A vendor service level agreement (SLA) outlines the level of service a client can expect from a vendor. The SLA includes penalties or remedies in case the agreed-upon services aren't met, as well as metrics by which the service is measured.

Understanding Vendor Service Level Agreements

A vendor SLA is an important part of any technology and outsourcing vendor contract. It's an agreement that identifies the expected level of service from the supplier and how to proceed if that level of service fails to meet the contract.

An SLA is a legally binding contract that includes certain contractual obligations. These obligations may be included as clauses in the agreement, or they may be reserved for a whole section. An SLA can be used as part of any supplier contract, as long as the vendor is providing you with a service.

In most cases, an SLA exists between a company and an external supplier. SLAs can also exist between two company departments. The agreement is an effective way of maintaining a certain level of control over outsourced services, since managing supplier performance is largely out of a company's hands.

According to a 2014 Deloitte's survey entitled “Global Outsourcing and Insourcing,” the two biggest concerns among outsourcing services customers are:

  • Reactive management
  • Poor service quality

Aspects such as cost and attrition were surprisingly lower on the list, which suggests a lack of partnering, collaborative relationships between service providers and their customers. The survey reported that the key to resolving vendor performance issues is to work with the vendor to identify issues, implement performance-enhancing training, and focus on better managing the relationship.

Over the years, the SLA has evolved to an agreement focusing on resolving issues rather than merely penalizing vendors for them. Sometimes, restructuring the terms of the contract or service levels can improve performance. The key is to develop a well-written vendor SLA that leaves room for improvements over time.

Why Do You Need a Vendor Service Level Agreement?

A service level agreement is an essential aspect of any IT vendor contract. The vendor SLA details information regarding all contracted services and what's expected of them.

A strong SLA will clearly define:

  • Vendor responsibilities
  • Customer expectations
  • Metrics

Since the SLA is so thorough, neither party can claim ignorance when their end of the bargain isn't upheld. Essentially, a vendor SLA makes sure that both sides of the agreement understand its requirements.

Unless you have an SLA in place, you leave yourself open to inadvertent or deliberate misinterpretation. Being misinterpreted could have a negative impact on the service quality, delivery, pricing, and overall customer experience.

Although SLAs originated with network service vendors, they're now used more broadly in a range of IT fields. Businesses that use SLAs include:

  • Managed service providers
  • IT service providers
  • Cloud computing service providers
  • Corporate IT organizations

Your IT department should create its own SLA to measure services and customer expectations. The SLA can also help your team define circumstances under which they are not responsible for performance issues or outages.

As a customer, you can also benefit from entering into a service level agreement with a vendor. The SLA describes the service's performance characteristics, which you can compare with other vendors to ensure you're choosing the right supplier.

Who Supplies the SLA?

In most situations, the service provider has a standard service level agreement document that they can tweak based on an individual customer's needs and expectations. The downside is that these SLAs generally benefit the supplier, so they should be modified and reviewed by the client's attorney.

The customer must explicitly state their expected service levels because their expectations will affect pricing and supplier offerings. For instance, if you demand system availability 100 percent of the time and the supplier cannot meet that need, it may offer a different solution.

If you're under contract with a vendor and the vendor is acquired by another company, the SLA will generally continue, although it may need to be renegotiated. Most companies, however, do not want to upset existing customers and will honor current vendor SLAs. Because of this, SLAs are transferable, but you should check with your supplier if they have merged or changed ownership.

If you need help creating or validating a vendor service level agreement, post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.