An SLA acts as a benchmark, detailing the anticipated performance characteristics of the service. This allows customers to compare offerings from different vendors objectively, ensuring they choose a service that meets their specific needs and performance requirements. Furthermore, SLAs outline the mechanisms for addressing and rectifying service-related issues, giving customers assurance and a clear path to resolution should problems arise.

Typically, the SLA is one of the two cornerstone agreements in a service provider-customer relationship. Many providers utilize a master service agreement (MSA) to lay out the overarching terms and conditions governing their engagements with clients. The SLA then complements the MSA by providing granular detail concerning the specific services to be rendered and the metrics that will be employed to meticulously measure service performance. Service commitments embedded within the SLA clearly define the exact services encompassed within the overall service offering.

Historically, SLAs were primarily used to define support levels for software, hardware, and networking companies providing services for on-premise data centers and office environments. They were instrumental in setting expectations for traditional IT infrastructure support.

With the rise of IT outsourcing in the late 1980s, SLAs evolved into a more sophisticated mechanism to govern these complex relationships. They became essential for setting performance benchmarks for outsourced services, outlining penalties for failing to meet these targets, and sometimes even specifying bonuses for exceeding them. Given that early outsourcing projects were often tailored to individual customer needs, these SLAs were frequently custom-drafted to govern specific projects, reflecting the bespoke nature of those arrangements.

Today, with the widespread adoption of managed services and cloud computing, SLAs have continued to adapt. They now address the nuances of these modern service delivery models. Shared services, in contrast to customized resources, are a hallmark of contemporary contracting approaches. Service Level Commitments (SLCs) are now frequently employed to create broader agreements designed to encompass a service provider’s entire customer base, reflecting the scalable and standardized nature of cloud and managed services.

Key features found in a service-level agreement.

Who Needs a Service Level Agreement?

While Service Level Agreements are believed to have originated in the realm of network service providers, their application has broadened significantly. Today, SLAs are widely adopted across a diverse spectrum of IT-related sectors. Industries that commonly utilize SLAs include IT service providers, MSPs, cloud computing vendors, and internet service providers (ISPs). Essentially, any organization offering technology-based services to external clients can benefit from employing SLAs.

Beyond external use, SLAs are also highly relevant within corporate IT organizations. Especially those embracing IT service management (ITSM) principles, internal IT departments often establish SLAs with their in-house customers – meaning users in other departments within the same enterprise. By creating internal SLAs, IT departments can measure, justify, and benchmark their service performance against external outsourcing vendors. This internal application helps ensure IT services are delivered efficiently and effectively to internal stakeholders.

Key Components of an SLA

A comprehensive Service Level Agreement typically includes several key components, each designed to provide clarity and structure to the service relationship. These components are essential for ensuring both the service provider and the customer understand their roles, responsibilities, and expectations.

