Every business entity lives to serve the needs and expectations of its customers. You must have heard business managers say “customers are the lifeline of a company.”
This saying goes beyond just creating a product or service that your customers need and setting up a top-rated customer service to actually ensuring that you understand their needs and set up the right measures to satisfy these needs at all times.
Business management is a commitment to customers and a service level agreement (SLA) is a document that helps service providers to stay committed to their customers by outrightly spelling out their service expectations to them – this way customers know what to expect from the service provider and service provider can also meet these expectations.
Aside from improving customer-client relations, service level agreements also help strengthen the bond and relations between departmental teams – marketing and sales departments for instance have to collaborate to achieve sales.
In this context, a service level agreement between the two teams can include marketing team goals and sales team activities that will support those marketing goals.
In this guide, we will discuss all you should about creating service level agreements (SLAs).
Table of Contents
- What is a service level agreement (SLA)?
- Why are SLAs important?
- Benefits of SLAs
- Types of service level agreements
- What is included in a service level agreement
- Service level agreement vs. Key performance indicators
- SLA metrics for businesses to consider
- Service level agreement and Indemnification Clause
- SLA penalties for businesses
- When to revise an SLA
- Service level agreement templates
- Best practices for service-level agreements
What is a service level agreement (SLA)?
A service level agreement (SLA) is a documented agreement or contract between a service provider and an end-user (client) stating the level of service that the client should expect from the service provider.
Often used when a company is signing up new customers for service, SLAs defined service expectations between service vendors and their customers and are also applicable for the alignment of internal organizational teams.
Although service level agreement varies between vendors, services, and industries, it is a critical component of any technology service provider contract that clearly defines the service standards that a service provider should meet, the metrics by which those services are measured, including the penalties applicable when a service provider fails to meet its expected service performance.
You must understand that SLAs are not inflexible, you should change or improve them over time to meet your business needs as it changes. Hence SLAs must include a clear framework for revisions or modifications of the agreements during the course of the contract.
Who needs a service-level agreement?
SLAs were originally used by network service providers but have now become popular and widely used by many companies in the IT-related industry. Examples of industries that widely use SLAs in this present time include IT service providers and managed service providers such as cloud computing, SaaS, and internet service providers.
Who provides a service level agreement?
An SLA is created and provided by the service provider, to enable every tech organization to customize their service agreements to meet their specific services and customers’ expectations. Depending on the service levels provided by the IT service provider, they can create several SLAs for a single service, with each SLA covering different price ranges.
Since SLAs are mostly prepared by the vendor, they could favor the service provider more than the customer. In order to prevent situations where customers feel like they have been deceived or misled, you can consider encouraging customers to review the SLAs and possibly invite legal counsel, where necessary to make the SLA satisfactory to both the service provider and the customer.
Why are SLAs important?
An SLA is important for the following reasons:
1. SLAs protect both parties involved – service provider and client
At the basic level, SLAs are created to protect the interest of the service provider and the clients making sure both parties are honest and on the same page with service expectations.
In situations where there is an issue with the service provider’s performance, an SLA serves as vital documentation that defines the metrics, responsibilities, and expectations that were originally agreed upon. These guidelines also enable an end user to know exactly what to expect and the responsibilities of every party involved. Check out the guide about the point of contract.
2. It provides clear metrics
Beyond simply defining the roles, responsibilities, and expectations of a service provider and its clients, an SLA also identifies the metrics by which the service levels will be measured. These guidelines enable both parties to better understand and determine the effectiveness of the service to decide whether it fulfills the terms of the contract.
3. It offers recourse for unmet obligations
One of the biggest importance of creating SLAs is that it spells out the consequences or penalties applicable in situations where obligations are not met. SLAs also identify the next steps to take when the service provider defaults or fails to meet expectations. It encourages transparency and awakens their sense of responsibility.
4. It gives peace of mind
When end users know that they can hold the service provider accountable for the service they promised at the time of the agreement, they have more peace of mind. With this assurance, they can stop worrying and enjoy the service as much as they can.
5. It strengthens provider-customer relations
A well-implemented and managed SLA can improve commitments between a service provider and customers. It also increases trust between both parties to strengthen the provider-customer relations for future business transactions. Customers can feel more at peace with introducing the service to their colleagues and families – which ultimately boosts the service vendor’s reputation.
Benefits of SLAs
The business advantages of creating and implementing SLAs include:
1. Improved Customer experience
SLAs provide a form of safe haven for customers when choosing a service provider. In situations where the service provider fails to meet their expectations, the customer has full knowledge of the penalty applicable to the service provider. On the other hand, when service providers fully understand their customer’s expectations and how these expectations can be met, it enables them to perform better- which ultimately improves customer experience.
