Including service level agreements (SLAs) in vendor contracts sets clear expectations for performance and service delivery — right from the start. Your organization can outline what’s required to support the successful delivery of the vendor’s product or service, and what happens if those requirements aren’t met.
Depending on the complexity of the relationship, crafting SLAs can be an involved process. But what exactly are SLAs, and how do they protect your organization? Read on to find out.
What’s an SLA?
A service level agreement (SLA) is a legally binding contract that defines the minimum level of service a vendor must provide. It includes measurable service requirements — such as uptime, response time, or quality benchmarks — and outlines remedies if the vendor does not meet them. These may include service credits, refunds, or other penalties.
Related: The Difference Between a Vendor Contract and a Service Level Agreement (SLA)
What’s Included in a Vendor SLA?
The contents of a vendor SLA vary depending on the product or service provided, but they should clearly define what’s required for successful delivery—and how performance will be measured.
SLAs often incorporate key risk indicators (KRIs) and key performance indicators (KPIs). For example:
- A KPI might include call resolution rates above 70% or an average customer satisfaction score of 3.5 or higher.
- A KRI might be a passing security audit or no critical findings during reviews.
These indicators help assess vendor performance, but not every KPI or KRI needs to be included in the SLA itself — only those tied to critical outcomes.
Here’s examples of what SLAs may address:
- Vendor response time
- Vendor repair time
- Accuracy
- Quality
- Safety
- Cost
- Cybersecurity controls
- Customer satisfaction
- System uptime
- Breach notifications
- Service definition – Clearly outline the scope of services to eliminate ambiguity or misunderstanding between the organization and the vendor.
- Performance metrics – Include both KPIs and KRIs that both parties agree on. These metrics should be SMART – specific, measurable, achievable, relevant, and time-bound. Examples of metrics include response time, quality benchmarks, and delivery times.
- Response and resolution expectations – Specify how quickly issues should be acknowledged and addressed. You may want to breakdown response time by issue severity. A prompt response to issues minimizes disruptions and ensures issues are handled promptly. Include escalation procedures for unresolved issues.
- Penalties and remedies – Specify what happens if performance falls short of SLA expectations — such as financial penalties, corrective action plans, or contract termination.
- Change management – Include a process for updating services, metrics, or requirements as the relationship evolves.
- Termination conditions – Address termination conditions for repeated SLA violations.
Related: How to Track SLAs Against the Vendor Contract
Tips for Creating Vendor Service Level Agreements
When creating vendor service level agreements, it’s helpful to keep the following tips in mind:
- Begin with a goal – Consider your organization’s objectives for the vendor relationship. Your vendor SLAs should contribute to or support the organization in reaching its goal.
- Work with the vendor – Consider the other party when negotiating or drafting SLAs. Setting unrealistic expectations can strain the vendor relationship. Working together to create achievable SLAs creates a mutually beneficial arrangement. Consider offering bonuses or incentives for exceeding performance metrics.
- Track performance metrics continuously – Define the frequency and format of reporting to track SLA performance. Be transparent with the vendor about the process and outline how performance is monitored and reported.
- Include stakeholders in SLA reviews – Including various department stakeholders ensures all aspects of the SLAs are considered. This helps identify any gaps or areas of improvement.
Related: Program Metrics to Measure Vendor Performance
What to do if a Vendor Fails to Meet SLAs
Occasionally, a vendor may fail to meet the agreed-upon SLAs. It’s important for your organization to act quickly to address the issue.
- First, review the vendor’s SLA – How critical is the SLA violation? Is this a one-time occurrence or a repeated violation? Carefully review the agreement for the specific penalties and procedures for next steps.
- Second, talk with the vendor – This is a key step to resolving issues. Explain the violation to your vendor and listen to their perspective. There may be external issues that prevented the vendor from meeting the SLA.
- Third, create a remediation plan – The vendor may already have a plan to resolve the issue, but if not, work together to create a remediation plan. Include remediation objectives and deadlines.
- Fourth, monitor for improvement – Monitor to ensure the vendor is improving on the SLA or working on remediation.
- Finally, escalate as needed – Refer to your escalation procedures in the SLA. If the vendor’s performance doesn’t improve, it may be time to implement penalties or terminate the relationship.
Contractual vendor SLAs ensure your organization is getting the most value from vendor relationships. Be sure to create specific SLAs and follow best practices for the most effective agreements.
Learn how to create vendor performance metrics and scorecards for the most effective vendor SLAs.