Agreement Overview: This introductory section lays the groundwork for the entire SLA. It clearly identifies the parties involved in the agreement, specifies the effective start date, and provides a general overview of the services that will be provided under the agreement.
Description of Services: This is a critical section requiring detailed and unambiguous descriptions of every service offered. It must cover all possible scenarios and include specific turnaround times for service delivery. Service definitions should encompass various aspects, such as the modes of service delivery, availability of maintenance services, hours of operation, identification of service dependencies, a clear outline of service processes, and a comprehensive list of all technologies and applications utilized in service provision.
Exclusions: To prevent misunderstandings and eliminate ambiguity, the SLA must explicitly define any services that are not offered. Clearly stating exclusions leaves no room for assumptions and ensures both parties are aligned on the boundaries of service provision.
Service Performance: This section is dedicated to defining performance measurement metrics and the expected performance levels. It’s crucial for the client and service provider to collaboratively agree on a comprehensive list of metrics that will be used to objectively measure the service provider’s performance against agreed-upon service levels.
Redressing: The SLA must outline the compensation or remedies available to the customer if the service provider fails to adequately meet its SLA obligations. This section details the consequences of not meeting service level targets and ensures accountability.
Stakeholders: Clear identification of all parties involved in the agreement and their respective roles and responsibilities is essential. This section ensures everyone knows who is accountable for what aspect of the SLA.
Security: This component defines all security measures that the service provider will implement to protect the customer’s data and systems. Typically, this involves drafting and reaching a consensus on IT security protocols and nondisclosure agreements (NDAs) to safeguard confidential information.
Risk Management and Disaster Recovery: The SLA should establish robust risk management processes and include a comprehensive disaster recovery plan. These aspects must be clearly articulated and communicated between both parties to ensure business continuity and data protection in unforeseen circumstances.
Service Tracking and Reporting: This section defines the reporting structure, the frequency of tracking intervals for performance metrics, and identifies the stakeholders who will be involved in receiving and reviewing reports. Clear reporting mechanisms are vital for monitoring SLA compliance.
Periodic Review and Change Processes: The SLA, along with all established key performance indicators (KPIs), should be subject to regular reviews. This section outlines the agreed-upon review process and defines the appropriate procedures for making necessary changes or updates to the SLA over time to ensure its continued relevance and effectiveness.
Termination Process: The SLA must clearly define the circumstances under which the agreement can be terminated or when it will naturally expire. It should also establish a notice period required from either party wishing to terminate the agreement, providing a structured exit strategy if needed.
Signatures: Finally, for the SLA to be legally binding and officially recognized, all relevant stakeholders and authorized representatives from both the service provider and the customer must sign the document. Signatures signify their formal approval of every detail, process, and obligation outlined within the SLA.

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

When developing an SLA, end-users can leverage templates to streamline the process. Many vendors also provide their own standard SLA formats. It’s crucial for users to first identify their specific business needs, customer experience expectations, and critical performance metrics. These metrics may include defect rates, network latency, and service-level indicators (SLIs). Templates can serve as helpful starting points, providing placeholders for essential elements such as specific deliverables, functionalities to be provided, the type of service being delivered, quality of service (QoS) parameters, and protocols for responding to service disruptions.

What are the Three Types of SLAs?

Service Level Agreements can be broadly categorized into three primary types, each tailored to different scenarios and relationships: Customer-Based SLAs, Internal SLAs, and Multilevel SLAs. Understanding these distinctions is key to choosing the right SLA structure for a given situation.

Customer Service-Level Agreement: This type of SLA is established directly between a service provider and its customers, who can be either external clients or internal departments. It is sometimes referred to as an external service agreement when dealing with outside clients. In a customer-based SLA, the customer and the service provider engage in a negotiation process to reach a mutually agreed-upon understanding of the services to be provided. For instance, a company might negotiate a customer SLA with an IT service provider managing its accounts payable and receivable systems. This SLA would meticulously define their specific relationship, service expectations, and performance metrics in detail.

A typical customer service-level agreement often includes the following key elements:
- Exact specifications of the service expected by the customer, leaving no room for ambiguity.
- Provisions detailing service availability, including uptime guarantees and scheduled maintenance windows.
- Clearly defined performance standards for each agreed-upon service level, ensuring measurable outcomes.
- A precise delineation of responsibilities for each party involved, outlining who is accountable for what.
- Established escalation procedures to handle issues that require attention beyond initial support levels.
- Penalties that will be imposed if the service provider fails to achieve the agreed-upon SLA metrics, ensuring accountability.
- Terms and conditions for cancellation of the agreement, providing a clear exit strategy if needed.
Internal SLA: An internal SLA exists between different departments or entities within the same organization. For example, it could be established between an internal IT department and another department, site, or organizational unit that relies on IT services. This means a company could have external SLAs with its customers and simultaneously maintain internal SLAs between its various departments. A common scenario is an SLA between the marketing and sales departments, defining the operational performance expectations between these interconnected teams.

