A Service Level Agreement (SLA) is a business document between a vendor and customer outlining agreed-upon deliverables, methods used to measure them, and potential penalties for failing to adhere to the terms of the SLA.
Especially within the Software as a Service (SaaS) space, having an SLA protects the interests of both the end user and the service provider.
In this post, we’ll define an SLA, break down key types and components, provide examples of effective metrics and penalties, and more.
- What is a Service Level Agreement?
- What are the Main Types of an SLA?
- Key Components of an SLA
- Why is an SLA Important?
- Service Level Agreement Best Practices
- Who Should Get an SLA?
What is a Service Level Agreement?
A Service Level Agreement (SLA) is a contract between a service provider (the vendor/entity selling their services) and a customer (the end user/entity purchasing the provider’s services.)
SLAs define and document:
- The provider’s responsibilities/guarantees to the customer
- The customer’s expectations of the provider
- The penalties imposed if the provider fails to meet these agreed-upon expectations
- The metrics used to measure and monitor the defined deliverables
Because an SLA is written by the service provider, vendors ensure fairness to clients by customizing certain SLA components according to the end user’s preferences and/or plan tier.
In most cases, SLAs are an agreement between a business and an external vendor–especially within the B2B space.
Internal SLAs between departments, employees and managers, and other team members also exist.
What are the Main Types Of an SLA?
There are three main types of SLAs:
Customer-based, Internal, and Multilevel.
Customer-Based Service Level Agreement
A Customer Service Level Agreement is the most common SLA type, outlining a contract between a business/buyer and the third-party service provider/seller.
A “customer” can be defined as an individual person, a nonprofit or corporate entity, or a group of people.
Customer-based SLAs exist to equally protect the interests of internal (the buyer) and external (the seller) parties.
Examples of a Customer-Based SLA include contracts/agreements between:
- A small business and a call center software provider
- An enterprise-level corporation and its website hosting services
- An individual and their Internet Service Provider
- A nonprofit and their office supplier
Internal Service Level Agreement
An Internal SLA is a contract between employees, departments, managers, and other internal team members at the same company.
Unlike Customer SLAs, no third-party managed services providers are involved in Internal SLAs.
Internal SLAs primarily serve the company the employees work for, but also prevent office miscommunications by clearly defining the roles, responsibilities, and deliverables each individual hire or team must provide.
Examples of Internal SLAs include agreements between:
- A sales manager and all company salespeople, defining the minimum number of monthly appointments each salesperson must schedule with potential buyers
- A company’s in-house IT team and its customer service department, outlining how the IT department will back up, update, manage, and monitor relevant business software and networks
- The marketing department and the sales team, stating the number and type of leads, advertisements, and market segments the marketing team will bring to the sales team
Multilevel Service Agreement
A Multilevel SLA is a singular document that includes both general SLAs applying to all customers/employees/vendors and specific SLAs applying only to certain internal teams/third-party service providers/customer segments.
For example, a SaaS provider may offer all customers 24/7 chat support, but only Enterprise-level clients receive 24/7 live phone support.
A multilevel SLA states that while 24/7 online chat support is available for Basic, Business, and Enterprise customers, 24/7 live phone support is only available with an Enterprise plan subscription.
An Internal Multilevel SLA defines both company-wide employee expectations, as well as expectations/deliverables that apply only to management positions or to specific departments.
For example, an Internal Multilevel SLA could state that all employees must adhere to the company’s social media policy and attend a minimum of three industry conferences a year. It also outlines additional deliverables all sales team members must meet (a minimum of $10,000 in quarterly sales) and marketing department deliverables (a minimum of 1,000 organic monthly website visitors.)
Key Components of an SLA
SaaS SLAs are composed of two main elements: Service Agreements and Service Management.
Service Agreements (sometimes called warranties) define the features and functionalities the customer receives from the provider. For example, Cloud PBX Service Agreements guarantee the cloud computing platform offers features like unlimited local calling, call recording, audio conferencing, etc.
Service Management defines how the service level is measured and maintained by outlining SLA performance quality metrics, the dispute resolution process, an escalation matrix, penalties and exclusions, and more.
Now, let’s take a detailed look at essential SLA template components.
- Standard Service Description
- SLA Performance Metrics
- Penalties and Exclusions For SLA Violations
- Customer Support Availability
- Security and Privacy Policies
- Pricing and Billing
- SLA Termination and Renewal
Standard Service Description
The SLA service description outlines the specific services, features, and functionalities the customer receives from the provider.
The service description includes a summary of the SaaS platform’s purpose and a breakdown of essential capabilities and network requirements.
SLA Performance Metrics
SLA performance metrics are the Key Performance Indicators (KPIs) used to ensure the service provider is successfully meeting the standards and delivering the capabilities guaranteed by the SLA.
Businesses use SLA metrics to monitor employee performance and the impact of the provider’s services. SLA metrics also offer insight into the efficacy of current workflows, optimize business processes, and better manage workloads.