2. Improved employee experience
When it comes to the smooth running of a business, everyone is important – customers, employees, and top-level management. As SLAs are important for customers to know what they should expect from a service company, they are equally important for employees to understand what is required of them and how their performance is being measured. This enables them to get better at their job and have better job experience.
3. Trusted Source of information
SLAs are documented agreements or contracts with legal binding for both the service provider and the customer. It provides legitimate and credible information relevant to service standards and other guidelines that customers can trust and service providers can use to guide their business actions.
4. Increased productivity and performance
SLAs have performance metrics that can guide the performance standards of their employees. As highlighted above, SLAs are important for internal purposes because they help employees understand their roles and responsibilities and how they are measured – which will eventually encourage them to improve their productivity and job performance.
5. It encourages client referrals
Aside from their obligations to customers, every business entity equally exists to make money and grow. In as much as you want to create products or services that solve the needs of your customers, you must also ensure services can generate income – if not your business closes down.
For this reason, client referrals are a cost-effective way for businesses to gain new customers and increase revenue. When your existing customers have a good customer experience and trust in the company, they naturally feel obligated to introduce the service to their family and friends. Check out the detailed guide about gross revenue.
Types of service level agreements
There are three basic types of service level agreements, which include:
1. Customer service level agreement
A customer service level agreement otherwise known as an external service agreement is an agreement between a business or service provider and a customer. A customer SLA is the most common or widely used type of service-level agreement. It includes
- Specific information about the service the customer will get
- Conditions of the service availability
- The standard for the time windows for each service level
- Responsibilities of each party involved
- Escalation procedures
- Cancellation terms
2. Internal Service level agreement
An Internal SLA serves the needs of internal teams. In most cases, this type of service level agreement is designed to create and adhere to service standards with teams such as the sales and marketing departments of an organization. For example, if a sales department has a goal of making $5000 in a month, which they break down to making $50 from 100 leads, they can communicate this with the marketing department, who are then informed of their role in supplying the sales team with 100 leads to hit the monthly sales goal. The SLA could further stipulate that the marketing team should submit four weekly status reports.
3. Multilevel Service level agreement
A multilevel SLA outline the responsibilities and expectations of different parties where there is more than one end user or service provider. A multilevel SLA divides the agreement into multiple levels and could be a part of the operations strategy or a means to support customers. For example, if the internal SLA between the sales and marketing team decide to include a customer retention strategy in their service agreement, the service level agreement will now add the customer service team to the agreement.
What is included in a service-level agreement?
The following are the different information that goes into a service level agreement:
1. Summary of the agreement: Most SLAs contain a summary of the service being rendered, who is receiving and providing the service, and how the success of the service will be measured.
2. Goals of the parties involved: Most SLAs, especially the external SLAs – between the service provider and customer – include the goals that the customers want to achieve. It also includes measurable goals that the service provider can regularly attain for its customers. If the SLA is for internal purposes, it must online all the goals of the teams involved.
3. Description of what’s needed to achieve the goals: The SLA must include a clear description of what each party needs to achieve the goals. For external SLAs, it can include things like technical maintenance, consulting, or reporting. However, if it is for an internal purpose, the SLA must include what each internal departments or teams need from one another to achieve their departmental goals.
4. Reporting procedure: An SLA must clearly state how and to who problems or issues should be reported and what the reporting process should be.
5. Consequences: The SLA must always state what the consequence is if any of the goals or expectations are not met. For instance, in a case where a service vendor fails to perform as promised or fulfill the service delivery, they could issue service credits or other forms of compensation to the customer.
6. Exclusions: An SLA must clearly define specific services that are not offered by the service company to avoid confusion or distrust and eliminate any assumptions from other parties.
7. Service performance: The SLA must clearly identify the agreed metrics by which both parties – service provider and customer- will use to measure the service levels of the provider.
8. Security Measures: The SLA should clearly identify all the security measures that are put in place to ensure the safety of the customer.
9. Risk Management and Disaster Recovery: The SLA must clearly define the risk management process and disaster recovery plan.
10. Service tracking and reporting: The SLA must define the reporting structure, tracking intervals, and all stakeholders involved in the agreement.
11. Periodic review and change process: The SLA must clearly state the appropriate process for reviewing and making changes to the agreement.
12. Termination circumstances: In any situation where the contract has to be terminated, the SLA must state formal conditions and guidelines for which the parties could terminate the contract for a better one. This is applicable to both internal and external service-level agreements.