Consider an example where a sales department consistently generates $10,000 in sales monthly, with each sale averaging $500. If the sales team’s historical closing rate is 20%, they know they require at least 100 qualified leads from marketing each month to maintain their sales targets. Based on this understanding, the heads of the marketing and sales departments might collaborate to create an internal SLA. This SLA would stipulate that marketing commits to delivering a minimum of 100 qualified leads to sales by a specific date each month. To ensure effective collaboration and progress monitoring, this internal SLA could further specify that marketing will provide four weekly status reports to sales each month. These reports would track lead delivery and quality, ensuring the sales team receives leads that enable them to achieve their monthly sales goals.
Multilevel SLA: A multilevel SLA is designed to cater to a diverse customer base with varying service needs. It structures the agreement into different tiers or levels of service, each tailored to specific groups of customers. This approach is particularly common for service providers offering standardized services to a large clientele. For example, a software as a service (SaaS) provider might offer a basic level of service and support to all customers using their product as a standard offering. However, they might also provide premium service tiers at different price points, offering enhanced support, faster response times, or additional features. These varying levels of service are then incorporated into a multilevel SLA, allowing customers to choose the service tier that best aligns with their requirements and budget.

Service Level Agreement Examples

To illustrate the practical application of SLAs, let’s examine specific examples in common IT service domains: Data Center SLAs and ISP SLAs.

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

Uptime Guarantee: This is a fundamental metric, specifying the percentage of time a data center’s systems or network services are guaranteed to be available. For modern, enterprise-level data centers, an uptime guarantee of less than 99.99% should generally be considered unacceptable, reflecting the expectation of near-constant availability.
Environmental Conditions: The SLA should define the required environmental conditions within the data center, including temperature, humidity, and power stability. It should also outline oversight and maintenance practices to ensure these conditions are consistently maintained, as well as compliance with HVAC (heating, ventilation, and air conditioning) standards to protect sensitive equipment.
Technical Support: Customers need assurance that data center staff will provide prompt and effective technical support. The SLA should guarantee that support will be readily available at any time to address any issues that may arise, with defined response times and escalation procedures.
Security Precautions: A robust data center SLA must detail the security measures in place to safeguard the customer’s information assets. This encompasses both cybersecurity measures to protect against cyberattacks and physical security measures to restrict unauthorized access to the data center. Physical security features might include two-factor authentication for personnel access, gated entries, comprehensive camera surveillance systems, and biometric authentication methods for enhanced security.

ISP SLA Example: An ISP (Internet Service Provider) SLA is essential for businesses reliant on internet connectivity. Key elements of an ISP SLA typically include:

Uptime Guarantee: Similar to data center SLAs, ISP SLAs guarantee a certain percentage of network uptime, ensuring consistent internet access for customers.
Packet Delivery Expectations: This metric defines the expected percentage of data packets that are successfully delivered compared to the total number of packets sent across the network. High packet delivery rates are crucial for reliable data transmission and minimizing data loss.
Latency: Latency refers to the time delay it takes for a data packet to travel between clients and servers. An ISP SLA will often define acceptable latency levels, as low latency is critical for real-time applications, such as video conferencing and online gaming, and overall network responsiveness.

How to Validate SLA Levels

To ensure a Service Level Agreement is effective and enforceable, it’s crucial to have mechanisms in place to validate whether the service provider is actually meeting the agreed-upon service delivery levels. Verification is essential for accountability and for triggering any compensation clauses if service levels fall short.

Calculating provider downtime per year based on SLA availability percentages, emphasizing the criticality of high uptime in modern enterprise data centers.

Service providers often provide service-level statistics to their customers through an online portal or dashboard. This transparency allows customers to actively track service performance and monitor whether the provider is consistently meeting the agreed-upon service levels. If a customer identifies instances where service levels are not being met, the portal may also provide information on eligibility for compensation, as stipulated in the SLA. This accessibility to performance data is often a significant deciding factor for customers when selecting a service vendor.

