What is a service level agreement (SLA)?

A service level agreement (SLA) is a contract between a service provider and a customer, defining the types and standards of services to be offered.

Success in business depends heavily on an organization’s ability to understand and meet customer expectations. But when those expectations are not clear, or when customers are not fully informed about what they can expect from a service provider, managing customer expectations may become extremely difficult. To counter this issue, businesses of all kinds rely on SLAs.

An SLA functions as a documented understanding between the entity providing the service and the one receiving the benefits of the service. Although traditional SLAs define service expectations between vendors and customers, they may also be employed between departments within the same organization. And while the SLA may consist of as little as a few sentences or as much as entire documents’ worth of provisions and stipulations, they are always a critical component of modern service contracts. It’s also important to note that SLAs should not be thought of as immutable; they should change and grow to meet evolving business needs. With this in mind, SLAs should incorporate a clear framework for introducing revisions or modifications during the course of the contract.

The SLA is created and provided by the service vendor. This allows the organization to customize their various SLAs to meet specific service and customer requirements. In fact, there might be cases in which a company may provide several SLAs for a single service, with each SLA reflecting different levels of service at different price points. However, because SLAs are usually prepared by the vendor, they may favor the service provider over the customer. As such, it can be helpful to encourage clients to review SLAs—and to even consider bringing in legal counsel, where appropriate—to ensure that the SLA is satisfactory before making any formal commitments. This will help prevent issues where customers feel as though they have been misled.

Although they may seem straightforward, SLAs serve a variety of functions.

Ensuring everyone involved is on the same page

At their most basic, SLAs are designed to keep both parties honest. If there is an issue with the service, the SLA acts as vital documentation detailing all the metrics, responsibilities, and expectations that were originally agreed upon. Both parties have access to the SLA, which means that neither may claim that they were unaware of expectations or agreed-upon standards after the fact. A legally reviewed and approved SLA effectively eliminates the possibility of misinterpretation of the contract and provides protection to both the customer and the service provider. Clients enjoy the peace of mind that comes from knowing that they will receive the service they are paying for, and providers have a contract to refer their customers back should they start to demand services that are not included in the agreement.

Providing clear metrics

More than simply defining what the services themselves will consist of an SLA also establishes the metrics by which service levels will be measured. These guidelines allow both parties to better understand and gauge the effectiveness of the service, and whether it is fulfilling the terms of the contract. The metrics outlined in the SLA must be clearly stated and fully quantifiable, so that there is no room for debate about whether vital KPIs are being met.

Offering recourse for unmet obligations

SLAs not only help define standards, set expectations, and offer insight into important metrics, they also act as a roadmap of next steps and consequences if obligations are not met. Should one of the parties fail to meet the standards outlined in the contract, the SLA will define the consequences—potentially including legal penalties or forms of financial restitution. Clearly defined repercussions help hold both parties accountable.

Improving provider-business partnerships

Finally, an effectively implemented SLA helps manage commitments between service providers and customers to improve the service provider-business partnership. Clients and businesses enjoy more productive and successful relationships, and neither has to worry about the other failing to meet their obligations. At the same time, the right SLA can help assuage the concerns of potential new customers, bringing in new business opportunities and improving the brand reputation.

The importance of SLAs in ensuring that expectations are being effectively managed cannot be overstated. Additionally, SLAs bring with them several clear advantages , including the following:

Improved customer experience

Customers who invest in a service provider are taking a risk—they are acting in good faith with the expectation that the provider will be able to meet their needs. The SLA provides these customers with a sort of safety net; the customer knows that should the provider fail to deliver on the agreed-upon services or otherwise fail to meet obligations, then the customer will have legally binding documentation to assist them in seeking restitution. By managing expectations and giving customers some much-needed insurance, SLAs can improve the overall customer experience.

SLA Benefits

Improved employee experience

When obligations are clearly defined and metrics are transparent and quantifiable, it benefits everyone involved. This includes employees, who have a clearer understanding of what is expected of them and how their performance will be measured.

Established and trusted source of information

In many ways, the SLA acts as a mediator, ensuring that everyone’s best interests are being looked after. It is something that can be trusted by both parties, acting as a source of reliable, legally vetted information relevant to service standards and other guidelines.

Increased productivity and performance

The metrics established within SLAs offer their own internal advantages. With clear expectations, employees have a ‘north star’ by which to guide their performance. This leads to improved productivity and increases personal accomplishment.

As previously stated, most SLAs cater to the provider/customer relationship. However, there are three different types of SLAs, categorized by their specific use cases:

Customer SLAs

The most common (or at least the most well-known) type of service level agreement, the customer SLA is a contract between a service provider and an external customer. This is sometimes also called an external service agreement.

