What is SLA? Best Practices for Service-level Agreements

0 12 min read Business Process Optimization, Corporate Innovation


Tech & Business

Doing business with any specific organisation entails a series of expectations. With an SLA (Service Level Agreements), you can ensure consistency from the vendor.

An SLA plays a crucial part in any technology vendor or outsourcing contract. It lists out each service rendered, the quality, and penalties if any requirement isn’t upheld.

With a well-laid-out SLA agreement, you can improve customer perception of your company. It helps minimise the number of disputes that arise, and ensure customer relations are well managed.

In this guide, you’ll learn more about a Service-Level Agreement, its metrics, best practices for creating the document, and much more. Let’s begin!

What is a Service-Level Agreement?

As the name implies, a Service-Level Agreement is a document that outlines a series of expected services that one party has agreed to give the other. The contract can exist between:

  • Business to customer
  • Business to another business
  • Department to another department within the same organisation

In simpler terms, this document creates an alignment by setting clear business expectations and mitigating any complications while offering these services.

For example, the contract may contain the expected response time for services requested by the customer. This can include having a consistent power supply, the maximum time a power outage can last, and the penalties for not delivering the promised service.

It’s worth mentioning that there are three types of Service-level Agreements. These include:

sla types

Customer Service Level Agreement

A customer service level agreement is a contract between a business and its customer(s) to deliver a certain level of service.

For example, a tech repair shop may offer its services to the general public. However, it may have a customer service-level agreement with a private library. The agreement may require it to perform weekly assessments on 50 computers, repair discovered faults, and report to a specific person.

Internal Service Level Agreement

An internal Service-Level Agreement is between two (or more) departments within the same organisation. This type of agreement is called an Internal SLA. It only concerns parties within the company.

For example, a company’s sales department makes $5,000 in sales monthly, with each sale being valued at $100. Suppose the sales team’s average win rate with leads is %50. In this case, the company’s marketing director can strike an internal service-level agreement with the sales team.

The contract may expect the marketing department to deliver 100 qualified leads to the sales director within a month. Such requirements may also include four weekly status reports per month to the director.

Multilevel Service Level Agreement

A Multilevel Service-level Agreement combines both Internal Service Level and Customer Service Level Agreements. It supports your company’s customers and internal departments to outline the expectation of each party if there’s more than one end-user and service provider.

For example, your company’s sales and marketing team can partner via an SLA to deliver leads from marketing to sales monthly. However, if they desire customer retention in the contract, they can expand the contract by making it an SLA between Sales, Marketing, and Customer Service. This option is effective because the Customer Service SLA provides valuable feedback for marketing and sales.

Purpose of SLA (Why do you need one)

A Service-Level Agreement plays an important role in IT vendor contracts. It pulls details on all contracted services and their parameters into one complete document.

Without a Service-Level Agreement, any significant contract is susceptible to accidental or deliberate misinterpretation if an issue arises. This specific factor makes it an essential layer of protection worth equipping for both parties.

It’s worth including that a Service-Level Agreement is ideally assigned to the technology or business objectives of the agreement. This is necessary since misalignments can negatively affect your business’s quality of service delivery.

Below are additional reasons why your business needs an SLA:

sla purpose

Easier Dispute Resolutions

Disputes are inevitable in business. However, having service-level agreement metrics in your legal arsenal can help support your case. Remember that this advantage is most effective based on how well you kept your end of the contract.

For example, suppose a customer complains without sufficient justification. Then, you may demonstrate that your business acted according to the agreed-upon SLA time frame.

Established Boundaries

As a business, you’re in charge of rendering specific essential services to your target audience. But there are several other services you don’t fall in your list of offerings.

For example, an IT firm may not render line-of-business applications with support contracts or print devices supported by a copier supplier. A Service-Level Agreement allows you to be specific on your handling and rejection.

Time Protection

Setting boundaries allows you to manage customer expectations better and clarify the boundaries of your business responsibilities. This factor prevents patronage with unrealistic expectations, demanding more time or service than you’re willing to offer.

Essentially, a Service-level agreement clarifies which days and hours you’re available and what types of service you offer. Thereby preventing customers from holding you accountable for issues outside of your control or aren’t your fault.

Who Provides the SLA

The servicing company provides the SLA often with a standard Service-level agreement that indicates each offering, pricing, and other factors. These parameters are created based on the following factors:

  • Popular industry standard
  • Business capabilities
  • Customers’ common expectation
  • Competition
  • Pricing

Service-level Agreements are reviewed and modified by the customer and legal counsel to ensure fair terms for both parties. When creating this essential document, the standard flow of events includes:

  • The provider company sends an SLA draft to the client
  • The client reviews the terms and conditions, KPIs, penalty clauses, deliverables, etc.
  • The client provides feedback on much-needed changes
  • Provider company reviews the feedback and makes appropriate recommendations and changes (if any).
  • The client reviews the recommendations and changes
  • The feedback and review proceed until both parties agree on specific terms
  • Upon agreement with the terms, the SLA draft goes to the legal team for approval
  • Once approved, both parties sign the SLA

*Note: This sequence is typical for most businesses; however, it changes on special occasions.

