Service Level Agreement (SLA) Boot Camp

Service Level Agreements, or "SLA's" are tricky but useful mechanisms for managing the risk of an on-going relationship with IT service providers. Unfortunately, most SLA's that show up in service contracts as worthless, cosmetic paper additions. SLA's can be extremely powerful tools to help you and your service provider get the most out of a relationship.

What is an SLA?

A service level agreement (SLA), in its most basic form, is a contractual commitment to meet specific goals. If, for example, you sign up for a hosting contract with a provider, you may desire an SLA that measures the up-time of your website. If you outsource your help desk, you may want an SLA that measures the time it takes to answer the phone. Usually, an SLA includes a penalty and/or reward framework. For example, many web hosting companies offer a refund based on the number of hours your website is unavailable. On the flip-side, an SLA may include an extra bonus to your help desk provider if all calls are answered within 30 seconds. The following are typical examples of SLA's:

"All help desk call will be answered within 90 seconds"

"95% of all bills will be printed and delivered on time"

"The website will be available 99.99%"

"Project X will be delivered within 2 weeks of the planned schedule"

What isn't an SLA?

An SLA is not a way to cut your costs. Rather, SLA's are mechanisms for managing risks, sharing pain, and benefiting from success. Many SLA's are setup as "outs" to contracts that allow customers to penalize technology providers for non-performance. Although penalties do reduce costs and they do send a strong signal to service providers to improve their service, neither you nor the service provider "win" if an SLA is missed. Think of an SLA as a shared goal.

SLA Philosophy

The best SLAs are setup to allow both you and your service provider to share in the success and failure of an agreement. If you intend to turn over the operation of your billing system to a service provider, getting the bills out on time is critical. Whether you do it yourself or partner with someone, if you fail to produce invoices, you delay incoming revenue. In this example, your SLA should inspire your vendor to deliver on performance levels that have an actual impact to your business. Let's say your current billing accuracy is 90%. If you increase this accuracy to 95%, you have directly improved your company's bottom line. If you intend to outsource this function, your SLA should include a shared billing accuracy reward to the service provider if they help you improve revenues.

Make It Count

Some web hosting plans offer an up-time measure that, if not met, will result in a refund to you. Unfortunately, this "refund" may be calculated as a credit based on the time that your site was down and your monthly hosting fee. For example, if you pay $100 per month for hosting services, and your site is down for 1 hour, your credit may only be 14 cents! $100/720 (number of hours in a month) = $0.14. If, on average, you sell $50 worth of goods through your website each hour, 14 cents isn't much of a blow to your hosting company. I recognize that my example is slightly exaggerated. Many hosting companies offer a more material penalty and most web sites do not generate $50 in sales per hour. But you can see how this penalty and SLA is mis-aligned with the business model. If you know you make $50 per hour in sales through your website, your hosting company should incur a much greater penalty for not keeping your website up and running! Whether you negotiate an SLA with a hosting company or a large IT company, create an SLA that is specific to your business and truly establishes risk sharing (i.e. we "win" or "loose" together).

Devil In The Details

A good SLA has four critical components: description, target, measurement, and penalty/reward. If you have an SLA that is missing one of these components, you run the risk of losing the benefit of having the SLA to begin with. In the web hosting example above, the SLA sounds good, but the actual measurement and penalty weigh heavily in the favor of the hosting company (they have little to loose!) Make sure your SLA's are well defined and agreed upon before you ink the deal. Here's an example of a good SLA:

Description: Billing - All bills will be rendered, printed, and mailed on a timely basis to ensure unbilled revenue is minimized.

Target: 90%

Measurement: Ratio of number of planned bills / number of bills actually produced. The calculation is based on the number of records in the billing input file compared against the billing output log file which lists the bills actually rendered.

Reward/Penalty: If billing accuracy is below 90%, penalty is calculated as 1% of the unbilled revenue for that billing run. If billing accuracy is above 90%, a bonus is calculated as 1% of the additional revenue billed.

In this SLA example, your service provider stands to loose or gain substantially based on their performance. Similarly, your company stands to loose or gain substantially based on the performance of the service provider. Depending upon your daily billings, 1% could be significant. Note the specificity of the SLA measurement and calculation in my example. If you are not very specific with the calculation methods, actual performance against service levels are open for debate.

Negotiate Up Front

Many businesses strike deals with IT companies and leave SLA's as an open item. Many IT service providers will want to establish a "base line" period where SLA's are measured and then negotiated. In many cases, this request is reasonable, especially if an IT company has little to no understanding of your environment and your current performance record. However, if you wait to negotiate service levels until after you ink a deal, you loose tremendous leverage with your provider unless you really think you can walk away from the deal. Ideally, choose a provider that is willing to negotiate a service level up front. In my experience, these SLA negotiations are much more difficult on the back-end.

Raise the Bar

A service level agreement should be changed periodically. Let's look back at my billing SLA example. Let's assume that after 1 year of service, your provider is billing at an accuracy, on average, of 95%, and in turn, you are rewarding them consistently for beating the original service level. It's time to raise the bar! If your provider can increase your accuracy from 90% to 95%, maybe they can increase your accuracy from 95% to 99%. Raise the SLA bar (target) to 95%, and only reward them if they beat this new level of quality. By providing the right incentives to improve upon service levels, both you and your service provider can benefit.

