What is a Service Level Agreement (SLA)?

What is an SLA?

A service level agreement (SLA) is a formal document between a service provider and a customer that specifies the quality and scope of the services that will be delivered. SLAs are important because they set clear expectations for service quality and performance, provide a mechanism for accountability, and establish remedies for service failures.

They are often used in the context of IT services but can apply to any service where performance and reliability are critical. Once the parties involved sign the agreement, it becomes a legally binding contract.

Keep reading to learn more about SLAs, how they work, types of SLAs, their benefits, and how to manage them.

• What is an SLA?
• How Does an SLA Work?
• Three Types of SLAs
• What Should Be Included in an SLA?
• Key SLA Performance Metrics
• Who Uses an SLA?
• Benefits of an SLA
• Best Practices of SLA Management
• Manage SLAs Effectively with Icertis

How Does an SLA Work?

A service level agreement establishes a mutual understanding of service levels, responsibilities, and penalties for non-compliance. An SLA is a communication tool that prevents misunderstandings by clearly documenting service expectations and shared responsibilities between both parties.

Creating a service level agreement starts with identifying the services to be provided and determining the metrics for measuring performance. This includes defining specific, measurable objectives and key performance indicators (KPIs). Once drafted, the agreement undergoes negotiation until all parties reach a consensus on the terms.

After implementing an SLA, monitoring and reporting mechanisms ensure compliance with the agreed-upon metrics. Many organizations use contract management software to automate this process, ensuring consistent adherence to SLA layout requirements and accurate tracking of performance data.

When service levels fall below the agreed thresholds, there may be penalties, service credits, or other remedial actions as specified in the agreement. Periodic reviews allow both parties to assess the effectiveness of the SLA and make necessary adjustments to maintain alignment with the business's changing needs.

Three Types of SLAs

There are three main types of service level agreements:

1. Service-based SLAs:

These SLAs focus on the specific services that the service provider is providing. For example, a service-based SLA for a cloud computing service might define the service's uptime, response time, and resolution time.

2. Customer-based SLAs:

These SLAs focus on the overall experience of the customer. For example, a customer-based SLA for a software company might define the number of support tickets that will be responded to within a specific time.

3. Multi-level SLAs:

These SLAs combine the features of service-based and customer-based SLAs. They can be used to define different service levels for different customers or types of services.

When creating a service level agreement, it is essential to carefully consider the customer's needs and the service provider's capabilities. The SLA should be specific, measurable, achievable, relevant, and time-bound.

What Should Be Included in a SLA? 

The best way to understand what to include in an SLA is to review service level agreement examples to identify the key components that promote clarity and enforceability. But for the most part, every SLA should include the following elements:

Service Scope

The service scope in an SLA defines what services are covered and excluded. A clear service level agreement layout distinguishes in-scope services from those that need additional negotiation while addressing geographical limits, service hours, and user entitlements to prevent contract redlines and misunderstandings.

Performance Metrics

Performance metrics in an SLA provide measurable standards for service quality. Critical metrics include uptime percentages, response times, resolution deadlines, throughput, and user satisfaction scores.

SLAs may incorporate generative AI for contract management to ensure these metrics are met. All metrics should have well-defined targets and clear measurement methods.

Roles & Responsibilities

A service level agreement must clearly define who does what. Providers are responsible for service delivery, resource maintenance, reporting, and timely issue resolution.

Customers must provide necessary access, report issues quickly, and maintain their infrastructure where applicable. This clarity allows for proper contract performance measurement and promotes collaborative problem-solving.

Incident Management

An SLA must include incident management procedures for service disruptions. This section defines severity levels with specific response times. It outlines notification procedures, escalation paths, and status update requirements to help improve your contract management process and maintain service reliability.

Security & Compliance

A service level agreement must address data security, privacy, and regulatory requirements. It should specify security measures, clarify data ownership, and address compliance with regulations like HIPAA or GDPR.

For sensitive data, provisions might resemble an end-user license agreement with detailed security terms to protect information and ensure regulatory compliance.

Remedies & Penalties

The SLA must include consequences for missed targets to ensure accountability. Service credits are the most common remedy, with additional options including expedited resolutions, enhanced support, or termination rights for persistent failures. When establishing penalties, they should balance incentivizing compliance without making the agreement commercially impractical for either party.

Termination & Renewal

An early termination clause stipulates how an SLA can be terminated early under certain conditions, such as repeated service failures or significant breach of contract. Terms for renewing an SLA usually involve reviewing current performance, and mechanisms for negotiating the updated terms and conditions before signing.