SLA performance metrics should be:
- Reasonably within the service provider’s control
- Collected, monitored, and measured via automation (not manually)
- Fair in comparison to the industry standard
- Consistently monitored at defined preset intervals
- Relevant to short and long-term business goals
What To Consider When Selecting SLA Metrics
When choosing the ideal metrics to measure and monitor your SLA, focus only on the most important factors influencing your business’s ability to operate successfully–avoid less relevant analytics.
Create a list of 20 KPIs, then narrow it down to the 5 metrics with the greatest influence on the success or failure of your business objectives.
Popular SLA metrics include:
- Guaranteed Uptime and Service Availability: The percentage of time (99.9% minimum) the provider’s service is successfully available (online) and operating as intended
- Incident Response Time: The amount of time it takes the provider to respond to (not to resolve) a service outage or other customer support issue
- Average Handle Time for Incident Resolution: The total amount of time it takes to completely resolve an incident, from the moment it is noticed to the moment the case is marked as complete (also called resolution time)
- Self-Service vs Provider-Managed Resolutions: The percentage of support cases customers were able to resolve via self-service resources (online knowledge base, chatbots, video tutorials, etc.) vs the percentage of support cases that required provider assistance
- First Time Resolution Rate: The percentage of support cases that are completely resolved during the first contact between the service provider and the end user/customer
- Ticket Escalation Rate: The percentage of total tickets that had to be escalated to a higher tier or the escalation matrix
- Total Number of Resolved Tickets: The total number of resolved support tickets over a set period of time
Penalties and Exclusions For SLA Violations
The penalties and exclusion section of an SLA includes:
- The consequences the provider/customer incurs for failing to meet the guaranteed performance standards/violating the SLA
- What the provider/customers are not responsible for/not required to provide to one another
- An Indemnification Clause defining the liabilities/legal limitations of both parties in the event of a lawsuit
To ensure providers offer the highest level of service management–and to secure more competitive pricing–consider offering a 60-120-day grace period where penalties will not be applied.
What Happens If A Provider Doesn’t Meet Service Levels?
If the provider or customer fails to adhere to the standards of the SLA, they will incur certain penalties.
Service delivery and service quality violation penalties may include:
- Penalty Fees and Percentages: The service provider is required to refund, reimburse, or refrain from charging a certain dollar amount or percentage of the total service cost
- Service Credits: The service provider gives the customer an agreed-upon amount of service credits to apply to the billing cycle
- Contract Revision or Termination: Early termination of the customer-provider contract without additional fees, or a revision of the contract length/terms (extended contracts without any fees, etc.)
Customer Support Availability
The customer support section outlines the resolution process as a whole, including:
- The points of contact for service interruptions and customer support
- Guaranteed incident response times and real-time service delivery outage updates
- The support escalation matrix
- Support issue/account priority levels
- All available support channels and support operating hours
- Standard service and maintenance schedules (upgrades, backups, etc.)
Security and Privacy Policies
This section outlines available security measures, data sharing and storage, and relationships with third-party software providers/businesses.
Common SaaS security and privacy standards include:
- End-to-End Encryption
- ISO 27001 Compliance
- HIPAA, GDPR, FedRAMP, PCI Compliance
- 24/7 network monitoring
- Automated data backups
- Network redundancy and global points of presence
- Multi-factor authentication
- Single Sign-On (SSO)
- SOC 2 Type 2/SOC 3 Type 3 Compliance
Pricing and Billing
The Pricing and Billing section outlines:
- The total cost of services
- Additional fees (Installation and setup fees, early termination fees, add-on support or feature fees, government-mandated fees, etc.)
- The frequency of billing and the billing method (monthly vs annual payments, online payment portal, etc.)
- The penalties associated with late payments
- The length of time the customer is guaranteed a specific price
SLA Termination and Renewal
The SLA Termination and Renewal section outlines:
- Early termination fees (if any)
- The length of the SLA/contract
- The renewal process
Why is an SLA Important?
SLAs are important because they set definitive expectations of what customers and service providers are and are not entitled to from one another once an official business relationship is established.
Additional SLA benefits include:
SLAs drastically reduce the number of miscommunications between customers and service providers.
Instead of constant back-and-forth communications across several channels, both parties can simply refer to the SLA contract with questions regarding guaranteed service and performance levels.
Because SLAs are a collaborative effort, customers and providers can ask and answer each other’s questions–and iron out any disagreements–before signing the document.
Legal Protection To Both Parties
SLAs are designed to prevent issues between customers and providers from escalating to legal issues and lawsuits.
Because both sides have the same level of access to the same information, SLAs make settling discrepancies or false claims made by either party fast, easy, and final.
Standard Metrics For Measuring Success
SLAs outline the metrics and KPIs used to consistently evaluate the provider’s overall quality of service (or in the case of internal SLAs, the employee’s performance.)