The Shorter, The Better

I have seen service contracts with dozens and dozens of SLA's. If you establish multiple SLA's, you and your service provider will have broad visibility into performance levels. However, establishing many SLA's can water down the over-arching performance of a service provider. Put simply, a service provider can "make-up" poor performance on one SLA by beating the performance target of another SLA. To keep things simple, pick the few critical success factors of your business and establish applicable service levels that your provider can truly focus on.

Service Level Agreements should be established as a "dashboard" for you and your service provider to share in the success and failure of your arrangement. SLA's are less effective if they are established as contract "outs" or as penalty frameworks, because they fail to drive a partnering relationship. Negotiate SLA's which, if met or beaten, truly benefit your company and your service provider. Always define SLA's to the lowest level of detail possible before you finalize the arrangement since negotiations become even more difficult after the deal is executed. And never commit to an SLA that could hurt you but not your provider.

About The Author

Andy Quick is co-founder of Findmyhosting.com (http://www.findmyhosting.com), a free web hosting directory offering businesses and consumers a hassle free way to find the right hosting plan for their needs. Feel free to contact Andy at andy@findmyhosting.com in case you have any questions or comments regarding this article.

---

Sharing the Reins: 10 Reasons To Sell Your Company To Your Employees

In 1987 I sold my business, South Mountain Company, to... Read More

Manage Your Time - Save Your Business.

If you work from home, chances are you already know... Read More

Selecting a Business Broker or Intermediary to Help You Sell Your Business

As crazy as it seems, some people spend more time... Read More

5 Questions Great Managers Ask (and they arent hard!)

However hard we try, we seem to make life more... Read More

How You Can Learn to be a Better Manager

When you first take over a department, expectations are usually... Read More

Customer Focus - Just 5 SimpleThings You Need to Think About

You can boil down the difference between successful businesses and... Read More

Sarbanes Oxley 404 Compliance - How Nov. 15, 2004 Deadline Affects You

Fast Relief for Sarbanes Oxley Section 404 ComplianceSection 404 of... Read More

How to Enhance Quality in Your Business

Every business must strive to provide quality products and services... Read More

Poor Employee Performance: How to Deal

KEEP WRITTEN RECORDS: "Document !Document! Document!" Keep a record of... Read More

Human Resource Employee Risk Profile - Management Risks Explained

Human Resource Employee Risk ProfileIs your business at risk? Do... Read More

Innovation Management - idea selection and valuation issues

Innovation is different and distinct from creativity in that it... Read More

Einstein, The Universe, And Leadership

Every since serving a hitch in the military, I have... Read More

When Business Becomes A Battlefield

"We have to be careful it's like a minefield out... Read More

The Three-category Approach to Performance Management: Effort, Ability, or Environment

Performance Management is the act of managing personal or organizational... Read More

Your Blueprint For Business Success

Before you start your own business one of the first... Read More

Organisation Tips For The Mobile Executive

Despite the fact that everyone sighs "How glamorous!", the life... Read More

A Leadership Lesson: Two Guys With Guns

PERMISSION TO REPUBLISH: This article may be republished in newsletters... Read More

Parenting Your Employees to Better Performance

Have you ever worked for someone who was such a... Read More

Selecting Top Talent: Improve Your Batting Average

I recently gave a presentation to a group of business... Read More

Is It Worth To Outsource? How One Can Outsource Wisely

Recent trends in software development market show that it is... Read More

When Code Freeze Turns To Code Slush

Time To Market (TTM) is a vital concept that every... Read More

Tales From the Corporate Frontlines:The Importance of a Competitive Wage and Benefit Package

This article relates to the Compensation and Benefits competency, commonly... Read More

A Man and His Razor

It is vain to do with more what can be... Read More

The Ins and Outs of Internal and External Relations

INTERNAL PUBLIC RELATIONS: Never overlook an opportunity to do internal... Read More

Best Practices Plan: Dissemination of a Great Idea

Good news spreads quickly News of the invention of the... Read More

Great Groups! - Getting a Group to Think Like a Genius

Great Groups! - Getting a Group to Think Like a... Read More

Terrible Meetings - Ten Ways to Spot Them!

Sometimes, better than giving advice about how to run things... Read More

Performance Appraisal Checklist: Raise Not Just Appraise Performance

It's that time again! Perhaps the most dreaded management practice... Read More

Good Idea Generation ? A Process

It seems incongruous that good idea generation can be a... Read More

Work Priorities: Where Can You Spend Your Time Most Effectively?

Understanding where you can spend time most effectively requires concentration... Read More

Implementing Change

There are different reactions that individuals experience during time of... Read More

Productive Meetings: How to Make Your Meetings More Productive

There's one simple secret to effective meetings: set an agenda... Read More

Uncommon Common Sense ? Know What is the Most Important Thing in Your Business

Over 3 of my meetings with 3 business owners last... Read More