The Difference Between a Vendor Contract and a Service Level Agreement (SLA)

Like many business arrangements, vendor relationships require an assortment of legal documents that are designed to protect each party. Although they’re often mistaken for each other, it’s important to understand the difference between a vendor contract and a service level agreement (SLA). 

These documents serve a distinct purpose in a vendor relationship, so let’s review some of the basics of what they include and why you should know the difference.

Understanding Vendor Contracts

A vendor contract is a legal agreement that obligates an organization and its vendor to perform specific duties. In general, the contract will state the terms of the vendor’s products or services that are delivered to the organization or its customers. The contract will also define certain responsibilities of the organization, such as how much it will pay the vendor and how it will measure the vendor’s performance. 

A vendor contract is not only good business sense, but also a regulatory expectation. Regulators such as the OCC, FDIC, and HHS have issued guidance that states how vendor contracts should be managed, from initial negotiation to termination. 

Without a clearly defined vendor contract that is adequately reviewed, the organization and vendor may have issues with enforceability and vendor risk management. 

What Should Be Included in a Vendor Contract 

A vendor contract is designed to incorporate generally accepted legal terms and provisions, as well as the rights and responsibilities of both parties. This document will often be negotiated to ensure that both the organization and vendor agree to its terms. 

A standard vendor contract should answer the following questions for your organization:

1. What is the scope of the following areas?
   
   
   • Support, maintenance, customer service
   • Timeframes 
   • Compliance with applicable laws, regulations, and regulatory guidance
   • Training
   • Ability to subcontract services
   • Distribution of required statements or disclosures to customers
   • Terms governing the use of the organization’s property, equipment, and staff
2. What is the cost of the product or service? 
3. How will we measure the vendor’s performance?
4. What will be reported?
5. Do we have the right to audit?
6. How will we verify that the vendor is compliant with regulatory expectations and our own internal standards?
7. Who has ownership and licensing of each product and service?
8. How will we ensure confidentiality and data security?
9. What are the terms regarding indemnification, insurance, and liability?
10. How will we resolve disputes with the vendor?
11. What are the terms regarding default and contract termination?
12. How will the vendor manage customer complaints?
13. What products or services will be subcontracted by the vendor? 
14. How often will the vendor’s business resumption and contingency plans be tested and reviewed?

Understanding the Service Level Agreement (SLA)

A SLA is an agreement between your organization and the vendor detailing the specific levels of service expected. 

In addition to defining the level of service and measuring the vendor’s performance, the SLA will also provide details about remedies or potential penalties for non-compliance. It should clearly state details such as the metrics, responsibilities, and expectations around the timing and frequency of issues so that both parties understand the requirements.

These details provide an objective measure that can gauge compliance with the contract terms. 

Service level agreements can help your organization accomplish the following duties: 

• Outlining expectations to the vendor as you develop service levels
• Establishing clear targets for remedies and penalties in the event of non-compliance with service levels 
• Creating a culture of high-quality service and accountability both internally and at the vendor level
• Formalizing duties and rights of each party  
• Setting benchmarks that each party expects the other to achieve
• Encouraging a level of consistency with the vendor’s delivery 
• Allowing your organization to compare similar services across multiple vendors within your environment
• Bringing uniformity and consistency to vendor performance reporting

Most SLAs are initially created with standard service levels that the vendor provides. These service levels will understandably favor the vendor, but don’t assume that they’re non-negotiable. 

The first round of SLAs should be viewed as a good starting point for negotiation, with the goal that both parties will be satisfied with the result. Keep in mind that additional costs or fees may apply if you request service levels that are outside the vendor’s normal service level metrics. This is typically the case with vendors like cloud service providers, who provide a standardized service to multiple customers. 

What Should Be Included in a Service Level Agreement

Service level metrics should include components that define how the vendor is expected to perform and how the organization will enforce those expectations.

The 6 Service Elements of Service Levels

These six service elements relate directly to the expectations around the vendor’s products or services.

1. Specifics of services provided
2. Conditions of service availability
3. Calculations of availability or uptime
4. Standards, such as time windows, for each level of service
5. Responsibilities of each party
6. Escalation procedures

The 9 Management Elements of Service Levels 

Knowing these elements is important to manage and maintain your SLAs. Having this information on hand, you will be able to respond appropriately to a failed SLA or make changes that will benefit your organization. 

1. Definitions of key terms
2. Reporting process
3. Remedies/penalties
4. Report contents and frequency
5. Dispute resolution
6. Indemnification provision
7. Change management
8. Termination provisions for repeated SLA failures
9. Both the organization and vendor’s key contacts/responsible parties

The exact metrics for each service level will vary, depending on the vendor. However, it’s important that the areas covered are consistent, specific, and measurable as they relate to the volume and quality of work, as well as the vendor’s speed, responsiveness, and efficiency. The SLA aims to establish a mutual understanding of services, areas prioritized, responsibilities, guarantees, and warranties provided by the vendor. 

The Importance of Knowing the Difference 

Now that you understand some of the main differences between a vendor contract and SLA, why does this matter? It may seem simpler to use the two terms interchangeably, but it’s worthwhile to know the difference for the following reasons:

• Efficient dispute resolution – While both are contracts and legally enforceable, an SLA is more than likely governed by and subject to the agreed upon dispute resolution in your vendor contract. You may be required to go to mediation or arbitration to resolve your SLA disputes and this language would typically be found in your vendor contract.
  
• Better understanding of contents – While the contents of a vendor contract won’t be found within an SLA, contents that are found in an SLA may be found within a vendor contract if a separate SLA is not present.
  
• Improved document organization – Knowing the differences between the two documents will allow you to pull up the correct document you need based on the information you’re looking for.

One of the most important things to remember is that vendor contracts and SLAs require periodic review. Even after you’ve successfully negotiated, reviewed, and signed these documents, neither should be filed away and forgotten. It’s likely that they’ll need to be adjusted or changed throughout the course of the vendor engagement, so it’s critical that you implement an effective strategy of monitoring and management.