These benchmark metrics ensure sudden drops in service levels are immediately addressed and rectified, allow managers to monitor improvement over time, and highlight the benefits of working with the service provider.
Standardized evaluations also provide valuable insight into network reliability, employee performance, peak times, and a clear vision of success and failure.
Consistent High-Level Service
Providers must adhere to the service performance terms, expectations, and incident response processes outlined in the SLA until the contract comes to an end.
Service providers cannot suddenly disregard the agreed-upon metrics once the SLA is signed, nor can they attempt to “trap” the customers into accepting consistently poor service for a high price.
Improved Customer Experience
SLAs outline the specific features and capabilities that the service provider will give not just the end user, but also the end user’s customers.
For example, common SaaS cloud service features like IVR, CRM integrations, and AI-powered workflows cut down on call waiting times, provide high-level customer self-service, and keep agents free to help with more complex issues.
Increased Team Productivity
Instead of losing time to technical issues, extended outages, or complex manual business processes, customers and end users benefit from SLA-guaranteed uptimes and response times, automation, and push notifications that notify management of issues before they spiral out of control.
SLAs also make it easier for end users to prioritize the most important tasks, better understand their customer base, meet customer expectations, and take stress off of employees.
Peace of Mind
Especially if the provider’s services are a significant investment for the business purchasing them, end users can rest easy knowing they are guaranteed a certain level of service, specific features/capabilities, and a set uptime for the SLA’s duration.
Because SLAs also state the process and potential penalties of terminating a contract early, customers avoid unexpected high early termination fees, sudden surges in monthly pricing, or attempted legal loopholes from the provider.
In turn, the provider knows the customer cannot suddenly make impossible demands, threaten to refuse to pay for their service, or terminate the contract early without some recourse to the provider.
SLAs lay a solid foundation for successful long-term business relationships.
Service Level Agreement Best Practices
Effective SLA best practices include:
Set Realistic Expectations and Deliverables
No vendor, customer, or employee will agree to sign an SLA with intentionally prohibitive or overly ambitious SLAs.
Avoid attempting to set deliverables that are not reasonably achievable relative to:
- The current phase of business
- Available resources
- The overall cost of services
- Company size, operating hours, etc.
- Levels of training provided/job title
Keep Language Specific
When defining expectations, goals, and deliverables, avoid general statements like “Company X will offer Company Y consistent, reliable service.”
Instead, use numerical values, specific metrics, and ensure the language leaves no room for interpretations or future contestations.
Aim for concrete, exact statements like:
Company X will provide Company Y with an annual minimum uptime of 99.99%, or no more than 52 minutes and 36 seconds of downtime annually.” If annual downtime is in excess of 52 minutes and 36 seconds, a penalty of $500 will be imposed upon Company X,” due within 15 days of the excess downtime.
Conduct Frequent and Collaborative SLA Updates
Review SLA metrics, provider services and performance expectations, and the general terms of the SLA at least annually.
Add/remove updated KPIs, discuss any new features/services the provider may have added, and connect with internal teams and service desks to ensure the baseline metrics remain reasonable and motivational.
Have A Legal Team Review Proposed SLAs
Before signing or proposing any type of Service Level Agreement, always consult with a legal representative to ensure:
- Service Level Verification
- Your interests are protected
- You have a clear understanding of what you are entitled to
- Proposed penalties and metrics are fair, ethical, and achievable
- The language is not intentionally vague, allowing for legal loopholes
- The term of the SLA is appropriate
- The SLA is binding
Who Should Get an SLA?
Any business engaging in outsourcing, working with a technology provider, and offering long-term services to customers should have an SLA in place.
SLAs protect stakeholder investments, interests, and reputation. They ensure a quality customer experience and low defect rates.
Common industries with SLAs include:
- SaaS providers
- Healthcare providers
- Subscription-based services
- Internet Service Providers
- IT service providers
- E-commerce shop platforms
Before your business chooses a contact center software, VoIP provider, or video conferencing solution, ensure you thoroughly review (and if needed, negotiate) the proposed SLA.
Service Level Agreement FAQs
Below, we’ve answered some of the top SLA FAQs.
Yes, negotiating with a vendor before you sign an SLA is very common.
Common areas of negotiation include:
- The pricing model itself (monthly, annually, bi-annually, etc)
- The length of the contract (often, vendors will offer a lower price in return for a longer contract)
- Out clauses and penalties/fees for early contract termination
Yes, outsourcing is almost always covered in an SLA. The SLA should include information about the limitations of outsourcing, what the provider is and isn’t responsible for, and any penalties related to outsourcing.
To protect yourself, try to avoid earn-back clauses.
SLAs are not transferrable--even if your service provider merges with another company.
Though some providers will keep the original SLA in place to placate customers, in most cases, the contract will need to be entirely renegotiated and updated.