Key SLA Performance Metrics

Performance metrics translate service expectations into measurable indicators that can be objectively tracked and evaluated. These metrics form the foundation for assessing service quality and determining compliance with contractual obligations:

• Uptime/availability: Measures system accessibility during agreed service windows, typically expressed as a percentage (e.g., 99.9%). 
• Response time: Quantifies how quickly the provider acknowledges service requests or incidents.
• Resolution time: Measures how long it takes to completely fix reported problems.
• Throughput: Evaluates the system's capacity to process transactions or requests within a given timeframe.
• Error rates: Tracks the frequency of errors or failures in service delivery.
• First-call resolution: Measures issues resolved during the initial contact.
• Customer satisfaction: Captures user experience through surveys and feedback mechanisms.

These metrics are typically tracked through automated monitoring systems, periodic manual reviews, or a combination. Regular reporting (often monthly) documents performance against targets, with real-time dashboards providing immediate visibility into service levels.

Who Uses an SLA? 

Service level agreements are versatile tools used across numerous industries and business relationships where service quality and reliability are essential. These agreements establish clear performance expectations for various sectors, including:

IT & cloud:

Guarantees uptime, data recovery times, and security commitments, ensuring seamless IT operations.

Software as a Service (SaaS):

Ensures system availability, performance benchmarks, support response times, and maintenance schedules to meet ongoing business needs.

Customer service:

Sets response times, resolution targets, and escalation protocols for stellar customer experiences.

Professional services:

Defines the scope of work, timelines for delivery, confidentiality levels, and quality criteria for services such as consulting, legal advice, or accounting.

Sales teams:

Aligns goals, defines lead generation benchmarks, and ensures clear communication for enhanced performance.

E-commerce and retail:

Defines website uptime, delivery logistics, return policies, and customer service responsiveness to enhance the shopping experience.

Healthcare:

Sets standards for appointment wait times, access to emergency services, and data confidentiality to guarantee quality and timely patient care.

Internal departments:

Enables smoother collaboration by establishing service expectations and performance metrics across departments.

By establishing clear metrics and expectations, SLAs across industries and company departments help businesses mitigate risks, elevate service quality, and encourage strong, mutually beneficial relationships.

Benefits of an SLA

Effective SLA management requires strategic approaches that go beyond simply drafting and signing the agreement. Following these best practices ensures sustainable success:

Performance Assurance

SLAs provide a clear benchmark for service performance, giving customers peace of mind that they will receive the expected quality of service.

Accountability

By defining responsibilities and performance metrics, SLAs establish clear lines of accountability. If the service provider fails to meet their obligations, the SLA provides a basis for addressing the issue.

Dispute Resolution

In the event of disputes or service failures, SLAs serve as a reference point for resolving conflicts. They help avoid lengthy legal battles by providing a framework for addressing issues.

Continuous Improvement

Monitoring and reporting SLA metrics encourage service providers to improve their services continuously. This benefits both parties by ensuring that services remain reliable and efficient. An SLA can help protect both parties and ensure the relationship is successful.

Best Practices of SLA Management

SLA management is the backbone of smooth business relationships and operational excellence. However, crafting effective SLAs is more than getting the final signature. A truly effective SLA puts building trust at the forefront of the agreement: 

• Regular reviews: Conduct quarterly assessments to evaluate performance against metrics.
• Clear communication: Establish designated points of contact and escalation paths.
• Automated monitoring: Implement tools for real-time visibility into performance metrics.
• Detailed documentation: Maintain records of incidents, responses, and resolutions.
• Collaborative problem-solving: Focus on root causes rather than assigning blame.
• Continuous improvement: Use performance data to identify enhancement opportunities.
• Flexible adaptation: Update agreements as business needs evolve through formal change processes.

These practices transform SLAs from static documents into dynamic tools that strengthen business relationships.

“Icertis Contract Intelligence has helped us improve contract compliance by streamlining and automating the way we monitor and manage SLA and SOW commitments, cutting what was a two-week contract cycle by 50 to 60 percent.” - Sanjeev Prasad, CIO, Genpact.

Manage SLAs effectively with Icertis

The Icertis Contract Intelligence platform converts SLA management from a manual, reactive process into a strategic, proactive operation. By digitizing SLAs and integrating them with operational systems, Icertis allows for automatic tracking of performance metrics against contractual obligations, providing real-time visibility into compliance status across your entire contract portfolio.

Icertis streamlines the entire SLA lifecycle with automated alerts for upcoming deadlines, performance thresholds, and renewal dates, eliminating the risk of missed obligations. The platform's advanced analytics capabilities identify performance trends and improvement opportunities.

Read Genpact's success story.

With Icertis, organizations gain the comprehensive oversight needed to maximize value from their service level agreements while minimizing compliance risks.

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