Contents of an SLA

sla contents

The content on a Service-Level will differ among internal and external agreements. However, specific elements are necessary for this document to function as a legitimate contract.

These elements include:

Nature of Service:

A well-written Service Level Agreement carries a comprehensive description of your business’s service(s). Naturally, these should be divided into categories and subcategories, highlighting general services and offerings specific to a department.

This section also includes hours of operation and issue resolution time, especially for IT businesses, leaving no room for ambiguity or assumptions.

Aim of the Contract

The SLA, irrespective of type, must outline who’s in charge of ensuring each party’s goals are archived. It also reveals who initiates and receives feedback, and which team is responsible for what action. Furthermore, this section also clarifies if a separate employee uses the service about who reports on performance weekly.

Essentially, this section clarifies who’s involved in the service-level agreement and how.

An Agreement Summary

A summary of the agreement is usually the first part of a Service-Level Agreement. It entails what service(s) your company wishes to give the other party, a summary of the service, who will receive it, and what metrics determine the success.

Requirements of Both Parties

The service-level agreement must include what factors are necessary for both parties to reach their goal. Often in contracts regarding a customer, the requirements might go beyond your company’s product as it can be concepts like weekly technical maintenance, reporting, and consulting.

On the other hand, an Internal Service Level Agreement requirement can include what they need from the opposing department to hit their weekly or monthly target. For example, marketing may require status reports on Sales pipelines once a week to correctly modify their lead-generating strategy.

The goal of Both Parties

This section highlights the goals that both parties wish to achieve, and in the case of a Customer Service Level Agreement, the goals are primarily those of the customer. Nevertheless, you still need to assess their desires and ensure it’s consistent with your business offerings, allowing you to deliver consistently and regularly.

Plan for Unfulfilled Expectations

Business is sometimes greeted with unfortunate situations that lead to inconsistent output to your customer. This factor is worth considering in an SLA and its legal consequences to ensure business proceeds.

Fortunately, not all repercussions will end your contract, as in external SLAs, the compensation can be in “Service Credits” or anything of the sort.

Cancelation Conditions

While a contract allows businesses and customers to work together predictably, occasions can arise that warrant a contract cancelation. This section of the SLA outlines what conditions can end the agreement to ensure unnecessary termination.

Some examples could be the contract goals being unrealized for three months or the agreement not having buy-in from the involved parties.

They differ depending on the agreement type, business, and other factors. Nevertheless, these elements above are fundamental to the contract’s structure.

Indemnification Clause

An indemnification clause is a provision where the company providing the service agreed to indemnify the customer whenever a breach in warranties occurs. For clarity purposes, indemnification is synonymous with “compensate”. The business will pay the client for any third-party litigation costs resulting from the breached warranties.

Essentially, the indemnification clause causes the service provider to recognize that the customer isn’t responsible for any related cost incurred after the warranties were violated.

Most companies aren’t comfortable with this part of an SLA since it can lose an undefined amount of financial resources. To limit the scope of indemnifications, companies can:

  • Consult a lawyer
  • Introduce time limits
  • Reduce the number of indemnitees
  • Create monetary caps for the clause
  • Specify where and when the responsibility of indemnification begins

On the other hand, suppose you’re on the receiving end of an SLA contract. There’s something you should know. If the company uses a standard service level agreement template, there’s a possibility the indemnification clause is absent. Consider asking your in-house counsel to draft a provision to include it.

Types of SLA Penalties

With the previously mentioned indemnification clause, it’s worth emphasising penalties, and which types appear on an SLA. Ultimately, there are multiple penalties in a Service-Level Agreement like the Licence extension or support penalty. However, two types are most prevalent in all industries.

sla penalties

You may opt to add either of these options or a combination of both, based on the agreement of both Parties. These penalties include:

Financial Penalty

Financial compensation is a common and simplest type of repercussion, where a specific amount is given for each contract violation. However, it’s worth adding that the amount paid for each violation is based on the issue’s type, extent, and frequency.

However, this factor is subject to adjustments in future payments since most clients prefer receiving penalty amounts individually. This decision is mainly for tax purposes and easy financial record keeping.