13. Signatures: Finally, all parties involved and authorized stakeholders must sign the agreement document to show the approval of every detail and process.
Service level agreement vs. Key performance indicators
A key performance indicator (KPI) is a form of performance measurement that a company uses to measure how well they are performing with regard to their strategic goals. It is important to keep an organization on track with its plans and lets them know when they are going off track.
Whereas, a service level agreement outlines what a customer will receive and what they should expect from their service providers. Although it includes metrics for measuring the service provider’s performance, it is a lot bigger than the scope of KPIs. An SLA defines KPIs so as to measure service performance and improve service management.
The implication of this is that the metric included in the SLA ultimately becomes the KPIs that the business will monitor and report on to measure its success.
SLA metrics for businesses to consider
As explained in the preceding paragraph, metrics are important components of SLAs. Hence SLA metrics must be easy to follow, with data that can be easily collected without stress. For best results, service providers must choose an accurate number of metrics to effectively measure performance.
It is important to understand that adding too many metrics could generate more data than you can analyze while too few metrics will not provide enough data to show that the customer expectations are being fulfilled. You must also note that every metric must have a reasonable baseline to be measured against. Some of the metrics to include in your service level agreement includes:
1. Service availability
This metric measures the amount of time that the service is available for use. This can be slightly difficult for some types of SLAs, as this means that service providers will have to go the extra mile to stay true to their promises.
2. Technical quality
This metric is used to measure the technical quality of certain services. This helps to reduce the chances of defects or errors in some services.
3. Error rates
This metric measures the number of times there have been defects or errors in major deliverables. It may encompass several other metrics and look out for missed deadlines, coding errors, production failures, etc.
4. Security
This is one of the most important metrics for many IT services firms. Security metrics measure the available security measures to protect customers from internal and external dangers. It specifically looks at the antivirus updates, the number of unclosed vulnerabilities, and other relevant security measures essential to ensure SLA compliance.
5. Business results
To ensure SLAs help clients achieve their desired business results, customers can consider adding some of their own key performance indicators, as metrics in the SLA as long as the service provider can positively influence the results. Such metrics could include time service factor, network uptime,
Service level agreement and Indemnification Clause
Indemnification is a contractual obligation made by one of the parties – usually the Indemnitor – who agrees to take full responsibility for any liabilities, losses, or damages suffered by the other party – the indemnitee – in the event of a contract breach.
Indemnification clauses are usually one-sided benefiting one party at a disadvantage to the other party. It usually involves the service provider clearly stating and acknowledging that the customer will not be held responsible for any costs incurred through violation of contract guidelines. It also requires that the service provider pays the customer for any litigation from third parties as a result of the contract breach.
It is used by service providers to further guarantee the standard of service after creating the service level agreement. A service provider can do the following to limit the scope of indemnification.
- Consult an attorney
- Reduce the number of Indemnitees
- State monetary fees for these clauses
- Create time limits
- Define the point at which the responsibility of indemnification starts
SLA penalties for businesses
SLA penalties are the disciplinary measures put in place to ensure that the terms of the contract are maintained. Although penalties differ from contract to contract, most penalties are given when there is perceived unavailability of service or a reduction in service quality. The penalties for this include
- Issuing a service credit
- Financial penalties: involves service provider reimbursing external customers when service expected is not met.
- License extension or support: involves extending the term of the license or providing the particular customer additional support with a charge.
When to revise an SLA
An SLA should be revised:
- When the customer’s business objectives or requirements have changed.
- If there’s a change in the workload.
- If the measurement tools, processes, and metrics have been upgraded.
- When the service provider stops offering an existing service or adds a new service.
- When the service provider’s technical capacities change.
Service level agreement templates
SLA differs depending on the organization, industry, or service delivery. Some of the SLA templates include:
1. Hubspot Marketing and sales SLA template
2. SLA Template 2
3. SLA Template 3
4. SLA Template 4
5. SLA Template 5
Best practices for service-level agreements
To help you get the most from your SLA creation, implementation and management, consider aligning your activities with some of the most common best practices. It includes:
- Set and define realistic goals
- Make sure everyone is on board.
- Be very specific about your service delivery and what customers should expect.
- Pinpoint your key metrics.
- Make provisions and plans for unexpected events.
- Double-check your details for errors
- Review and revise where necessary.
SLA: The Bottom Line
A service level agreement is a crucial part of any technology service agreement. Although its short-term benefits are to guarantee service standards and eliminate all confusion or uncertainties, its long-term benefits will help strengthen customer-client relationships. SLAs protect both parties and in situations where disputes arise, they clearly specify solutions and action plans to avoid misunderstandings.