Drafting and enforcing service level agreements (SLAs) is essential to ensuring that your business has reliable legal protection in supplier relationships.
SLAs are sometimes regarded as ‘bolt-ons’ or purely operational tools, but drafting and enforcing service level agreements correctly is essential to ensure they provide real protection when needed. However, they can be of strategic importance because unless they are properly drafted and structured at the outset, they may be unenforceable later on, at the point when you need them most.
Our commercial law solicitors can work with you to ensure that your SLAs are watertight and provide maximum support for your outsourced services model. This means that if problems arise with the performance of the services, your business will have the tools to address them effectively.
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What protection does an SLA give to my business?
Your business needs a clear and comprehensive SLA for all outsourced services contracts which are high-risk, high-value, complex, or critical to your business operations, and choosing the right service level agreement plays a key role in ensuring those standards are clearly defined and maintained.
A properly drafted SLA ensures that your supplier knows precisely what is required of them and sets out the standards and timescales to which they must adhere when performing the services. It provides specific remedies for your business if the supplier doesn’t meet those standards.
For example, a master services agreement for a professional services provider (the client) includes outsourced customer services via a call centre. The client receives complaints about how long it takes for its customers to get through to a call handler, and about the time it then takes for their query to be resolved. At this point, the detail in the SLA will be crucial. If it has been well drafted, it will:
- Specify how quickly calls must be answered and how customer queries are to be dealt with.
- Contain a reporting procedure, so that the client knows whether these standards are being met.
- Establish an escalation mechanism to ensure that performance issues are promptly reported to the supplier.
- Provide service credits or some form of financial redress for the client if the supplier continues to underperform.
- It should be legally enforceable, so that if all else fails and the supplier doesn’t perform to the SLA standards, legal action can be taken. For example, if performance falls below the critical service level failure threshold specified in the SLA, the client may consider terminating the contract and suing for damages.
Structuring your SLA
The SLA usually forms part of the main services contract. Often, it’s a schedule that adheres to that agreement, and it's lengthy because of the level of operational detail required. It will be legally enforceable as part of the overarching contract.
Sometimes the SLA will be a standalone document, and this is often the case where multiple complex services are being outsourced (for example, an insurance provider may outsource its entire IT function). In this scenario, it’s vital to ensure that the SLA is a legally binding contract in its own right; otherwise, it may be nothing more than a detailed operational manual. Not only will this leave your business without legal redress if the relationship goes sour, but the absence of measurable service levels (backed up by service credits for poor performance) will remove the day-to-day incentive for the supplier to optimise their performance.
Our commercial contracts experts can help ensure that your SLAs are legally binding and that they work seamlessly with your central services contracts.
Key legal components for your SLA
Your business needs to be in a position to respond effectively to any underperformance by the supplier. To do this, you need to focus on the following in your SLA:
- Scope of the services – identify your business objectives and set out the service deliverables in detail. Where personal data processing is involved, ensure your SLA aligns with the UK GDPR contract requirements.
- Service standards – fully describe the standards you expect of your service provider.
- Performance metrics – set out an accurate and objective mechanism for measuring performance.
- Reporting requirements – set out how performance standards will be reported. Detail the format and frequency of the reports you require.
- Escalation mechanism – describe the process for raising any issues regarding performance, including key contacts.
- Remedies and compensation – set out a service credit mechanism, whereby your business will receive a credit if the supplier’s performance doesn’t meet the SLA standards. This will compensate you financially for poor performance and help focus the supplier's attention on the elements of the service that are most important to your business.
- Review process – Your business priorities may change over the course of the contract term. Build in the flexibility to update the service levels and credits to keep pace with your evolving business needs and fluctuating market conditions.
- Termination – if the supplier consistently underperforms, you may want to terminate and seek legal remedies for breach of contract, such as damages. Your SLA should clearly define what constitutes a critical failure justifying you to terminate your contract, and it’s also vital to ensure that your SLA doesn’t conflict with the termination provisions of your main contract. You should seek legal advice if you are unsure about this.
Common pitfalls
An SLA which is loosely drafted or unenforceable won’t protect your business against poor service provision. Here are our top tips for avoiding the most common pitfalls:
- Stay focused – It’s easy to lose sight of what the SLA is for. Focus on your business objectives and the services that are critical to you. Ask your operational team to specify precisely what they need from the services and how performance will be assessed. Service levels must be clearly defined and include objective measurement metrics – vague targets and aspirations won’t be legally enforceable.
- Stay in control – Setting up a major outsourcing arrangement involves a lot of work, and it can be tempting to cut corners. Don’t agree to the supplier drafting the service levels: you’re in the best position to understand what your business needs from the services.
- Give it teeth – Unless real consequences back up your service levels if performance falls below required standards, you won’t be able to enforce them. Give careful thought to service credits, remedies, and termination rights to ensure your business is protected in the event of issues. This will also focus the supplier on maintaining high-performance standards.
- Be reasonable! There is no point drafting an ‘ideal world’ SLA which is too unwieldy to be practical. For example, suppose your supplier is overwhelmed with too many service levels and excessive reporting metrics. In that case, they may not have the time and resources to focus on your primary objective of receiving excellent service (and you may not have the time to monitor them). Asking too much of the supplier through the SLA may also increase the price of the services.
- Keep it up to date – You should review your SLAs regularly as part of your wider contract management programme. If any have become obsolete or need updating, check whether your SLA allows you the flexibility to make these changes. You will need to stay informed about industry changes and an evolving economic climate, so ensure that your SLAs continue to reflect the environment in which you operate.
- Start early – Enforcing service level agreements effectively begins with proper planning; the SLA is too important to leave to the last minute. Prioritise it as soon as you start work on the outsourcing relationship.
- Look at the broader picture – check that your SLA aligns with your services contract, especially with key terms such as termination rights, variation provisions, and limitations of liability.
- Legal effect – Your SLA must be legally binding so that you can rely on it in the event of a dispute and can take action through the courts if necessary. Involving your legal team from the outset is essential. Our commercial law experts can help you ensure that you have a legally enforceable SLA which reflects your business priorities and protects you if things go wrong.
Checklist for reviewing your SLAs
Regularly reviewing your SLAs is essential to ensure they keep working for you, and you should diarise this as part of your contract management process. Here are three key areas to look at when reviewing your SLAs:
- Practicality – Ask your operational team for feedback on how the service levels work on a day-to-day basis. Are they clear enough? Do they accurately measure performance? Is the reporting system adequate, or is there, in fact, an information overload which needs to be addressed?
- Relevance – Are any of the service levels now obsolete? Weed out any service levels and accompanying reporting requirements that are no longer relevant, as these will only add to the workload without driving any improvement in overall contract performance.
- Significance – Look at service credit history – what does it tell you about the impact of the SLA on service performance? Service credits should incentivise better performance rather than generate income, and the best position for your business is to receive nil credits and excellent services. Consider what else the SLA enables you to do, which might improve the situation. For example, you could use the escalation procedure to prompt the supplier to address any fundamental issues that may be contributing to poor performance, such as inadequate resource allocation or staffing.
If changes to the SLA contract are needed, such as adjusting the service levels or tightening the service credit regime, seek legal advice on how to proceed. A legal expert will assess the scope of the variation provisions in the SLA and the main contract and advise you on how to proceed.
Enforcing service level agreements
Enforcing service level agreements that are legally binding, practical, and aligned with your core contracts is key to maximising the benefits of your outsourcing relationships. Our commercial law solicitors can work with you to ensure that your SLAs are effective in driving excellent contract performance and that they support your business objectives.
