What You Need to Know About Service Level Agreements (SLAs)

What is a Service Level Agreement?

A Service Level Agreement (SLA) is a document accompanying a technology or vendor agreement that defines the service expectations for the offering.  The SLA may contain provisions on product and service support, response times, uptime guarantees, and system availability during scheduled maintenance or upgrading (if applicable).  Paired with these expectations are provisions detailing what happens in the event a service level is not met.  For example, a customer may be entitled to service credits or other remedies if there is an outage lasting longer than what is permissible under the SLA.

Though a Service Level Agreement is an “agreement” in name, vendors often provide their SLAs separately from their principal or master agreement and attempt to make them not subject to negotiation.  It is in the vendor’s interest to have uniform service expectations across the board.  After all, it would be a challenge for a company’s support personnel, engineers, and other employees (while sophisticated in their areas of expertise) to deliver bespoke service levels to each and every customer.  A vendor would reasonably fear the material business risk that a service level will be missed.  Therefore, you can expect that a vendor will be somewhat wooden in its approach to its SLA.  In fact, it may only provide you the SLA upon your request; even then, you are likely to see “NOT FOR EDITING” at the top of the SLA copy.

Why is a service level agreement important?

Nevertheless, a Service Level Agreement is a vitally important document for your business.  These service terms are the terms your vendor will rely upon during the life of the relationship.  If you need a support response time of 24 hours or less, but the SLA guarantees no better than 48-hour turnaround, that difference represents a negotiation impasse no different from any other one in the principal agreement.  To that end, whenever you buy a technology or information service, you must review the SLA carefully and square it with your needs.  When necessary, fight for the tailored service levels you need, and make sure they appear in the principal agreement.  Very often, you might find that your vendor is accustomed to providing service that far exceeds its basic levels.  Competent transactional counsel will be able to test the strength of the SLA and extract the coverage and service levels you need for your business.

What are some of the most important elements to FIGHT FOR in a service level agreement?

  1. Measurement, reporting, and auditing.  You need to have defined mechanisms for determining whether service levels meet expectations and mechanisms for being notified when they are not. An SLA that is silent as to these mechanisms is very problematic.
  2. Remedies for service-level failures.  The remedies for failure should be practical, deterrent, and materially useful to you when needed. Indemnification concepts may also be addressed in the SLA, or the principal agreement’s indemnity may be revised to cover certain SLA failures.
  3. Change events.  SLAs are often updated. Sometimes these updates benefit the customer, so you want to make sure that your SLA ensures that you will get the benefit of any positive SLA update, but that there will never be a material diminishment of your service levels during the life of your agreement. Relatedly, it is important to know what happens if there is a change of ownership or acquisition of your vendor.  We expect continued active M&A activity in the technology space, notwithstanding (and to an extent because of) unique economic conditions caused by the Covid-19 pandemic.  If your vendor is acquired, you want to make sure that your services will still be governed by the SLA you negotiated and not by the SLA of your vendor’s successor.

If this discussion has spurred any questions as you consider a software purchase, it would be my pleasure to discuss your business and its needs.  I look forward to learning more about your requirements and plans for technology or other vendor services.