The most common types of service agreement include; (1) Outsourced Support Agreements: service desk, IT technical, design development support, programmers support and (2) Uptime Agreements: determines the percentage of network uptime, power uptime, etc. SLA objectives to achieve the desired results of the service agreement must be clearly defined by the client and understood by the service provider. The SLA lifecycle provides the processes involved in managing the services driven transaction.
In a typical SLA it is recommended that four critical components be included; (1) description of services to be provided; (2) objectives that client wants to accomplish; (3) measurement of performance levels, which are what to measure i.e. cost of services or quality of services, who will measure, how it will be measured and how often it will be reported; and (4) design a penalty/incentive system by defining what is bad/substandard service and superior service, what is the tolerant level of such bad/substandard service and when is superior service can be rewarded.
It is not sufficient merely to list the issues the SLA is intended to address. You also need to define specific and measurable service level objectives, performance indicators, description of services rendered in order to set an objective standard to determine whether the various service conditions are met. For its part, the service provider benefits from a clear set of expectations rather than having to guess the client's expectations or be held to a vague set of service conditions. Be precise about the details and "what-ifs" up front.
The following are important to ensure that a meaningful SLA is negotiated; (1) provable indicators that measure the right performance levels to ensure that the client is receiving its expected level of service, example: efficiency, effectiveness and quality; (2) the client and service provider are able to achieve an acceptable level of profitability and increased productivity; (3) performance productivity can be easily collected with an appropriate level of detail but without costly overhead; and (4) bind all commitments/objectives to reasonable, attainable performance levels so that good service can be easily differentiated from bad/substandard service and allowing the service provider a fair opportunity to satisfy its client.
The principles in the contractual nature of the SLA are; (1) Flexible - able to change as needs, priorities, products, and technologies change; (2) Responsive - able to meet client's needs; (3) Timely - able to stay on schedule; (4) Motivate the right behaviour-is it to reduce costs or obtain new skills or improve production quality; and (5) Adopt reasonable metrics - able to measure service and such metrics within service provider's control and reward accordingly.
SLA is a living document that needs to be reviewed constantly to ensure that the service level objectives remain valid and kept current on an ongoing basis. It is advisable that the same teams from both parties oversee the negotiations and execution of the SLA and thereafter the management of the SLA to ensure that any change to the SLA objectives can be made without major confrontation and encourages both parties to demand continuous improvements from the SLA. This may be achieved by including a variation clause to practically reappraise the SLA on what are the service commitments that are acceptable and what are not acceptable.
The variation clause may be in the form of incorporating floating performance commitments by doing this may allow the client to conduct such reappraisal on the SLA on an ongoing basis.
The floating performance commitments may be through the following methods; (1) Contractual increase- whereby the SLA may have a fixed schedule of increasing requirements; (2) External indicators - the service levels to be accepted can be based on the best industry standards of acceptable or achievable performance; and (3) Service provider's performance - the SLA can increase the performance requirement based on the service provider's actual performance. For example each year the minimum service level indicators or the target service level indicators may be increased by a percentage of the amount which the service provider's actual previous year performance exceeded the target performance set according to the minimum service level indicators or the target service level indicators.
By incorporating a variation clause in the SLA will allow the floating performance commitments be effectively accommodated for in the event following the reviews conducted on the effectiveness of the SLA it is found that the performance requirement needs to be enhanced. This may assure the client's requirement of demanding continuous improvement on the services it contracted for.
Warranties and liabilities must not be taken lightly in a SLA. The warranties must be specific in allocating the responsibilities and to ensure that the parties are committed to assume those responsibilities. Each of the responsibilities of these parties must have a corresponding warranty that warrants the responsibilities to remain available throughout the term of the SLA.
One of the consequences of non-performance of those warranties may result that a party or all parties being sued by a third party claimant for negligence either jointly or separately. The purpose of having a warranty clause is to establish the right of one party to be reimbursed by the other party for losses, claims and expenses to settle a claim for damages made by a third party. Without such provision each party will be responsible for its own negligence and share any joint of negligence.
Assumption of the above liability may cause financial implications on both parties and it is during the negotiation process that the purpose of the clause can be applied to address whether to exclude or cap the service provider's liability to the best possible extent allowed.