Service Credit

Another popular type of compensation for violating a Service-Level Agreement is service credit or extension in service. For example, if the providing company fails to complete the man-hours needed monthly, the disappointment is compensated in subsequent months.

This option is popular in application maintenance, software development, software and hardware testing services, and anything of the sort.

However, irrespective of the penalty type, it must appear on the service level agreement, alongside expectations, ensuring both parties understand the best actions during disputes.

It’s also worth adding that sometimes, penalties can cause issues between parties as some get complex and difficult to comprehend, especially during massive projects. For this reason, it’s recommended to have clear guidelines and compensations whenever the KPIs aren’t met, or there’s a breach of contract.

Another reason why some penalties result in disputes between both parties is unrealistic expectations. Essentially, some clients desire higher compensation, often unfair to the servicing company.

Ultimately, both parties must prioritise fairness when accepting and compensating for shortfalls in service.

Service-level Agreement metrics to Monitor

sla metrics to monitor

Metrics are essential as businesses and society generally need them to make informed and calculated decisions. The same applies to service level agreements, where the provided service will shape what metric needs monitoring and ignoring.

While many factors can be monitored in an SLA, it’s recommended to keep them as simple as possible to avoid high costs and confusion from both parties. The best way to decide what to observe is to examine your operation and pick which elements matter.

Complexity isn’t recommended when considering service level agreement metrics. This is because a sophisticated monitoring process is less effective due to how much time is wasted analysing the data.

When choosing metrics, opt for easy collection of metric data. Also, use automated systems since the manual collection of data is unreliable and prone to errors.

Depending on the service and what it entails, the metrics to monitor may include:

Availability of Service

A common factor to monitor in SLAs is how often a service is available. For example, the contract may specify that the service is required from 8 a.m to 6 p.m and should be available for at least 99.5% of the time otherwise indicated.

Other establishments like eCommerce operations have more aggressive service availability, with some having a 99.999% uptime since such sites generate millions of dollars hourly.

Rate of Defect

Errors in business operations are inevitable, with big corporations like Facebook experiencing complications with their service. The frequency of these issues matters, as they are extremely damaging when excessive.

Some examples of defects include network/coding errors, incomplete backups, and restoring missed deadlines. They’re worth observing and can be crucial to keeping or terminating the contract.

Technical quality

When outsourcing applications and hardware, assessing the technical quality is necessary. This is because they play a vital role in fulfilling the contract’s goals. Some technical metrics include coding defects, program size, and tool integrity.


Security online and in the workplace are top business priorities. This is because office injuries and network security breaches are expensive to repair. Some security measures to consider monitoring include:

  • Constant antivirus updates
  • Proper office equipment inspection
  • Consistent cybersecurity assessment

Business results

Most IT customers would like to incorporate metrics on business processes into their SLAs. It’s best to use existing key performance indicators since the vendor’s contribution to these factors can be calculated and measured.

Best practices for writing SLAs

The efficacy of any Service-level Agreement depends on having well-written terms and fulfilling these expectations accordingly. Therefore, you must thoroughly understand the relationship before entering the business relationship.

To ensure the desires of both parties are met, incorporate fairness. Below are some best practices for composing a well-written service-level agreement.

Clearly Define your Services

Your business most likely offers various services, and not every department is needed in a contract, even if they are related. However, your SLA must specify which department(s) is vital to the contract to prevent loopholes and extortion.

Define Expectations on Reporting Issues

While your business may have a department for customer complaints, they aren’t always ideal for tackling issues regarding an SLA.

Your SLA needs to be specific on who is suited to receive complaints on the SLA and what medium of communication is preferred (phone calls, emails, SMS, etc.). Outlining this crucial detail for the customers keeps the entire relationship optimised, stable, and avoidable confusion.

Keep Performance Metrics Realistic

While performance metrics like “incident response time” and “uptime” are important, keeping them realistic and simple is essential. These numbers help customers understand what to expect from your service and identify shortfalls. Ultimately, service-level agreement metrics should be relevant, quantifiable, and realistic.

Include a Compensation Clause

Penalties are natural repercussions following the violation of a Service-Level Agreement. Therefore, including a clause that compensates for the shortfall allows customers to view your company as trustworthy and accountable. The most common type of compensation is a financial one, where the company gives money back to the customer or offers a discount on the following month’s fees.


Disputes are inevitable in business, and a Service-Level Agreement is crucial to reduce these threats greatly. This document saves you time and money and also helps in sustaining a relationship with a client and delivering on agreed terms.

This contract is worth your while as it contributes to the smooth functioning of your business, facilitates transparency, and raises your credibility.

Additionally, before breathing any Service-Level Agreement, ensure to consult a legal expert. This individual will properly assess the document and ensure the parameters are realistic and fair for you and the party involved.

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