What is a service level agreement?

The Service Level Agreement (SLA) is important when service providers and customers enter into a contract. It specifies the standards that must be met. It is a contractual document that provides the framework for the collaboration.

An SLA is subject to the German Civil Code. It is a component when a service or work contract is entered into. The SLA therefore has legal significance and gives the customer the opportunity to assert their claims in the event of non-compliance with standards that were previously defined in writing. As a consequence, this can mean cancellation of the contract or financial compensation.

In recent years, more and more SLAs have been created as many business processes are outsourced. Especially in the area of IT they are therefore utilised.

What is the significance of SLAs?

When a customer enters into a contract with a service provider, SLAs help to ensure that there is clarity about the standards and that the business relationship is binding. This also promotes quality assurance. Both sides define clear metrics and can review them at any time. This puts both sides in a position to minimise risks. In addition, there is the possibility of being able to react quickly if problems arise or there are deviations from the services.

What are important components of an SLA?

There are some points that should be clearly defined. These are as follows:

• Description of the service: The service provider receives information here about what its services include. To avoid any misunderstandings, it is important that the description is as detailed as possible.
• Key performance indicators (KPIs): This area defines what measurable standards are. For example, the availability of technical support can be defined, how quickly it must respond to customer enquiries and the maximum time it may take to find a solution to the problem. These are measurable values that allow performance to be assessed.
• Roles and responsibilities: As an SLA does not only affect the service provider, it is important to define which tasks are the responsibility of the customer and which are the responsibility of the service provider. This can vary greatly depending on the industry and should be clearly defined.
• Escalation mechanisms: This is an area that defines what happens if standards are not met. Measures are defined here, a time frame in which remedial action must be taken and who the contact persons are.
• Penalties and reports: This is mainly a matter for the service provider if they fail to meet standards. Both sides must be clear about what the penalties will look like. Traditionally, for example, there can be price reductions or credit notes. At the same time, there is also the option of setting bonuses for above-average performance.

What types of SLAs are there?

It depends on the type of service or business relationship between the customer and the service provider. There are different types of SLAs that can be agreed. The aim of SLAs is to ensure that both sides can work together effectively and that both sides feel that their needs have been met.

Customer-based SLAs

Customer-based SLAs are a solution that has been completely customised for the respective customer. All the services that the customer needs are described in detail here.

The advantage of customer-based SLAs is that they can be better tailored to the customer's specific requirements and business processes. This is particularly important in areas that are very specialised. The customer is much more satisfied as they receive a customised solution that has been developed just for them. Of course, the downside is that it takes much more effort to create these SLAs. It can also be more difficult to monitor the agreed services.

Service-based SLAs

Service-based SLAs are very often used in the area of IT concluded. Here, there are certain services that are all applied to the respective customer. For example, a cloud provider may guarantee its customer an availability of 99.9%.

This type of SLA is suitable for all companies that have the same offer for all their customers.

SLAs advantages

The advantage is that the SLA can be defined very quickly. It is a standard contract that applies to all customers. This naturally makes it easier and more cost-effective to draw up. Monitoring is also easier here, both for the customer and for the service provider. However, it is possible that not all the special features that a customer has are taken into account.

Multi-level SLAs are a combination of global and individual requirements. This often comes into play in large corporations. For example, there may be global availability for the entire group. In addition, there are also special requirements for individual departments that are regulated.

Multi-level SLAs have the advantage for major customers that both global and local company requirements are met. This makes collaboration much more efficient. If the company has different locations, departments or even services, everything is covered by the SLA at every level as standard. Of course, you should be aware that careful coordination is required to fulfil the SLA and that monitoring compliance ties up considerably more resources. It can also lead to contradictions or overlaps at different levels. It is therefore important to take these conflicts into account at the drafting stage.

What are the challenges with SLAs?

SLAs offer many advantages. However, there are also things that are always a challenge that you should be aware of.

For example, unclear or perhaps even vague definitions can lead to room for interpretation. It is inevitable that there will be conflicts with the customer and their service provider. This is why it is so important that the SLAs are defined as precisely as possible. You have to sit down together beforehand and go through the individual points. Where there are different ideas, the SLA must be made even clearer.

Sometimes customers tend to exceed the service provider's requirements. Such unrealistic expectations lead to problems that should be avoided at all costs. The service provider should clearly state which requirements they can fulfil.

Once the SLAs have been defined, they must be documented. They are also monitored by both sides. This requires staff to deal with them. This additional effort should be clear to both sides in advance.

If SLAs are not adhered to, this can lead to legal disputes. This can delay a project, for example. It can also lead to additional costs if the service provider has to issue discounts or credit notes.

What does the future of SLAs look like?

The world is currently undergoing a major transformation. Technological progress and the increasing importance of artificial intelligence and machine learning are changing everything. It will be important to create automated monitoring. It may be that artificial intelligence takes over monitoring for customers. Escalations can be automatically forwarded to Sio. This would certainly reduce the burden on companies, as they would not have to provide their own resources.

Dynamic SLAs will gain in importance. Traditional SLAs are often static and do not change over the term of the contract. With dynamic SLAs, current data and market developments can be used to automatically adjust SLAs. Artificial intelligence will be able to help ensure that SLAs are adjusted to maximise efficiency. In this way, more or less all customers will experience a customised service that automatically adapts when needs change. This enables better planning and allows the service provider to better utilise its resources. Companies that rely on this type of SLA can gain a market advantage.

Blockchain technology will also change the world of SLAs. Customers can enter into smart contracts that release automatisms when an SLA condition is met or breached.

Do you still have questions about SLAs? Contact us, we will be happy to advise you.