The systems and processes used to monitor and report on SLA performance are frequently managed by specialized third-party companies that offer independent monitoring services. If a third party is involved in SLA monitoring, it’s vital that they are also included in the SLA negotiations. This inclusion ensures the third party has a clear understanding of the specific service levels that need to be tracked, the methodologies for tracking them, and reporting requirements.

Furthermore, a range of tools are available that automate the process of capturing and displaying service-level performance data. These tools streamline SLA monitoring, provide real-time insights, and facilitate efficient reporting, making it easier for both providers and customers to track and manage SLA compliance.

SLAs and Indemnification Clauses

An indemnification clause within a Service Level Agreement is a critical legal provision. Indemnification is essentially a contractual obligation where one party, known as the indemnitor, commits to compensate another party, the indemnitee, for damages, losses, or liabilities they may experience. This obligation can also extend to redressing damages experienced by a third party.

In the context of an SLA, an indemnification clause typically requires the service provider (indemnitor) to acknowledge and accept that the customer (indemnitee) will not be held responsible for any costs or liabilities arising from violations of contract warranties by the service provider. This protects the customer from being penalized for the service provider’s failures.

Moreover, an indemnification clause may obligate the service provider to financially cover the customer’s legal costs if the customer faces litigation from third parties as a direct result of the service provider breaching the SLA contract. This provision offers an additional layer of financial protection to the customer.

To manage and limit the scope of indemnification obligations, service providers can take several strategic steps:

Legal Counsel: It is crucial for service providers to consult with an attorney specializing in contract law during SLA drafting, particularly when formulating indemnification clauses. Legal expertise ensures the clause is fair, legally sound, and appropriately limited in scope.
Limit Indemnitees: Service providers can seek to limit the number of parties covered under the indemnification clause. Restricting the clause’s protection to directly involved parties can reduce potential liabilities.
Monetary Caps: Establishing monetary caps or limits on the financial amount that the service provider is liable for under the indemnification clause is a common risk mitigation strategy. This sets a defined ceiling on potential financial exposure.
Time Limits: Indemnification clauses can include time limits, specifying a period after which the indemnification obligation expires. This introduces temporal boundaries to liability.
Define Trigger Points: Clearly defining the specific events or conditions that trigger the indemnification obligation is crucial. This ensures clarity on when the responsibility for indemnification commences, avoiding ambiguity and potential disputes.

SLA Performance Metrics

Service Level Agreements rely heavily on performance metrics to objectively measure the service provider’s performance and adherence to agreed-upon standards. Selecting appropriate metrics is crucial, and it’s essential that these metrics are fair to both the customer and the service provider. A key principle is that metrics should be within the service provider’s control and expertise. It is not equitable to hold a vendor accountable for metrics they cannot directly influence or manage. This point should be thoroughly discussed and agreed upon by all parties before finalizing the SLA.

Accurate data collection is paramount for effective metric measurement. Implementing an automated data collection process is often an important solution to ensure data accuracy, consistency, and efficiency. Additionally, the SLA should specify a reasonable baseline for each metric. This baseline serves as the initial benchmark for performance. It’s understood that these baselines may be refined and adjusted as more performance data becomes available over the course of the service relationship.

SLAs establish customer expectations regarding service provider performance and quality in various tangible ways. Common metrics specified in SLAs include:

