Guide to Service Level Agreements for Outsourced IT services

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Businesses engaging in outsourced IT services require an understanding of the service type and quality that is expected. Whether you’re a company looking for vendor, or a service provider in the market, it is important that you have properly drafted Service Level Agreement in place. It is beneficial to do so as it will support all your business dealings, protect yourself from legal consequences, and avoid damage to your reputation. It will allow common ground to be agreed upon with your business partners and build trust to create fruitful business operations. A Service Level Agreement can achieve all these goals.

This article consolidates what a Service Level Agreement (SLA) is, the variations SLA’s that exist, what they consist of, and how they can benefit you in avoiding legal repercussions for future business dealings.

However, having a poorly drafted SLA can lead to undesirable consequences, such as downtime on service availability, financial losses, and serious business ramifications.

What is a Service Level Agreement (SLA)?

According to Australian law, an SLA is a contract between two parties that formalises the minimum level of service to be provided by a customer to a supplier, specifying the metrics by which the service is measured and remedies or penalties. This is done ensure that both parties involved in the contract have a common understanding of the outcomes. It is a legally binding contract between the service provider and the customer.

What is an Outsourced IT service?

Outsourced IT services refer to third-party service providers who manage the technological needs of other businesses. With an outsourced IT service, you can leave the heavy lifting to be done by the third-party service provider and focus on what your company does best.

Components of an SLA

An SLA typically has components within two specific areas, namely, service and management.

The service agreement aspect consists of the specifics regarding the services that are to be provided, alongside any conditional situations that affect the availability of the service, the scope to be provided, standards that will be upheld and lastly, the responsibilities accepted by the service provider.

Service management on the other hand includes that are critical to the successful fulfilment of the SLA. This includes definitions of measurement standards and methods, reporting processes, contents and frequency, a dispute resolution process and an indemnification clause. Said indemnification clause is protects you, the customer from third-party litigation as a result of service-level breaches. 

Types of SLA

There are three types of SLA’s;

  • Customer SLA: this kind of SLA is used for external individuals and consists of all the relevant information to review, having only one contract containing precise details, standards, responsibilities and conditional terms.
  • General SLA: a general SLA is a nearly identical contract used for all customers. It is straightforward and to the point, with almost no room for negotiation, making it appealing and convenient to use for general purpose.
  • Multi-Level SLA: a multi-level SLA is a unique kind of agreement, it can be customized to fit the needs of the consumer. This kind of SLA is often used when the customer wishes to further incorporate large changes into the system, or make drastic modifications to the service being provided as the service is worked upon.

Why do you need an SLA?

An SLA is an important aspect of service. It gathers all the necessary information into a concrete agreement for both parties to conduct business, and clearly states all important details regarding the service so that no misinformation or misunderstanding can occur between both parties. The absence of an SLA between a company and a vendor can lead to misinterpretation of what the company is expecting and what the vendor is providing. It is best to clarify all aspects to avoid any problems. An SLA offers legal protection to both the consumer and service provider in such situations.

Who provides an SLA?

Almost all service providers have standard SLA’s ready for use and can undergo further modification should the client require. Negotiating your demands and understanding what service providers can offer is what can help you decide which service provider to use.

SLA & Indemnification Clause

An indemnification clause within an SLA is a contractual obligation of a service provider to ‘indemnify’ a customer in the event of a breach of the SLA takes place. It states that the provider must assume full responsibility in such an event, and must pay the customer for any liabilities and damages that were caused by the breach.

Can service levels be verified?

Service levels can be verified through statistics, often provided by the service provider for consumers to ensure that their requirements are being met. If they are not, the consumer is entitled to compensation. Due to the service provider providing the information, the usage of third-party software is not uncommon to fully verify that the information being given is not false.

Metrics you should monitor

There are some key metrics to look out for, such as

  • Availability of Service: this metric refers to the entire duration that the service is provided, when and for how long the service was up and running, and any downtime on the service, should it occur.
  • Safety & Security: this metric refers to the monitoring of data and the usage of security measures to prevent a leak of information, which can be costly and, in some cases, lead to irreparable damage to the company’s reputation.
  • Quality of Service: this metric refers to the overall experience and quality of the service being provided as directly written within the expected standards of the SLA, making certain that the quality of work is deemed acceptable and that there are no defects present within the product.

How to set the metrics for your SLA

In order to set the metrics of your SLA it is important to understand which metric is relevant to you, and which metric is not as significant. Prioritize what you need and what you’re looking for in your system from both a customer and a provider standpoint. The addition of metrics that you will benefit the most from will add a significant amount of value to your SLA.

What happens in case an SLA is breached?

In the event that an SLA is breached, the service provider will attempt to fix the breach, and the indemnification clause of the SLA is referred to for any penalties and compensations that a customer may be entitled to.

What is “earn back”?

In order to understand what an earn back is, it is important to grasp the concept of service-level credits.  Service-level credits are agreed upon financial amounts that a customer is entitled to receive should a standard of service not be reached. An earn back is an agreement in SLA’s that gives rights to the service provider to receive service-level credits if their performance has exceeded expectations and their work has been above standard for a certain period of time.

Does an SLA need to be updated?

A growing business is a changing business, and there are often times where service requirements become outdated and must be changed in order to adapt to situations. An SLA isn’t a permanent document, there are opportunities and reasons for it to be constantly updated as time passes. A well-thought-out SLA with room for modification will benefit everyone involved in the long run, saving time and resources and avoiding any misunderstandings.

Key Takeaways

  • An SLA is an important contract between a customer and a service provider that has all necessary details and information regarding the aspects of the service being provided, acting as a safety net to protect both parties in the event of an unexpected result.
  • There are various kinds of SLA’s that can be used by service providers, with each of them having their own benefits and appeal.
  • There are many different types of metrics that should be focused upon and monitored when drafting an SLA, and should always suit your needs.
  • An SLA is designed to protect the customer and the service provider, and thus is a core aspect to service provision, however arbitrary it may seem.

Get The Right Business Lawyer On Your Side

Keeping in mind all the points highlighted in this resource, and being extremely careful, there may still be some unfortunate situations that could arise from the absence of a properly drafted SLA. Should you find yourself in such a situation or need help drafting Service Level Agreements, contact one of our business lawyers who will be glad to assist you with any legal requirement. 

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Mark Lazarus

Mark Lazarus

Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.

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Guide to Service Level Agreements for Outsourced IT services