5 Practical Tips: Service-Level Agreements
Many companies that outsourced parts of their own internal IT to a service provider a number of years ago and have since procured IT services externally, subsequently in many cases find themselves subjectively dissatisfied with the services they receive. The reason for this often lies in the fact that no objective metrics for the quality of the services to be provided have been agreed, or that such metrics could not be agreed due to a lack of historical data. The services offered may not objectively always have been poor, but they were often not precisely tailored to the customer’s needs and business. At any rate, an assessment of customer satisfaction is dominated by a subjective feeling of “things being different than before”. This is changing, however, particularly as next-generation outsourcing becomes more widespread. Not only are the purchasers of IT services increasingly insisting on the definition of service levels, but service providers are also using service-level agreements in their own interest, i.e. to specify their contractual service obligations precisely, but also as a means of raising their own profile. In fact, under Section AT 9, clause 7 of the Minimum Requirements for Risk Management (MaRisk) published by the Federal Financial Supervisory Authority (BaFin, Circular 10/2012) and valid since 14 December 2012, banks and financial service providers are bound by supervisory law to define criteria, i.e. service-level agreements, with which to evaluate their service providers’ performance of services that are essential for business. In other sectors beyond IT, service-level agreements have long been commonplace, and are for example used by call centres and telemarketing service providers.
Service-level agreements are concluded as contracts between companies, i.e. different legal entities. The party that fails to achieve the agreed service level must expect to face real sanctions. This means that the party failing to provide services as agreed or deliver quality as defined usually faces not only payment obligations but often also additional performance obligations.
Practitioners exclusively associate the term “service-level agreements” (“SLAs”) with a definition of quality standards for services – the content and scope of which are defined elsewhere – alongside provisions governing sanctions in the event of non-fulfilment. The services due do not have to be just IT services; indeed, entire business processes can be outsourced to service providers and largely provided with IT support (for example, the processing of credit or loyalty cards; telephone or email marketing services; settlement processing for securities, loans or payments; systems for HR administration or accounting services etc.). Here too, provisions on the quality and speed of the services provided play a major role.
Quite irrespective of how an outsourcing agreement or any other agreement under which a party is obliged to provide services is defined in contractual terms (as a works, lease or service contract, but usually a mixed-type contract), all statutory provisions governing these types of contract have one thing in common: the law contains no provisions on the quality of work or services (services to be provided, piece of work to be manufactured, item to be purchased). In fact, the legislator expressly assigns this task to the contractual parties of an agreement.
Learning from previous mistakes …
If SLAs, as defined above, are not in place, or if they have been drafted incompletely or contain gaps, this is not simply a minor issue. Rather, the absence of key contractual elements from such an agreement can have lasting detrimental effects.
Where SLAs are either not drafted or contain gaps, the potential disadvantages to both sides are clear: the client, to whom the work or services are owed, has no sustainable contractual basis on which to take action against the work or service provider if he deems the work or services delivered to be inadequate. Conversely, the party required to provide the work or services finds himself confronted with the client’s requirements which – although often rather vague per se – he still has meet, and with the associated feelings of dissatisfaction. Due to the lack of contractually agreed standards for the work and services to be performed, he is unable to put forward specific and convincing arguments to tackle this problem. In particular, however, the contractor does not have any clearly defined performance target on which to base his internal planning and calculations and which he knows is achievable, and which gives him peace of mind that he has done everything required of him under the contract and has been able to achieve a fair price for his work or service. From this, it is evident that the frequently encountered attitude among contractors and clients that no SLAs should be in place or that they should be worded as indistinctly as possible in order to be able to demand what is most convenient in any given case, is a deceptive view that does not provide any security whatsoever. The client who wishes to assert claims for alleged non-compliance with contractual service levels cannot do so because he is unable to claim and prove that when the agreement was concluded, the parties agreed that precisely this service level was contractually owed. Conversely, although the contractor may be able to state and prove which specific service level he fulfilled with the work or services provided, he is denied access to the second argumentation step required for the successful defence against claims, i.e., stating that the service level achieved actually did at least correspond to the service level contractually owed. Without an exact prior contractual definition of the service level owed, the contractor will never be able to state and prove that he fully complied with his contractual obligations.
Forward planning pays dividends
SLAs are not just concerned with defining particular standards for the performance of work or services. An SLA also provides the parties with a range of sanctions to ensure smooth handling of the resolution process in the event that agreed service levels are not met. The function of SLAs is first to set out the outsourcing company’s specific expectations with regard to the work or services and thereby enable management of the service provider and timely monitoring of the quality of work and services, ensure precautionary steps to avoid conflict and remedial steps to resolve disputes, and create incentives for the service provider to comply with agreed SLAs. There is also the issue of compensation for damage incurred in a situation that has already become critical due to poor performance, yet this should be regarded more as a secondary effect. Ultimately, the failure to achieve service levels can also be linked to procedures to improve the service providers’ process quality so that SLAs have the medium to long term effect of improving quality. The amount of work and effort devoted to the careful drafting of an SLA will pay absolute dividends in terms of ensuring that issues are resolved as smoothly as possible.
At regular intervals over the next few months, we will be bringing you 5 practical tips on how to avoid the most common pitfalls of SLAs. We will begin in March with Tip No. 1: Define clear metrics and head off subsequent disagreements!