Availability and Uptime Percentage: This metric quantifies the amount of time services are operational and accessible to the customer. Uptime is typically tracked and reported on a monthly basis or per billing cycle. High uptime percentages, such as “five nines” (99.999%), are often sought for critical services.
Specific Performance Benchmarks: SLAs can define specific performance benchmarks for various service aspects. Actual performance is then periodically compared against these accepted benchmarks to assess compliance and identify areas for improvement.
Service Provider Response Time: This metric measures the time it takes for the service provider to initially respond to a customer-reported issue or service request. For larger service providers, a dedicated service desk is often employed to handle and respond to customer inquiries efficiently.
Resolution Time: Resolution time, also known as time to resolution, is the duration from when an issue is logged by the service provider until it is fully resolved and service is restored. Minimizing resolution time is a key objective in many SLAs.
Abandonment Rate: This metric, often used in customer support contexts, measures the percentage of queued calls that customers abandon while waiting for assistance. A low abandonment rate indicates effective call handling and customer service.
Business Results: Some SLAs incorporate business results as a metric, using agreed-upon Key Performance Indicators (KPIs) to assess how the service provider’s contributions directly impact the customer’s business performance. This aligns service delivery with business outcomes.
Error Rate: Error rate quantifies the percentage of errors within a service. This could encompass coding errors in software development, missed deadlines in project management, or other service-specific errors. Low error rates are indicative of high service quality.
First-Call Resolution (FCR): FCR, primarily used in help desk and customer service, is the percentage of incoming customer calls that are resolved during the initial call, without requiring a callback or further follow-up. High FCR rates improve customer satisfaction and service efficiency.
Mean Time To Recovery (MTTR): MTTR is the average time required to recover from a service outage or failure. Minimizing MTTR is crucial for ensuring business continuity and minimizing service disruptions.
Mean Time To Repair (MTTR): Mean Time To Repair, distinct from Mean Time To Recovery, is the average time needed to fix a component or system that has been reported as inoperable. It focuses specifically on the repair time, excluding detection and recovery phases.
Security Metrics: Security within SLAs can be measured using various metrics, such as the number of undisclosed vulnerabilities identified, the frequency of security audits, and incident response times. In case of a security incident, service providers should be able to demonstrate that they have taken proactive preventive measures.
Time Service Factor: This metric, often used in call centers, represents the percentage of queued calls that customer service representatives answer within a defined time frame. It measures service responsiveness and speed of answer.
Turnaround Time: Turnaround time is the time it takes for a service provider to fully resolve a specific issue or fulfill a service request once it has been officially received. It measures the overall efficiency of service delivery.

Additional metrics within an SLA might include the timely delivery of a schedule for planned network changes that could potentially affect users, as well as regular reporting of general service usage statistics. SLAs can also specify availability, performance, and other parameters for different types of customer infrastructure, including internal networks, servers, and infrastructure components like uninterruptible power supplies (UPS).

Key performance indicators and business metrics are closely linked to benchmarks, serving as essential tools for performance improvement and SLA service level attainment.

What Happens if Agreed-Upon Service Levels are Not Met?

Service Level Agreements are not just about setting expectations; they also include pre-agreed penalties that come into effect if a service provider fails to meet the stipulated service levels. These penalties serve as a form of recourse for the customer and incentivize the provider to maintain service quality.

Common remedies for SLA breaches include:

Fee Reductions: If service levels consistently fall below agreed targets, the customer may be entitled to a reduction in service fees. This directly impacts the provider’s revenue and serves as a financial disincentive for poor performance.
Service Credits: Service credits are a frequently used penalty mechanism. They represent credits applied against future service fees incurred by the customer. In essence, if the provider underperforms, the customer receives a discount on future services.
Contract Termination: In cases of repeated or severe failures to meet SLA commitments, the customer may have the right to terminate the contract altogether. This is a significant penalty and underscores the importance of SLA compliance.

Customers can actively enforce these service credits when service providers fail to uphold the agreed-upon performance standards. Typically, the initial SLA negotiation involves both the customer and the service provider agreeing to put a certain percentage of the monthly service fees “at risk.” These at-risk fees then become the pool from which service credits are drawn when the vendor misses SLA targets.

The SLA document should meticulously detail how service credits will be calculated. For example, the agreement might include a formula that determines service credit amounts based on the duration of downtime exceeding the SLA’s uptime guarantee. To manage their potential liability, service providers may cap performance penalties at a maximum dollar amount, limiting their financial exposure from SLA breaches.

