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The Pitfalls of Service Level Agreements…and how to avoid them

In the ever-more complicated world of contract negotiation, service level agreements (SLAs) in vendor contracts are a source of confusion and, frankly, risk to many enterprises. Putting complex and obscure “lawyer-ese” aside, these agreements are typically riddled with inconsistencies and conditions that inevitably favor the vendor. This issue is challenging enough under ordinary circumstances, but there’s even greater importance today, given industry’s mass exodus from legacy services.

Companies are discovering—and we’re advising our clients about--the need to incorporate SLAs with teeth into their new vendor contracts’ terms and conditions section. SLAs have gone from, in a sense, being nice to have to critical in order to protect the enterprise’s new infrastructure and many cloud-driven services. This means plenty of new “opportunities” to negotiate with vendors.

It’s a reality in outsourced communications relationships that the enterprise has, for the most part, ceded control of their key technology functions. In practical terms, that means that the enterprise is totally dependent on the vendor to keep its communications backbone up and running, answer customer support calls on a timely basis, and have reports available on activity, performance metrics—and not to be forgotten, the ability to exercise termination rights. This is where getting the right SLAs in place gets critically important.

A properly negotiated service level agreement helps protect the enterprise if its vendor is unable to provide services in a satisfactory manner. Unfortunately, we rarely see adequate protection in standard boilerplate contracts from the major service providers, an omission that could put the enterprise in jeopardy if there are service issues.  We advise our clients to seek, at minimum, these conditions:

  • The appropriate measurement period:  that is, to ensure that the measurement period is aligned with the period referenced in the SLA. For example, you would not want a monthly uptime SLA based on an annual measurement, and vice versa.
  • The performance credit associated with breaching the SLA: if an SLA is breached, it is helpful to have a multi-tiered structure. Let's say, for example, if the SLA for 99% monthly data accuracy is breached, the performance credit could be 5% of monthly charges. If, however, you negotiate a secondary SLA that, for example, set at 95%, then the performance credit could rise to 10% of monthly charges. This helps capture the service pieces throughout the network that might be affected.

In our experience, there are a couple of situations where the enterprise should have an absolute right to terminate the services agreement without penalty.  These include:

  • Chronic problems: this is typically defined as an issue that repeatedly occurs, but is not strictly speaking, critical, to the business. That could be defined as 3 minor SLA breaches within a 6 month period, for example.
  • Critical failure:  Critical failure can be a one-time event, such as a 12 hour data center power outage or cut fiber line. Regardless of cause, it brings your business down and should give you the option to find a more reliable provider.

It is our position that if either chronic trouble or critical failure occurs, you should have an unfettered right to terminate the agreement with no termination penalties.

When we review contracts like this, we know it won’t be long before we’re engaged to help review the service agreements and help with the final negotiations. After reviewing and discussing the contract with our client, it’s then time to get to work and obtain meaningful SLAs included in their contract.  Typically this means a three step process:

  • Step 1: Penalties are added.
  • Step 2: Standards are raised to an acceptable level.
  • Step 3: Loopholes are removed and a final agreement is reached on the SLAs.

Vendors often try to insert cure periods (time to fix a problem before penalties kick in or a termination provision can be exercised). We call this a “gotcha” and we pay very close attention to these inclusions. Why should a vendor have a cure period if its service has been below standard for an extended period of time?  Also, we see a red flag when they read “sole and exclusive” language about accepting monetary penalties for missed performance. Accepting a monetary penalty for poor service as a sole and exclusive remedy precludes the enterprise from collecting any direct damages even if the direct damages exceed the amount of the penalties in the future if the poor service resulted in monetary damages.

In our experience, vendors will agree to SLAs with monetary penalties such as service credits for poor performance and termination provisions if the failures are excessive, but it usually takes a lot of back and forth at the negotiating table. There should be better ways to accomplish SLAs without having to work so hard, but it appears that this isn’t how life is just now. That’s why it is important to get SLA clauses in your service agreements from the very beginning, to avoid being put in triage mode if ever an outage or termination of service occurs.