When a customer and a supplier agree to do business, it's important to define expectations. That's the purpose of a service-level agreement (SLA). An SLA is a contract between a supplier and a customer that defines the minimum acceptable level of the service that will be delivered.
This agreement can be a formal negotiated contract or an informal understanding between two parties. Some are extensive agreements covering many performance metrics, while others are simple single-term measurements.
A Simple SLA
In its most basic form, a service-level agreement specifies a minimum level of performance that the customer agrees to receive and the supplier agrees to deliver.
If you have a pizza delivered to your home every Friday night by the same delivery person, you might have an implied SLA with that person. You hand over a generous tip for delivering the pizza hot, and a less generous tip if it arrives cold. If it arrives cold too often, the SLA is canceled and you're moving your business to a rival pizza place.
In this simple example, the key elements of a service-level agreement are:
- A supplier who agrees to deliver the service according to the SLA (the pizza delivery person)
- A customer who agrees to receive and pay for the service and add a tip (you)
- A clear and specific definition of what the service to be delivered is (one pizza with specified toppings)
- A clear and specific definition of how to measure that the service has been delivered in accordance with the SLA (hot, correct toppings, delivered within a reasonable time frame)
- The penalty, or other options that are available to the purchaser, if the SLA is not met (reduced tip)
A Non-Negotiable SLA
If you subscribe to cable television, you have a more complex SLA in place. It covers more than one item and is a formal written document enforceable in a court of law.
Unlike the agreement with your pizza delivery person, the SLA with the cable company was not negotiable. The cable provider published it as part of its terms and conditions. Your only alternative is to sign up with another cable provider, assuming an alternative is available.
Among other things, this SLA covers the availability of the cable service, the time the cable company has to respond to requests for information or service, and the time the company has to repair or replace defective equipment. The SLA specifies penalties to the cable company if it fails to meet the terms of any part of the SLA. For example, if any cable channel is not available for more than four hours in a day, your account may be credited the cost of a full day’s service.
A proactive customer can complain about an SLA violation, and some companies may respond with a bonus, such as a credit for a full month of service. This is a customer satisfaction practice, not a part of the SLA.
An SLA specifies minimums, but the provider is always free to exceed the minimum. The purchaser has the right to enforce (or choose not to enforce) the SLA penalties to the fullest.
A Complex SLA
A more complex SLA might specify responsibilities for both parties in the agreement.
For example, let's say Company X signs a service-level agreement 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 might specify that Company Z’s website will be available 99% of the time at a minimum. (The company could have gotten 99.9% availability at a higher cost.) The SLA also stipulates that Company X will be able to process 2,000 orders per minute and that on-screen confirmation of an order will take no longer than three seconds.
Company X agrees to provide contacts for Company Z to get in touch with 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 within the specified timeframe.
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.
Why Use an SLA?
A service-level agreement allows a supplier and a purchaser to agree on a minimum level of customer satisfaction. It specifies the basic requirements and the options the purchaser has if the SLA is not met. If 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.