Service Level Agreement, commonly referred to as “SLA”, is one of the key aspects of technology outsourcing that is frequently negotiated between service providers and customers. An SLA would set out the agreed standards at which the outsourced services are supposed to be provided, how the standards will be measured, and the consequences for failing to meet the agreed standards. When it comes to technology outsourcing, SLA can normally be found in contracts involving the provision of Software-as-a-Service or information technology (IT) managed services.

Given the increased reliance on technology in today’s age, it is crucial for a customer to ensure that the new S-a-a-S that it has just subscribed to, or that new service provider engaged to manage its core business IT system, is able to meet the level of service that the customer expects. If the services provided are not satisfactory, the customer should then receive, in one way or another, some form of rebate or credit from the service provider for the less than satisfactory services rendered. Due to this very nature of SLA that may potentially reduce the remuneration that a service provider receives, SLA regularly becomes the subject of contention.

In this article, we set out some considerations that businesses should take into consideration when structuring an SLA.

Service Level Objectives

From a customer’s perspective, the first thing when structuring SLA is to identify the service level objective that is sought to be achieved from the services outsourced. Depending on the type of services outsourced, the objective could be to ensure high system availability, or that service disruptions are attended to and get resolved promptly.

Once the objective has been identified, it then allows clear communication of the objective to the service provider, and to facilitate the determination of appropriate metrics to be used to measure the standards of the services being performed. Failure to properly identify the objectives may result in the service provider’s attention being diverted to aspects of the services that are actually of lesser importance to the customer, hence translating into a mismatch in the level of services being delivered by the service provider.

SLA Metrics

Upon the identification of the service level objectives to be achieved, one will then be able to establish the most appropriate metrics to be used to evaluate the quality of the services rendered.

Assuming that the service level objective is to ensure that a particular system or software has a high availability, “uptime” would then be the metric of choice. When a customer is looking to ensure that service disruptions are promptly attended to, the most common metrics that the customer can use are response time, resolution time, and/or mean time to recovery.

Depending on the metrics chosen, the way that they are being measured may also differ. Take uptime for example, it is typically measured across a period of time, potentially on a quarterly basis, half yearly basis, or annual basis. The customers will have to determine the desired uptime of the system, be it at 99.7% a year, or 99% in a month. For incident response on the other hand, it has to be measured on a case-by-case basis, typically depending on the severity level of the incident, which would in turn affect the expected response and resolution time by the service provider.

On top of that, SLA metric should also incorporate flexibility to adapt to changing commercial circumstances, such as business growth, evolving technology, or shifts in the economic landscape, and by incorporating customizable or flexible SLA metric, this adaptability ensures that the SLA remains a living document that continues to serve the interests of the parties over time.

The SLA metric is an important component in an SLA as it sets the expected standards at which the service providers should be achieving when delivering their services. Additionally, it allows for clear and objective evaluation of the standards of services provided by the service providers, and paves the way for the implementation of the service credit regime.

Service Credit Regime

In an SLA, failure by a service provider to meet the agreed service level objectives based on the agreed metrics would normally result in the customer being entitled to service credits. Service credits can take the form of cash payment by the service provider to the customer, or a rebate in the subsequent fees payable by the customer to the service provider. The rationale of a service credit regime is that a customer should not have to pay the service provider 100% of the agreed fees, since the service provider has failed to perform the services at the level or standard expected. In other words, service credit regime should rightfully reflect the lowered standard of services actually performed by a service provider, as opposed to what the service provider was initially offered to be paid to perform.

Many have the misconception that service credit regime is a tool for customers to potentially achieve cost savings or getting huge discount from the fees otherwise payable to the service providers. This thinking often results in the misguided approach of affixing high price tag to service credit that is disproportionate to the magnitude of the corresponding service level failure. It can potentially derail and delay the finalisation of the contract for technology outsourcing, or prompting the service provider to mark up its fees, or worse – causing reluctance among service providers to agree to undertake a particular service.

An effective service credit regime will have to take into account the nature and extent of the service level failure – more severe service level breaches should translate into higher service credit, while minor service level breaches should only result in lower service credit.

Creative Structuring of SLA

Structuring and negotiating SLA for technology outsourcing requires careful planning. A well-crafted SLA would facilitate service providers to deliver services that meet the expectations of the customers, allowing customers to achieve their business goals.

As technology advances, it may not be so easy at times for service providers to meet the service level requirements of the customers, especially when cutting edge technologies are involved. These circumstances may then call for creative structuring of SLA, such as incorporation of service credit holiday, incremental service levels, assigning weightings and multipliers to different type of service level breaches, or potentially allowing service credit earn-back, in order to incentivize the service providers to deliver their best games.

Businesses should consult legal professionals in crafting a meaningful SLA that would help in directing the service providers to deliver services at the level and standard expected of them.

Please feel free to reach out our partners from the Technology Practice Group should you have any enquiries in relation to your next technology outsourcing initiative or if you would like a consultation on your service level agreement. Our team of professionals are always here to help.

About the authors

Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications, Intellectual
Property, Corporate/M&A, Projects and Infrastructure,
Privacy and Cybersecurity
ky.lo@hhq.com.my.

Ong Johnson
Partner
Head of Technology Practice Group
Transactions and Dispute Resolution, Technology,
Media & Telecommunications, Intellectual Property,
Fintech, Privacy and Cybersecurity
johnson.ong@hhq.com.my

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