Another consequence of non performance of warranties is not achieving the minimum service level that is in the SLA. The performance level is sometimes referred to as performance warranty. Performance indicators must be defined objectively and realistically to reduce disputes over measurements. It is imperative a calculation of penalties and incentives be defined and the method of calculation be incorporated in the SLA. The main principle is to fairly and consistently apply these incentives and penalties in an effective manner.
The following types of incentives may be considered; (1) Gain-sharing - the service provider receives a portion of any additional savings it can generate for the services rendered through its efforts; (2) Achievement Bonuses - one-time payments provided for reaching certain objectives; and (3) Performance-based Pricing - when performance in a given time period exceeds some specified criteria, additional payments apply; when it falls short, penalties are imposed.
Different types of penalties that may be imposed include; (1) Liquidated Damages/Cash penalties; (2) Performance Rebates/Credits against future payments; (3) Delayed payment (4) Financial Guarantee; and (5) Performance Guarantee
Such penalties must be used only to protect the most critical items to the business. Penalties must be tightly tied to measurable performance items so that failure to meet the performance requirement is unambiguous. If the SLA has penalties (in the form of liquidated damages) non-performance can be costly. This is something the service provider will try to avoid.
Rather than commencing legal action to recover damages and to reduce administrative costs in contract management, incorporation of a penalty clause is increasingly common these days. However the penalty clause incorporated in the agreement must be drafted to ensure that it must not be a "penalty" within the Contracts Act 1965. A penalty clause is unenforceable in Malaysia.
A penalty is when the court finds that the real purpose for which the term was that its burdensome, excessive or oppressive character may operate to extort the other party so as to drive him to fulfill the contract, then the term will be considered to be one by way of penalty. A penalty occurs when payments were agreed upon in advance that were not a genuine pre-estimate of damage arising from a breach of obligation.
Where a party has made a genuine effort to determine their loss and has acted in good faith, the clause will not be classified as a penalty regardless of how unreasonable it may appear to others. As a matter of public policy, terms of agreement cannot be used by a party to profit from the breach of an agreement by the other party.
In negotiation it would be advantageous to the client that the service provider understands the client's demands for good quality, availability and reliability service and that immeasurable warranties are not acceptable.
It is advisable that the service provider is required to provide end-to-end warranties in the event of service outage by having immediate restoration, taking full ownership and responsibility in the event of bad/substandard service. It is also important that the client is aware what the warranties cover and when exactly the warranties begins and end at the onset of the negotiation process.
The SLA must be simple, measurable and realistic. This creates clarity, dispels ambiguity and keeps the negotiation process simpler. With realistic objectives in placed will ensure the same be achieved easily and the penalties imposed can be limited.
A SLA may contain standardized provisions and such obligations imposed must be understood clearly. Some standardized provisions may impose terms and conditions which are not favourable to the party. If these provisions contain unfavourable terms and conditions the party may not want to assume such obligations as it may expose the said party to undesirable obligations to perform certain responsibilities that may be detrimental to the said party.
The SLA must act as a tool to obtain maximum and continuous quality of service, value to both parties, minimize business risks and have clearly defined components in ensuring a win-win agreement is achieved. The ability to minimize business risks and protect the party's interest will depend on the bargaining position of the party, the type of services being contracted for and the skill in writing SLAs. The SLA must be mutually agreed and not be contracted unfairly for the benefit of one party. Both parties must be prepared to anticipate the worst possible scenarios that may occur in the event their relationships turn sour.
As such the SLA must provide for any future events that may creep up once the agreement has been entered. Not only the SLA is able to anticipate future events but it must also provide the contingency plans to address the occurrence of such future events.
To sum up, it may be advantageous that the following elements are also captured in the SLA accordingly; (1) Reporting - once the services have been described, the objectives and type of measurements are agreed upon it is advisable that a defined measurement period be set to measure whether required or expected level of service are achieved by the service provider. Further the SLA must provide whether the measurement period include times when force majeure occur or does it include periods when the service demand exceeds the minimum or targeted levels; (2)Reviews - to conduct regular reviews to evaluate the SLA since the nature of technology and other advances in systems and processes are constantly evolving and improving. It is advisable that such reviews be conducted every 6 months to 1 year; and (3) Change Management Process - change procedures must be agreed upon by both parties and documented in the SLA. These change management procedures are required to facilitate any change that may be required to the SLA during the term of the agreement.
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