A service level agreement is a contract between a service provider and the end user that defines the level of service expected from the service provider. Service providers use service level agreements to help them manage customer expectations and define the circumstances under which they are not liable for performance issues. Customers can benefit from a service level agreement in that they describe the performance characteristics of the service and set out the means of redressing any issues.

Service levels

Service levels define how well the supplier needs to perform and how they will respond to any issues. The service level response tends to be highly variable depending on the services provided and, ideally from the customer’s perspective, should be negotiated between parties. The customer should include a term where the supplier gives regular updates on the nature and status of any efforts to correct any fault. The customer should also consider requiring the updates to specify a description of the problem and the estimated time of resolution. Often, though, suppliers will present their own service levels agreements and the customer will need to “take it or leave it”.

Service credits

If the supplier fails to provide a solution within the relevant response time, the customer will often become entitled to a service credit. The level of service credit will correspond with the relevant severity level of fault on submitting a written claim. Amounts are deducted from the amounts to be paid under the contract to the supplier if these performance standards are not met. The main agreement may contain various other mechanisms to rectify poor service delivery.

Service credit amounts can be determined in a variety of ways. For example, the amount may be calculated by applying a specified percentage to the annual support fee and multiplying the result by the number of relevant days. Alternatively, a fixed amount could be multiplied by the relevant number of days. Service credits will be shown as a deduction from the amount due from the customer to the supplier in the next invoice. The supplier will not be required to pay any money or make any refund to the customer.

Companies that establish service level agreements include IT service providers, managed service providers and cloud computing service providers. Service level agreements, regardless of type, will be subject to modification over time. Service providers should update and review service level agreements to reflect the addition of new services, changes to existing services or changes in the overarching regulatory environment.

For any questions you may have concerning service level agreements contact Neil Williamson.