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

4 min read
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It’s common to be confused on the difference between a vendor contract and a service level agreement. In general, both documents are established to ensure that certain things occur during a vendor relationship. However, each document serves a more specific purpose. Read on to learn more about how to differentiate between vendor contracts and service level agreements.

Understanding Vendor Contracts

A contract is an agreement between two parties that creates a legal obligation for an organization and vendor to perform specific acts. Each of the parties to the contract are legally bound to perform the specified duties outlined within the contract.

From a regulatory perspective, organizations must have a formal contract with vendors that provide products or services. The contract must clearly address the duties and responsibilities of all parties involved. In the past, some organizations may have had informal expectations for their vendors that weren’t defined in writing or were inadequately reviewed. This ambiguity creates issues with enforceability, vendor risk management and overall risk management. So, it’s a regulatory requirement and best practice to have a contract in place with all of your vendors.

What Should Be Included in a Vendor Contract

Vendor contracts should incorporate generally accepted legal terms and provisions, while also outlining the rights and responsibilities of both parties. To be more specific, a contract should include the following 14 elements:

  1. Scope of:
    • Support, maintenance, customer service
    • Time frames
    • 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. Cost and compensation
  3. Performance measures and standards
  4. Reporting
  5. Right to Audit
  6. Compliance
  7. Ownership and license
  8. Confidentiality and security
  9. Indemnification, insurance & liability
  10. Dispute resolution
  11. Default and termination
  12. Customer complaints
  13. Subcontracting
  14. Business resumption and contingency plans

Understanding the Service Level Agreement (SLA)

While a vendor contract focuses on specific duties for both parties, a service level agreement (SLA) is used to measure the performance and service quality of the vendor. This can either be a stand-alone document or included in the contract. The main purpose of an SLA is to spell out the level of service that will be provided.

In addition to defining the level of service expected by an organization from its vendor, the SLA also establishes how to measure the service and whether there will be any remedies or penalties for non-compliance. It should clearly state metrics, responsibilities and expectations around timing and frequency so that in the event of issues, there’s an objective measure that can be used to gauge compliance with the terms of the contract. It ensures all parties have the same understanding of requirements.

Service level agreements provide your organization an opportunity to accomplish the following 8 items:

  • Outline expectations to the vendor during service level development
  • Establish clear targets for remedies and penalties in the event non-compliance with service levels
  • Create a culture of high-quality service and accountability both internally and at the vendor
  • Formalize duties and rights of each party
  • Set benchmarks that each party expects the other to achieve
  • Encourage vendor delivery and consistency of service
  • Allow your organization to compare similar services across multiple vendors within your environment
  • Bring uniformity and consistency to vendor performance reporting

Most SLAs will be created with standard service levels that are provided by and favor the vendor. These should be viewed as a good starting point for negotiation and should not be taken as non-negotiable, no matter what the vendor initially states. Keep in mind that requests for service levels that are outside the vendors normal service level metrics may result in additional costs or fees. This is typically the case with vendors that provide a standardized service to multiple customers, like cloud-based service providers.

What Should Be Included in a Service Level Agreement

Service level metrics should include both service and management components:

The 6 Service Elements of Service Levels

  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

  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

Although the exact metrics for each service level will vary depending on the vendor, it’s crucial that the areas covered are uniform, specific and measurable related to the volume and quality of work, speed, responsiveness and efficiency. In covering these areas, the SLA aims to establish a mutual understanding of services, areas prioritized, responsibilities, guarantees and warranties provided by the vendor.

When your organization implements a contract or a service level agreement with a vendor, remember that both must be managed and reviewed periodically. Neither should be viewed as a static document because it’s likely they will eventually need to be adjusted or changed. Both must be actively monitored, managed and include a defined framework for change management and monitoring during the term of the vendor relationship.

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