Internal SLAs

Internal SLAs are designed to establish and adhere to service standards within a specific company or organization. These may function between teams or departments and help ensure that different groups that depend on each other within the business are meeting vital goals.

Multilevel SLAs

For occasions when there is more than one service provider or more than one end user, a multilevel SLA can divide the contract into multiple levels. These can be applied to internal or external customers and may also cater to different price ranges for varying levels of service within a single product.

There is no set standard outlining everything that should be included in every SLA; details will differ between industries, businesses, customers, service types, and even individual situations. That said, there are several SLA elements that have become commonplace in many service agreements. These include the following:

Agreement summary

Possibly the most-important part of the SLA is the summary of the agreement itself. This should clearly outline and summarize the service, the stakeholders involved, and the metrics that will be used to measure success.

Party objectives

In some cases, the SLA will focus heavily on the customers’ goals, and fail to connect those goals with organizational objectives and important KPIs. When this is the case, it’s important for service providers to establish their own measurable goals that may be applied to help promote client success. For internal SLAs, every involved department will need to outline their own goals and objectives.

Schedules for reviews

SLAs may also need to establish a review schedule. These reviews will allow parties to periodically reassess the SLA and make changes when necessary.

Points of contact

The SLA must make fully clear who is responsible for what aspects of the service. This section should detail who is involved, who should be contacted regarding which issues, etc.

Compensation for unmet goals

The SLA is a legally binding contract, and if the promised service levels are not delivered, then there will need to be consequences. This section outlines what those consequences are, and what compensation the service recipient can expect in remediation. For internal SLAs, this may involve plans detailing how the defaulting party can ensure that their dependent parties are still able to meet their objectives.

Cancellation conditions

SLAs aren’t forever—they’re usually designed to apply for a limited amount of time, and there may even be occasions when one or both parties may wish to terminate the SLA and replace it with something better during the contract. Whether because the SLA isn’t working, circumstances have changed, or the agreed-upon end date has been reached, this section formally established the conditions in which the SLA may be revoked.

Some SLAs may feature an indemnification clause. In an indemnification clause, one of the parties (called the indemnitor) agrees to take full responsibility for any liabilities, damages, or losses suffered by the other party in the event of a contract breach. These clauses are often one-sided, benefiting one party without providing any clear advantages to the other. That said, some service providers may wish to include such a clause as a way of further guaranteeing the standards of their services.

As stated above, metrics are important components within SLAs. But just because something is measurable, it does not necessarily mean that it should be included as a metric. SLA metrics should be easy to follow, with data that can be accurately collected with little effort. Likewise, because the service provider will be held accountable to these metrics, they absolutely must be within the providers control to directly influence.
It’s also important to choose the correct number of metrics. Too many different metrics will likely produce more data than can easily be analyzed, while too few metrics will not provide enough information to prove that the contract is being fulfilled. Finally, every metric will need a reliable and reasonable baseline to be measured against. These baselines may be revised during periodic SLA reviews.
Possible metrics to include in an SLA are as follows:

Availability of service

This metric measures the amount of time that the service is available for use. Service availability may be very demanding within certain types of SLAs, meaning that service providers will have to work hard to ensure near-constant uptime, with very little room for error. This may be especially true for ecommerce sites, where even a brief drop-in service may result in large amounts of lost revenue.

Technical quality

Metrics exist that may be used to measure the technical quality of certain services. For example, if the service includes the creation and delivery of digital applications, the SLA may need to establish quality standards, possibly measured by program size or number of coding defects.

Error rates

This metric may encompass several other metrics and is best described as a measurement of how many times there have been defects or errors in major deliverables. These may include coding errors, missed deadlines, production failures, etc.

Security

For many IT services, one of the most-important metrics to keep track of to ensure user success is security. Should an incident arise, security metrics such as the number of unclosed vulnerabilities, anti-virus updates, and the application of other relevant security measures are essential to proving SLA compliance.

Business results

To better connect SLAs with established business results, customers may wish to include some of their own key performance indicators as metrics, provided that the vendors are able to positively influence the results.

The right SLA can go a long way towards correctly managing user expectations and creating powerful, profitable business relationships. But SLAs are only one aspect of the whole process. To ensure optimal experience while managing commitments between customers and service providers, more and more businesses are turning to Service Level Management from ServiceNow.

Built on the award-winning Now Platform, Service Level Management brings SLAs, operational level agreements, key definitions, and accurate real-time analytics together in a single, centralized location. Employ visual, intuitive dashboards to see and manage SLAs across departments and customers and optimize essential tasks by incorporating advanced automation capabilities and integrating with related ServiceNow applications. And that’s only the beginning.

ServiceNow SLAs

Take your SLAs, and your business, further, with ServiceNow. Learn more about the ServiceNow® Service Level Management (SLM) application.