Learn About Service Level Agreements (SLA)

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A service level agreement often called an SLA for short, is an agreement between a supplier and customer that specifies specific service levels. This agreement can be either formal, a negotiated contract between two companies, or informal, like an understanding between two departments in a company. The SLA can be an extensive agreement covering many different performance measures or it can be a simple, single-term measurement.

A Simple SLA

In its simplest form, a service level agreement specifies a minimum level of performance that the customer agrees to receive and the supplier agrees to deliver.

I have a very simple SLA with my paperboy. In return for the generous tip I give him each month, he agrees to put my paper on my doormat. If he chucks it into the flower pot, he is in violation of the SLA and his tip will be reduced. If he does it often enough, the contract will be canceled.

There is an implied contract between myself and the newspaper publisher that the paper will be delivered before 5 AM (it’s in their advertising), but that is not part of my SLA with the paperboy. In this case, the SLA is very informal, is not written, and was dictated by me more than it was “negotiated”. So we can see from this simple example that the key elements of a service level agreement (SLA) are:

  1. A supplier who agrees to deliver the service according to the SLA (the paperboy)
  2. A customer who agrees to receive and pay for the service according to the SLA (me)
  3. A clear and specific definition of what the service to be delivered is (newspaper)
  4. A clear and specific definition of how to measure that the service has been delivered in accordance with the SLA (on the doormat)
  5. The timeframe covered by the agreement (continuing until I terminate it)
  6. The penalty, or other options that are available to the purchaser if the SLA is not met (reduced tip)

    A More Complex SLA

    The SLA I have with my cable company is more complex. It covers more than one item and it is a formal written document that is enforceable in a court of law. Unlike the paperboy SLA, I did not dictate this SLA with the cable company. Nor did I negotiate it. The cable company publishes it as part of their terms and conditions. My only “negotiation” was the option to accept the SLA as they presented it or to find a different cable company.

    This SLA covers the availability of my cable service, the time the cable company has to respond to my requests for information or service, and the time they have to repair or replace defective equipment. The SLA specifies penalties to the cable company if they fail to meet the terms of any part of the SLA. For example, if any cable channel is not available for more than 4 hours in a single day they will credit my account the cost of a full day’s service.

    On several occasions, when I have complained about an SLA violation, they have credited me for a full month, rather than a single day, but this is a customer satisfaction matter rather than strictly a part of the SLA. The SLA species minimums, but the provider is always free to exceed that and the purchaser also has the right to not enforce the SLA penalties to the fullest.

    Another SLA Example

    Company X signs a service level agreement (SLA) with Company Z. Company X agrees to host a website for Company Z on Company X’s servers. The two companies negotiate what will be covered by the agreement, how long the agreement will be in effect, how much Company Z will pay for the service at the level specified in the SLA, and what the penalties will be if Company X does not deliver in accordance with the SLA.

    The agreement specifies, that Company Z’s website will be visible to online users 99% of the time. (They could have negotiated that it be available 99.9% of the time, but that would have been more expensive and Company Z did not feel that was necessary.) The SLA also stipulates that the order process will be able to process 2,000 orders per minute and that from the time a user submits an order until they receive an on-screen confirmation will not take longer than 3 seconds.

    Company X agrees to provide the contact information (phone and email) for an engineer for Company Z to contact at any time the website is not available. The SLA also includes an escalation path, all the way to the CTO of Company X if service breakdowns are not resolved in timeframes specified in the SLA. Finally, the SLA specifies financial penalties Company X must pay Company Z if the SLA is not met. The penalties are different for the availability measurement and for the two order processing measures.

    Bottom Line

    Service Level Agreements (SLAs) are a way for a supplier and a purchaser to agree on what will constitute a minimum level of customer satisfaction. They can be simple and unwritten. They can be complex legal documents. They specify specific minimum requirements and the options the purchaser has if the SLA is not met. When certain standards and behaviors on the part of a supplier are important to the success of your company consider a service level agreement as a way to minimize your company’s risk.