Furthermore, every SLA includes a section outlining “exclusions.” These exclusions define specific situations or events where the SLA’s guarantees and associated penalties for non-performance do not apply. Common exclusions often include events beyond the service provider’s reasonable control, such as natural disasters (e.g., earthquakes, floods), terrorist acts, or force majeure events. This “force majeure” clause is designed to excuse the service provider from liability for service disruptions caused by events that are genuinely outside their ability to prevent or control.

Service Level Agreement Penalties

Service Level Agreement penalties are essentially disciplinary measures designed to ensure that the terms and commitments outlined in the contract are consistently upheld. These penalties are not standardized and can vary significantly from contract to contract, depending on the nature of the services, the criticality of those services to the customer’s business, and the negotiation between the parties.

Common types of SLA penalties include:

Service Availability Penalties: These penalties are triggered by failures in service availability, encompassing factors like network uptime, data center resource availability, and database accessibility. They are designed to act as deterrents against service downtime, as downtime can have significant negative impacts on the customer’s business operations, revenue, and reputation.
Service Quality Penalties: Penalties related to service quality address performance guarantees and acceptable error rates. They may be triggered by exceeding a pre-defined number of errors in a product or service, failing to meet performance benchmarks, or experiencing processing gaps or other quality-related issues. These penalties ensure that the service is not only available but also performs to the expected standards of quality.

Beyond service credits, other forms of penalties may be incorporated into SLAs:

Financial Penalties: These penalties require the vendor to directly reimburse the customer for a pre-agreed amount of financial damages resulting from SLA breaches. Financial penalties represent a direct monetary compensation for underperformance.
License Extension or Support: In certain SLAs, particularly in software or technology services, penalties may take the form of extending the customer’s software license term or providing additional support services at no charge. This could include extended access to technical support, development services, or maintenance services, compensating for service quality issues by enhancing service duration or scope.

It is absolutely critical that all SLA penalties, regardless of their type, are explicitly and unambiguously specified within the written language of the Service Level Agreement. If penalties are not clearly defined in the contract, they cannot be legally enforced.

It’s also important to recognize that some customers may not perceive service credits or license extensions as adequate compensation for significant or repeated service failures. They may question the value of continuing to engage with a vendor that consistently fails to meet agreed-upon quality levels, even if penalties are applied.

Therefore, in some cases, it can be beneficial to consider a combination of different types of penalties within an SLA. Furthermore, incorporating incentives, such as monetary bonuses or rewards, for service performance that consistently exceeds satisfactory levels can be a valuable addition. Incentives can motivate service providers to not only meet but surpass SLA targets, fostering a proactive approach to service excellence.

Considerations for SLA Metrics

When selecting performance metrics to include in a Service Level Agreement, a company should carefully consider several crucial factors to ensure the metrics are effective, fair, and aligned with the overall objectives of the SLA.

Metrics Should Drive Desired Behavior: A primary consideration is that the chosen metrics should actively motivate the right behaviors from both the service provider and the customer. When defining metrics, both parties should remember that the fundamental goal is to encourage appropriate actions and accountability. Metrics should be designed to incentivize the service provider to deliver high-quality service and to encourage the customer to effectively utilize the service and provide constructive feedback.
Metrics Must Be Controllable by the Provider: It is essential that the metrics selected for the SLA only reflect factors that are genuinely within the service provider’s reasonable control. It’s unfair and counterproductive to hold a provider accountable for metrics influenced by external factors they cannot manage. Furthermore, the data required to measure these metrics should be readily and easily collectible. Both parties should exercise restraint in choosing an excessive number of metrics or measurements that generate vast amounts of data. Overly complex metric systems can become cumbersome and difficult to manage. Conversely, including too few metrics can also be problematic, as missing a key performance area might create a misleading impression of overall contract compliance.

For the established metrics to be truly useful and actionable, it is imperative to establish proper baselines. These baselines should set measurements at performance levels that are both reasonable and realistically attainable. The initial baselines are not necessarily fixed; they should be viewed as starting points that can be redefined and adjusted throughout the duration of the agreement. The SLA should specify the processes for periodic review and change management, allowing for baselines and metrics to evolve as the service relationship matures and more performance data becomes available.

