SLA and Service Credits

Service Level Agreement is one of the great ideas in outsourcing or a managed service engagement. In a service level agreement (SLA), a provider agrees to achieve defined performance levels and if it fails to achieve those performance levels then the provider has to reduce the cost. An effective SLA balances the unfortunate incentive for a provider, in a fixed price arrangement, to increase its profits by cutting service quality. SLAs are boon to the providers as they have well defined performance requirements.

What should be included in the SLA?

A well thought out and properly drafted SLA should include the following elements:

1. What are the business objectives that need to be achieved during the service
2. The service deliverables should be defined properly and in detail
3. What does the customer expects from the service provider in terms of performance standards
4. How to measure the ongoing reporting mechanism
5. It gives the customer the right to terminate the contract if the performance falls drastically

Service Level Credits

When disputes over performance arise then monitoring of service levels may be the best way to record the performance of the service provider. The customer may wish to show that there have been breaches and, that the failure to meet the service levels is a symptom of bigger failings which is when the service credits comes into place. Service level credits are reduction in the provider’s compensation if any of the defined service fails. Whenever the service provider fails to implement or perform the desired task mentioned in the SLA then the provider will have to pay back by service credits, which should be mentioned in the agreement.

The supplier may be required to write a check to the customer or the customer may simply have the right to apply the credit to future service if any of the service fails. It eventually reduces the effective price of the services and the supplier’s profit margin.

In order to penalize the rectification of the root causes of problems and the failure of any services, service credit regimes frequently include mechanisms which impose multipliers on the service credits that are payable by the provider if something goes wrong or fails. The intention is to prevent the service provider from behaving as though small lapses in service are a part of its overheads and also to get the work done on a timely basis.

The SLA should include some of the below points:

1. It should have the minimum credit payable for each service failure
2. A target service level with credit payable for series of service failure
3. IF there are successive breaches then create an additional incentive to fix the problem quickly
4. Give the customer the right to reallocate service credit exposure over the service levels to allow the customer to realign incentives as its business needs change

Give the customer the right to reallocate service credit exposure over the service levels to allow the customer to realign incentives as its business needs change.

About Author:

Shailesh Nambiar is consultant and part of Systems Plus Pvt. Ltd. He actively contributes to information technology and VMO. He can be contacted at: shailesh.n@spluspl.com