A service level agreement (“SLA”) is a contract between a service provider and its client that documents what services the provider will provide. It also explains the performance standards the provider is required to meet, thereby protecting both parties in lawsuits, helping to prevent lawsuits, and resolving disputes that might otherwise damage the business relationship. SLAs are thought to have originated with network service providers, but are now commonly used by cloud computing service providers, IT service providers, and managed service providers. Typically, two documents are drafted: first, a master service agreement that defines the liabilities and services in general terms and second, a SLA that is specific to each client.
The term “service level agreement” has a broad application. It addresses technology, and includes the conditions under which a contract can be terminated, the availability of data upon contract termination, and alerts relating to any kind of a security breach. Service providers need SLAs to manage client expectations and explain circumstances under which they will not be responsible for performance issues. As cloud computing and software as a service becomes more popular, the attention shifts to the SLA. Depending on the SLA, a client’s data may be stored locally, in the cloud, or both locally and in the cloud. In drafting a SLA, the first step is to determine what services you will provide. Below are other key terms to include:
- Scope of services. This provision clearly explains what services the client can expect to receive and determines when the services are required. The greater the detail and clarity, the less risk of misunderstanding or unfulfilled expectations later. This provision should also include a subpart addressing what services are excluded under this agreement.
- Payment. The agreement should include a provision that states the amount to be paid, when it is to be paid, and any penalties for late payments.
- Relationship. Since some relationships can be implied by the law, it is important to clearly state the relationship between the service provider and the client.
- Confidential information. The agreement should address the fact that confidential information is likely to be shared and explain how that information will be identified and handled. This provision should also include restrictions on disclosure and misuse, and exceptions to what is included in confidential information.
- Warranties. A warranty is a written guarantee. The kind of warranty to be included depends on whether the agreement is drafted by the service provider or hiring company.
- Indemnification vs. Limited Liability. The client (hiring company) should include a provision stating that the service provider will indemnify the client for any breaches of warranties; meaning, the service provider will pay the client for any third party litigation costs resulting from its breach of the warranties. The service provider should include a provision limiting its liability to the maximum amount it receives under the agreement. The provider’s liability should apply to both direct and indirect damages.
- Term of agreement. The agreement should state how long it will be in effect, and the options and results for termination.
- Escalation points. This provision should provide clear instruction regarding to whom the client should talk to if a problem arises.
- Hours of availability. This provision is not required, but suggested as a means of lessening frustration for clients should a problem occur. Also included in this section should be a statement regarding a turnaround time for the provider obtaining any complaint and when the client can expect to hear back.
- Client responsibilities. The service provider and the client have obligations to each other. The service provider may draft this provision based on its corporate strategy.
SLAs are standard business practice and it is essential to put them in the proper context. Evaluate the service. The SLA does not control what is actually delivered, but is a formal way of identifying key services and required performance standards. As software as a service becomes more prevalent, SLAs should evolve to address various approaches of IT procurement models so that new contract methods cover all of a service provider’s clients.