What are SLA Earn Back Provisions?

An “earn back” provision is a specific clause that may be included within a Service Level Agreement. This provision is designed to offer service providers a mechanism to regain service-level credits that they may have previously incurred due to performance shortfalls. Earn backs are essentially a response to the increasing standardization and prevalence of service-level credits as a common SLA penalty.

Service-level credits, also often referred to simply as service credits, are intended to be the sole and exclusive remedy available to customers for compensating them for failures in service level performance. A service credit functions by deducting a specified amount of money from the total fees that the customer is obligated to pay under the contract if the service provider fails to meet the agreed-upon service delivery and performance standards.

If both the customer and the service provider agree to incorporate earn back provisions into their SLA, it is crucial that the process for earning back credits is meticulously defined and documented right from the outset of the SLA negotiation. The earn back mechanism should be seamlessly integrated into the overall service-level methodology to ensure clarity and prevent potential disputes later on. Typically, an earn back provision might stipulate that if a service provider consistently performs at or above the standard service level for a defined period, such as several consecutive months, they can then earn back a portion or all of the service credits previously applied.

When to Revise an SLA

A Service Level Agreement should not be viewed as a static document. Instead, it is a “living document” that needs to be actively managed, updated, and reviewed regularly to ensure it remains relevant and effective over time. As business needs evolve and service landscapes change, the SLA must adapt accordingly. Most organizations find it beneficial to revise their SLAs either annually or bi-annually as a standard practice. However, for organizations experiencing rapid growth or significant changes in their operational environment, more frequent reviews and revisions may be necessary.

Knowing precisely when to make changes to an SLA is a critical aspect of effectively managing the client-service provider relationship. Equally important is understanding when it is not appropriate to make changes, avoiding unnecessary modifications that could destabilize a well-functioning agreement. To facilitate this ongoing management, it is recommended that both parties involved in the SLA establish a set schedule for periodic meetings. These meetings should be specifically dedicated to revisiting the SLA, reviewing its effectiveness, and ensuring that it continues to adequately meet the evolving requirements of both the customer and the service provider.

An SLA should definitely be revised if one or more of the following conditions have been met:

Changes in Customer Business Requirements: If the customer’s underlying business requirements undergo significant changes, the SLA may need to be adjusted. For example, if a customer expands into e-commerce and establishes an online sales platform, their requirements for service availability and uptime may substantially increase. The SLA should be updated to reflect these new, more demanding needs.
Workload Changes: Significant shifts in workload volume or patterns can necessitate SLA revisions. If the demand for services increases or decreases substantially, the existing SLA metrics and service levels may no longer be appropriate or achievable. Adjustments may be needed to accommodate these workload changes.
Improvements in Measurement Tools, Processes, and Metrics: As technology and service management practices advance, new and improved measurement tools, processes, and metrics may become available. Revising the SLA to incorporate these advancements can lead to more accurate, efficient, and insightful performance monitoring and management.
Service Offering Modifications: If the service provider decides to discontinue an existing service that is covered by the SLA, or if they introduce a new service offering, the SLA must be revised to reflect these changes in the service portfolio. This ensures that the SLA accurately represents the current set of services being provided.
Changes in Service Provider’s Technical Capabilities: Significant changes in the service provider’s technical capabilities can also trigger SLA revisions. For instance, if the provider adopts new technology or invests in more reliable equipment that enables them to offer faster response times, improved service performance, or enhanced security, the SLA should be updated to reflect these improved capabilities and potentially set new, more ambitious service level targets.

Even in the absence of substantial changes to services or capabilities, service providers should proactively review their SLAs on a regular cadence, ideally every 18 to 24 months. This periodic review ensures that the SLA remains relevant, aligned with current best practices, and continues to effectively govern the service relationship, even if no major revisions are immediately needed.