What is a service level agreement? (With different types)

Effective agreements between service providers and their clients can improve communication, customer satisfaction and provide clear expectations for both sides. Implementing successful agreements improves your business relationships. Understanding service level agreements (SLAs) can be beneficial for improving the quality of services and avoiding losses and penalties. In this article, we define what an SLA is, explain why they're important and list their components.

What is a Service Level Agreement?

A Service Level Agreement is a part of a written commitment between a service provider and their clients. It outlines specific details of a service arrangement related to quality expectations, pricing, availability, requirements, performance metrics and dispute resolution. An SLA specifies metrics that measure performance, processes for altering metrics, responsibilities of each party involved in the agreement and penalties for violation or breach of the SLA. You can create an SLA between two departments within a company or with external vendors like suppliers, service providers, technicians or facility management companies.

One example of an SLA is an agreement between an internet service provider and their customers. SLAs typically define a service provider's parameters of service for customers. SLAs define important metrics like Mean Time To Recovery (MTTR) and Mean Time Between Failures (MTBF). They may also outline who is supposed to report failures or pay applicable fees.

Who uses Service Level Agreements?

Although SLAs are popular with network service providers, IT solutions providers also use them frequently. IT, internet and cloud computing service providers may also enter into SLAs with their customers. IT departments are usually responsible for creating agreements that define measurable and tangible service expectations. Many service providers offer SLAs for varying price points that outline standardised expectations that correlate with costs. Customers and service providers can also work together to create SLAs specific to their needs.

What are the three types of SLAs?

Organisations can choose from three types of SLAs based on their users, the purpose of the agreement and its relevance. The three types of SLAs are:

• Customer-based SLA: These are internal SLAs that involve a service provider and a single customer stipulating the many services provided by a company. SLAs can exist between an organisation and a customer, between different departments of a company or between a company and an external organisation.

• Service-based SLA: These are identical SLAs formed between a service provider and each of their customers. For example, a cellular service provider may include voice calls, internet services and text messaging in one SLA and use it for all their clients.

• Multi-level SLA: An SLA may cater to a customer's needs, allowing the company to combine many of the customer's conditions into one agreement. Companies use multi-level SLAs when they have many categories of customers who choose different pricing plans for their services.

What are the points included in a Service Level Agreement?

A well-drafted SLA spells out a company's business objective. It gives information regarding service deliverables. An SLA defines a customer's expectations on quality and performance levels. It also details how to monitor, report and review performance by setting standards and guidelines. One of the most important points that an SLA may contain is a clause regarding penalties or conditions of termination. It can also provide information about redressal procedures in case a customer defaults on payments.

What are the components of a Service Level Agreement?

An SLA contains components that provide information regarding service and management. Service components include information regarding service objectives, exclusions, service availability, service-provider responsibilities, procedures for escalation of grievances and service costs. The management components may include information regarding reporting procedures for standards and metrics, processes for performance tracking, dispute resolution mechanisms and renewal protocols. The following are the important components of an SLA:

An agreement summary

The initial parts of an SLA include the agreement's objective, start date, end date and a summary of the service or services provided. It also defines the roles and responsibilities of both parties. The invested parties may be vendors, suppliers, customers or clients.

Description of services

An SLA typically contains a description of individual services provided by a company. Service description includes information on client information, along with the type, cost, duration, location and frequency of the service. It can also include specifics like turnaround time, delivery methods, customer service availability and maintenance schedules.

Related: How to write a business description (including tips)

Exclusions

Besides detailing the services customers can expect from a provider, SLAs can also list the services that providers don't offer. These can help address any confusion or assumptions a customer may have about what's included in the service. Exclusions make it easy to refer back to service offerings in the event of a discrepancy.

Performance standards

A customer may expect 100% quality and performance at all times, which becomes the responsibility of service providers. A service provider may request a lower threshold of Key Performance Indicators (KPIs) to avoid penalties or breaches of the agreement. There is no generalised method of setting performance standards and metrics. Companies design KPIs based on the type of service provided, the risk of disruption, cost of service and customer expectations. Clients can develop realistic assumptions regarding the promptness of responses following requests, system availability and overall reliability of a service with the help of well-defined performance expectations.

Related: What KPI stands for and how to use it in your career

Performance review schedules

Establishing a schedule for reviewing KPIs can ensure sustained performance. Defining how and when to measure the success of a system's performance can help clarify confusion if providers make changes. Sometimes, an SLA may define methods for supervising and assessing statistical data.

Related: What is a Performance Review Template? (4 Templates to Use)

Compensation

SLAs can provide procedures for compensating a customer for grievances caused by a lack of service. In such cases, SLAs may penalise the service provider, typically with a fine. If the service provider fails to meet the KPIs, they may compensate clients or customers in cash or offer credits with which they can purchase products, get discounts or pursue incentives. A system that enforces accountability through penalties, incentives and credit accounts can enable companies to provide consistent quality of service.

Breakdown or critical failure

A provision that safeguards a customer from total breakdown or service failure is an important component of an SLA. While service credits may be helpful in case of unexpected disruptions, a customer has the right to terminate a contract if the service is consistently poor. An SLA may include such provisions for breach of contract to safeguard the rights of a customer.

Contract management

The purpose of an SLA is to ensure good quality service at reasonable prices. Both parties, therefore, frequently review performance and pricing. An SLA includes pricing and performance review mechanisms for both parties. SLAs may also stipulate schedules for reviews and revision of rates and terms once a contract duration is over. SLAs also set up processes for raising service-related issues and procedures for dispute resolution.

Risk management processes

In the event of a security breach or data loss, SLAs may detail risk management processes and recovery plans that the company may implement. Communicating such strategies can help mitigate risks and assure clients that their information and resources are secure. Additional security measures can include the service provider's expectations regarding IT security, anti-poaching processes and non-disclosure agreements.

Related: How to perform a risk analysis (with tips)

Why is an SLA important?

SLAs are the blueprints of a business relationship between a service provider and a client. They guarantee good service to the customer and complement the reputation of a company. An SLA is important for both the client and service provider because:

It brings clarity to expectations and deliverables

Businesses typically deal with multiple vendors and clients. It may be impractical to have verbal agreements or provide services based on mutual understanding. SLAs provide clarity regarding a company's dealings with their vendors and customers. It is a professional tool that brings accountability while streamlining procedures and processes.

It provides compensation for unsatisfactory service

If a service provider fails to meet the agreed KPI benchmarks and service obligations, it can damage the client organisation's reputation and lead to losses for customers. For example, a breakdown of communication infrastructure at the service provider's side can lead to losses for many companies that rely on that service for business communication. A financial consequence or penalty ensures that the service provider compensates their clients for such losses.

Related: 10 ways to consistently offer good customer service

It sets clearly defined guidelines

Since an SLA describes performance indicators and expectations in detail, there is reduced scope for a misunderstanding or miscommunication between a customer and a service provider. It also helps in building accountability on the service provider's side. Since SLAs also set up processes for dispute resolution, any issue regarding service can be amicably settled between both parties.