What Are Service Level Agreements (SLAs)?

Service Level Agreements ensure vendors and customers are on the same page about deliverables. Here's what you need to know about SLAs.
Published on: Nov 30, 2023
Last updated: Jan 25, 2024

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American economist and former chair of the Federal Reserve Alan Greenspan once said, “I have found no greater satisfaction than achieving success through honest dealing and strict adherence to the view that, for you to gain, those you deal with should gain as well.”

When a company requires services from an outside vendor or internally through a different department, it must ensure these services are met. The most effective way to outline expectations, reporting, and other metrics is through an SLA or service level agreement. In this post, we answer all your questions regarding SLAs, including a definition, types of companies that use them, why they are necessary, and best practices when setting up these contracts.

What are SLAs?

Service Level Agreements (SLAs) are contracts or agreements between a service provider and a company that outline the level of service that can be expected. These agreements establish measurable criteria for various aspects of the service being provided, such as quality, performance, availability, and responsibilities of both parties.

SLAs are used across various industries and by different types of companies. Here are a few sectors where SLAs are common:

  • Information Technology (IT) Services
  • Telecommunications
  • Outsourcing Services
  • Cloud Service Providers
  • Manufacturing
  • Healthcare Services
  • Financial Services
  • Transportation and Logistics

Any business that provides services or relies on services provided by others can benefit from using SLAs.

8 Reasons why companies need SLAs

  1. Clear Expectations: SLAs establish clear, measurable expectations for the service provider and the customer. This clarity helps avoid misunderstandings and ensures that all parties have a mutual understanding of what is expected.
  2. Quality Assurance: By defining specific service levels, SLAs ensure a certain quality of service. This can include response times, uptime, resolution of issues, and other measurable metrics. It helps maintain consistency and reliability in service delivery.
  3. Customer Satisfaction: SLAs often result in improved customer satisfaction. When customers know what to expect and can rely on consistent service levels, they tend to be more satisfied with the services they receive.
  4. Accountability and Responsibility: SLAs establish accountability for both parties. Providers commit to meeting specific standards, while customers commit to providing necessary information or cooperation. This shared responsibility encourages collaboration and efficient issue resolution.
  5. Risk Mitigation: These agreements help mitigate risks by addressing potential issues proactively. Contingency plans and protocols for handling service disruptions or failures are often outlined in SLAs, reducing the impact of unforeseen events.
  6. Performance Monitoring and Improvement: SLAs include metrics and reporting mechanisms that allow companies to monitor performance. This data helps identify improvement areas, optimize processes, and enhance overall service delivery.
  7. Legal Protection: SLAs serve as legally binding contracts, protecting both parties in case of disputes. They outline remedies, penalties, and termination clauses, providing a structured process for conflict resolution.
  8. Communication and Transparency: Establishing SLAs encourages open communication between service providers and customers. Regular reporting on service performance promotes transparency, fostering a healthy business relationship.

What‘s included in an SLA?

Not all SLAs are equal. A cloud service provider will have different needs than a manufacturing company. As a result, the SLA will be specific to the services provided. However, the following parameters should be included in all SLAs.

  • Service Metrics: Specific, measurable elements that define the service, such as response time, uptime percentage, resolution time for issues, etc.
  • Responsibilities: Clearly define the roles and responsibilities of the service provider and the customer. This includes each party's actions to meet the agreed-upon service levels.
  • Performance Measurement: Methods and tools used to measure and report on the performance of the service. This often includes writing intervals, data collection methods, and reporting formats.
  • Penalties and Remedies: Consequences if the service provider fails to meet the agreed-upon service levels, including financial fines, service credits, or other forms of compensation.
  • Termination Clause: Conditions under which either party can terminate the agreement.

Many vendors that operate using SLAs will use a metric known as a service level agreement adherence rate. Companies looking to outsource services can use this percentage to understand how successful a vendor is in meeting the requirements defined in an SLA. For example, if a vendor is offering customer service support as a service, they will measure how many tickets are resolved compared to how many are left unresolved in a specific time rate as the SLA adherence rate.

Best practices when creating SLAs

If your business is interested in outsourcing services or is already doing so without an SLA, follow these recommendations to maximize the relationship's potential while ensuring compliance and accountability.

Welcome collaboration

Collaboration between service providers and customers is crucial in crafting effective SLAs. By involving all stakeholders in the process, ensuring their inputs, and aligning expectations, the resulting agreement becomes more comprehensive and reflective of both parties' actual needs and capabilities.

Create specific KPIs and metrics

Defining clear and measurable metrics within the SLA is imperative. These metrics, such as response times, uptime percentages, or resolution times, provide the foundation for evaluating performance and ensuring a shared understanding of success.

Set realistic expectations

Establishing achievable and realistic targets is critical. Setting expectations within the realm of possibility prevents disappointment and frustration, fostering a more positive relationship between the service provider and the customer.

Determine clear roles and responsibilities

Clear delineation of roles and responsibilities prevents misunderstandings. This clarity ensures that each party understands their obligations, reducing confusion and potential conflicts. Don’t overlook this aspect of crafting your SLA. Take adequate time to include all possibilities and situations in the agreement.

Let’s use a BPO helpdesk SLA as an example of setting responsibilities. The parties agree to service availability in the agreement based on when the provider is ready to take customer inquiries. The SLA outlines the types of interfaces, telephone and web portal, the availability for each (95% via phone and 99% through web chat), and the hours measured (business hours for telephone and 24/7 availability online).

Allow flexibility

Building flexibility into the SLA accommodates changes and unforeseen circumstances. This flexibility enables both parties to adapt to evolving needs without compromising the agreement.

Also, allow for flexibility to accommodate changes in circumstances or technology. Write review mechanisms to evaluate and revise the SLA periodically to ensure relevance. If new technology changes the service's capabilities, you don’t want to be stuck in a long-term agreement with a subpar service.

Set up communication channels

Establishing effective communication channels is vital for seamless interaction. Specifying the means and frequency of communication ensures swift issue resolution and ongoing collaboration. These communication channels can be everything from cobrowsing, to email, to chat and social media.

Include contingency plans

Integrating contingency plans for unexpected events or disruptions is essential. These plans offer a roadmap for handling emergencies, minimizing downtime, and maintaining service continuity.

Monitor regularly

Regular monitoring of performance against agreed-upon metrics is critical. This ongoing assessment allows for timely adjustments and continuous improvement in service delivery.

Set compliance measures

Defining penalties, remedies, or incentives for meeting or failing to meet SLA terms ensures accountability. Fair and reasonable compliance measures encourage adherence to the agreement.

In the BPO SLA mentioned above, the provider set penalties based on KPIs. If the provider doesn’t adhere to the level of service they agree to, 95% availability on phone and 99% availability through web chat, there’s a penalty. A service level credit is issued for every percentage point below the agreed-upon availability rate in the SLA.

Ensure documentation

Thorough documentation and accessibility of the SLA are fundamental. Precise record-keeping serves as a reference point for both parties, minimizing misunderstandings and facilitating smooth operations.

Conclusion

SLAs are essential for business operators who outsource services. However, a poorly executed agreement can drain resources and damage your brand reputation. That’s why it’s necessary to understand what’s included in an SLA and best practices. Remember that setting up clear expectations, roles, and monitoring are fundamental to executing a mutually beneficial relationship between two parties.

Sources used:

Sources last checked: 28-Nov-2023

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