When outsourcing critical services, it’s essential to understand how service level agreements work with service agreements to make sure you’re protected and getting what you’ve paid for.
A well-drafted service level agreement (SLA), working in tandem with the main service contract, provides clarity, measurability, and accountability, key tools for extracting consistent performance from your suppliers.
If you’re unsure whether your current agreements are doing their job, or you need support setting up the right legal framework from the start, our commercial law solicitors can help you put robust, enforceable contracts in place that protect your commercial interests.
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What is the difference between a service agreement and an SLA?
They may sound similar, but the service agreement and SLA each fulfil a different function.
The service or outsourcing agreement – often called a master services agreement – is the primary contract, outlining the details of how the relationship between the supplier and customer will operate. It contains the overarching legal provisions that bind the parties, including contract terms, charges and payment, termination and dispute resolution, as well as key clauses such as limitation of liability and ownership of intellectual property rights (IPRs).
Crucially, the service agreement should also require the supplier to provide the services in accordance with a set of service levels. These will be set out in the SLA, which usually forms part of the service agreement, as a schedule or annexe at the end. The SLA contains an agreed-upon system for monitoring and reporting on service performance, as well as service credits or other remedies to address any failure by the supplier to achieve the required service levels.
If performance falls below these standards, the customer can seek redress through the mechanism outlined in the SLA, without having to take more drastic steps under any of the breach remedies in the main contract, such as suing the supplier or terminating the agreement. The SLA incentivises the supplier to provide high-quality services and helps maximise contract performance.
What terms go where?
Think of the service contract as the legal framework for the entire outsourcing relationship, and the SLA as the performance metrics for the services.
Your service agreement should cover the fundamental relationship issues such as:
- When the contract starts and ends
- How charging and invoicing will work
- How IPRs will be dealt with
- Data protection and security requirements
- Guarantees and indemnities
- Limitation of liability
- Insurance
- Termination
- Compliance with relevant laws and regulations
- Which country’s law governs the contract?
There are a number of elements you will find in an SLA, these include:
- A requirement for the supplier to provide the services so that they meet or exceed the service levels.
- The mechanism for the supplier to report its actual performance, measured against those service levels, on a monthly or other regular basis.
- Details of how the supplier will remedy any failure to provide the services in accordance with the service levels. For example, they may be required to allocate additional resources (such as staff or equipment) to rectify any performance shortfall.
- A system of service credits. If the supplier fails to meet a specified element of the service levels, they may be required to provide a refund or service credit. Service credits often apply on a graduated basis between the level of service needed set out in the SLA, and a lower minimum performance threshold. Below the lower limit, the customer should always reserve its right to claim additional damages under the main contract.
You can explore which SLA structures best suit your needs, depending on the triggers that apply and how your services are delivered.
Common SLA pitfalls
Drawing up an SLA without legal input or clarity on enforcement often leads to avoidable pitfalls, particularly if the service levels are vague or don’t tie back to your contract structure. For example, an SLA which isn’t legally enforceable, which is insufficiently clear, or which fails to provide a workable mechanism for measuring and reporting on performance, will not help your business if things go wrong.
Our commercial lawyers can help you avoid these pitfalls, by drafting a strong SLA which works in partnership with your service agreement.
Sector-specific examples
SLAs are useful across a broad range of sectors where services are commonly outsourced. Examples include:
- Technology: Technology outsourcing arrangements are often complex and require a high level of technical detail in relation to how the services are performed. For example, a master services agreement in a software as a service (Saas) environment may require an elaborate set of service levels, including key metrics like response times, the number of supported users, uptime commitment, and an escalation mechanism. Service outages will be a major customer concern and can be dealt with by a service credit mechanism.
- Manufacturing: Depending on what is being manufactured, the SLA will deal with production times, quality control, and delivery targets (particularly critical if the products are components forming part of a wider manufacturing chain). A watertight SLA can help to drive timely performance and consistently high product quality.
- Professional services: A professional consultant's scope of services can vary widely from project to project. The project manager or lead consultant is best placed to advise on the service levels that the project needs, and these can be fed into the SLA. The SLA will deal with issues such as quality control and review mechanisms, detailed reporting, and the timing of delivery cycles which are vital to the wider project – particularly important in large-scale construction projects, or in a corporate acquisition where time is of the essence.
How to align your SLA with your service contract
Our three top tips for making sure that your service contract and SLA work properly together are:
- Interaction:Key clauses in your service contract (such as limitation of liability, indemnities, dispute resolution and termination) must interact properly with your SLA. For example, any service credits in the SLA must be expressed not to be the customer's exclusive remedy, otherwise the protection offered by the liability clause in the main contract may be lost.
- Allocation: Ensure that the right terms are in the right places. For example, the termination clause needs to apply to the whole contract and should not therefore be in the SLA.
- Collaboration: Most importantly, make sure that your internal teams work together. It’s common for the procurement team to take charge of setting up the SLA, as they are fully informed about the technical and operational details that need to be covered. However, if they don’t liaise with the legal team, mistakes can be made which mean that the SLA doesn’t work properly with the main contract, lacks essential clarity, or in a worst-case scenario, isn’t legally enforceable.
Checklist for reviewing or redrafting service and SLA bundles
Prioritise SLAs as part of your contract lifecycle management process:
- Regular reviews: When you review your service contracts, review the SLAs as well, to ensure they remain current and reflect your evolving business processes. Is the reporting frequency required by the SLA inadequate, or too frequent? Have any of the underlying services changed? This is your opportunity to fine-tune any service levels which are no longer working for you, and to remove any which are no longer relevant.
- Take legal advice:If your SLA needs amendment, ask your legal team whether the main contract allows for this. There is likely to be a defined contractual procedure for variations, which must be followed if any change is to be legally valid.
- Don’t do it informally: Making changes to the SLA in a series of emails, or verbally with your operational counterpart at the supplier’s business, is a recipe for disaster. Treat any amendment to the SLA as a change to the contract itself and take legal advice to ensure that it is formally documented as required by the contract.
Making your SLA and service agreement work together
Your SLA must work hand in hand with your service agreement, or you risk creating confusion or gaps in protection. Understanding the role of each, and how they complement one another, is vital to securing reliable service delivery from your suppliers.
If you’re negotiating new contracts or reviewing existing ones, speak to our commercial law solicitors for clear, commercially focused legal advice that ensures both your SLA and service agreement are working hard for your business.
