Service Level Agreements, or SLAs, are a common feature of a wide range of different commercial agreements. An SLA is a part of a contract that turns promises around service delivery into measure commitments. In turn, if the commitments are broken, the customer has an obvious recourse – usually as part of the workings of the contract itself rather than generating a potential claim for breach of contract.
Although SLAs are sometimes treated as legal formality, in practice they are a practical tool for managing performance, setting expectations, and protecting both parties.
In this blog, we explore what SLAs are, why they matter, the different types that exist and the essential elements to include when preparing one.
What are Service Level Agreements?
An SLA is an agreement between a service provider and a customer that defines:
- The services to be delivered
- The performance standards to be met
- The consequences of failing to meet those standard
The most common use of SLAs is around the deployment and maintenance of software. SLAs may form part of an existing services contract, or could be a standalone agreement that works with that contract.
For example, a SaaS provider will host its software on its own servers. If the software is of sufficient importance to a customer (e.g. invoicing software), a customer will want an actionable guarantee that the software will be available and its data is accessible.
Therefore, the SaaS provider may guarantee a figure of 99.5% availability over period, typically a year. If availability falls below 99.5%, there will be a consequence. In a software setting, the consequence is typically a “service credit” mechanism. The service provider will issue a refund calculated with reference to the amount of time that service availability fell below 99.5%. A typical “supplier friendly” refund mechanism is a discount applied against the customer’s next invoice.
SLAs are not only used in conjunction with software, however. They can apply to most service sectors, such as:
- Warehousing and logistics providers. Sellers of goods will need commitments that delivery times or refund processing times will be met given the critical importance of the logistic provider in the seller’s supply chain.
- External healthcare services. Laboratories that provide diagnostic tests typically give SLAs over testing turnaround time.
- Internet services. Internet suppliers providing internet availability to large organisations will almost always give SLAs over internet availability.
- Facilities management. Large cleaning providers may give SLAs over response times.
Availability and response times are the usual focus of SLAs. However, SLAs can also incorporate provisions around standards. A software provider may offer SLAs as part of a bug-fixing support package. If things break within the provider’s software, not only will there be a response time but also a contractually binding outcome – usually linked with severity of the bug. For example, if the bug is critical, an SLA may guarantee a fix or reasonable workaround within the relevant timeframe. If the bug is less severe, the commitment may only be to fix the issue on the next patch or version.
Why do SLAs matter?
SLAs matter because they give a customer (ideally) a clear resolution pathway if things go wrong.
The primarily importance of this resolution pathway is that it is catered for within the contract between the customer and the supplier. This serves to both give the supplier some breathing room whilst maintaining the trust and confidence of customers.
In a contract between a service provider and a customer, at a minimum level there will be a term within that contract that the services are to be provided ‘with reasonable care and skill.’
If the service is unavailable for a significant amount of time, it would be arguable that the supplier has breached that term of the contract. That may entitle the customer to terminate and potentially get a refund of any advance payments.
With an availability SLA, instead of being entitled to terminate, the customer gets a credit. Both the supplier and the customer are protected. Of course, SLAs can be drafted in such a way to favour either the supplier or the customer. But a balanced SLA should achieve both parties’ objectives.
What are the different types of SLA?
Different commercial situations call for different SLA structures. The three most common are:
- Customer-based SLA. A single agreement tailored to a specific customer covering all or part of the services they receive. This is often used for large or strategic customers
- Service-based SLA. A standard SLA that applies to all customers of a particular service. For example, a cloud provider might apply the same uptime guarantee to all hosting customers
- Multi-level SLA. An SLA that sets different service levels depending on factors such as customer tier, service type, or location.
SLAs – essential elements
Service levels and performance metrics
As above, this is the core aspect of any SLA. The service levels and performance metrics set out the measure performance standards – often referred to as Service Level Objectives – and the metrics, or Service Level Indicators, used to measure them.
Various objectives and indicators include:
- Availability/downtime
- Response time
- Customer satisfaction
- Error rate
- Utilisation
- Data corruption
- Processing speed/handling time/throughput
- Recovery time
- Security incidents
Exclusions and caveats
The exclusions and caveats around SLAs are just as important as the SLA metrics themselves, if not more important.
Suppliers will frequently look to caveat their own SLA metrics. An uptime guarantee of 99.5% is usually subject to scheduled maintenance and unscheduled emergency downtime. If there is no availability within those periods, then that doesn’t count as a knock on availability.
Faults and sources of responsibility are also typically carved out. For example, if a fulfilment partner loses a parcel, that may not count as a failure to hit a given SLA. In a software context, the meaning of a ‘fix’ or a ‘solution’ may just be a plaster as opposed to fully restored functionality.
Finally, SLAs are often provided on an exhaustive basis. If the supplier fails to meet a service level but provides the relevant remedy (e.g. a credit), that will be the customer’s sole remedy and the customer will not be able to terminate the agreement or seek damages. Customers should be alive to this risk and consider whether this is appropriate. It is common for SLAs to cater for a scenario in which SLAs are repeatedly breached, even if remedies are given.
Monitoring and change
Details of how performance will be monitored, how often reports will be provided, and what data they will contain. Transparency is essential if the SLA is to be effective – if a customer doesn’t know that anything has gone wrong then the remedies are worthless.
The nature of the underlying services may also change over time. SLAs should include a process for reviewing and updating the service levels – often through a formal change control procedure.
Charging structure
SLAs are occasionally offered as add-ons to a supplier’s service provision. In other words, SLAs are not offered as standard but are made available for an additional fee. For some suppliers, this may be a serious source of revenue, especially with services that do not break down frequently.
Conclusion
SLAs are more than just a contractual document. It is a practical framework for defining, measuring, and managing service delivery. When drafted carefully, it protects both provider and customer, supports operational performance, and builds trust over the long term.
Ultimately SLAs can help suppliers retain customers – exceeding SLAs are a clear value indicator. Customers benefit from the security SLAs can offer.
At EM Law, we are experts in commercial contracts. From software licences to logistics contracts, we can assist you and your business with a wide variety of requirements. If you have any questions about SLAs or commercial contracting more generally, do not hesitate to contact one of our contract law experts – Neil Williamson or Colin Lambertus – directly, or feel free to contact us here.
