A vendor contract is an important document that defines the duties and responsibilities of both parties. But how do you make sure the vendor’s performance is consistent and meets your expectations?
Organizations generally use a few different terms when referring to a vendor’s performance. Key performance indicators (KPIs) are metrics that are defined by an organization and used to guide a vendor’s efficiency and success. Service level agreements (SLAs) establish firm, legally binding commitments between the organization and the vendor to provide a specified level of service.
We’re going to focus on SLAs and provide guidance on how to use them for tracking vendor performance. We’ll also provide some examples of generic vendor SLAs that can be adapted to your organization’s needs.
How Vendor KPIs and KRIs Measure SLAs
Although this blog focuses on tracking vendor performance with SLAs, it’s still important to understand how KPIs and key risk indicators (KRIs) fit into vendor performance. Both of these metrics are essential to SLAs and tracking vendor performance.
- KPIs assess how well a vendor performs its business functions, progresses toward a goal, or achieves objectives.
- KRIs are used to indicate risk and provide an early warning vs measuring something that’s already happened. It’s a forward-looking measurement.
For example, let’s say your organization uses a vendor for call center services. To measure the vendor’s performance, an SLA tracks customer satisfaction with the call center service. Some KPIs to help measure this SLA include customer satisfaction ratings that are greater than 3.5 and more than 80% of calls are resolved within 5 minutes. Some KRIs include security audit findings and a call abandon rate no higher than 20%.
These KPIs and KRIs ultimately help your organization evaluate the SLAs and track the vendor’s performance against the SLA. Now let’s look more at how to monitor and track a vendor’s SLAs.
Related: Using SLAs and KPIs for Effective Vendor Performance Management
Using Vendor Service Level Agreements to Track Performance
SLA tracking, or monitoring, is a critical component to your third-party risk management (TPRM) program. Establishing and tracking vendor SLAs ensures both parties are on the same page in terms of standards and service.
This builds consistent support and holds you and the vendor accountable to the service being provided. If a vendor failed to meet their SLA obligations, this could negatively impact your organization's reputation and even the quality of the service your organization is providing to customers or employees.
Here are some tips to remember when creating and using vendor SLAs:
- Set a standard. Prior to contract signature, understand your organization’s strategic goals and objectives are. Ask yourself, “What is the big picture?” Having this clear understanding provides the ability to define what those SLAs or measurements need to be to motivate the right behavior. Setting a standard also gives you the ability to measure against it, so you can track the vendor's performance against the SLA.
- Take inventory. Know what your current SLAs are. As the industry evolves, this directly impacts those goals and objectives you identified above. Never view your vendor's SLAs as fixed. Periodically review the types of vendor SLAs and the need for them. This included verifying your SLAs have built-in guidance to modify them if a vendor fails to meet obligations, if your workload has changed, or there’s been a shift in your organization’s business needs. If your identified standards aren't laid out in an already executed vendor contract, discuss executing an addendum to the SLA to adjust to your preferred standards.
- Create a monitoring schedule. The frequency of monitoring depends on the SLA and any change in the vendor’s performance. Tracking your SLAs on a regular basis informs you whether they’re being met. Don’t wait until your annual review before discovering the vendor failed to meet one or more of your SLAs.
- Document unmet SLAs. As you track vendor performance and SLAs, you may discover issues. Formally document the issues and communicate with the vendor. This ensures you have a formal record of issues that arose during the contract period, which minimizes the chance of potential vendor disputes.
- Refer to your exit strategy. If the vendor’s performance has greatly declined through multiple SLA failures, it may be time to consider termination. Ensure you’re within contractual rights to terminate and follow your exit strategy for a smooth transition.
Related: How to Request SLAs When Negotiating a Vendor Contract
3 Benefits of Vendor SLAs
Tracking vendor performance is an important goal of SLAs, which allows you to identify, escalate, and resolve issues more efficiently. SLAs also provide additional benefits for your organization, such as:
- Providing contractual leverage. After all the work that goes into negotiating and writing a vendor contract, ensure both parties live up to their responsibilities. If the vendor isn’t meeting SLAs, this can be used as leverage for contract negotiations such as discounts or free products and services.
- Justifying cost and risk. Every vendor relationship carries some risk, and there’s always a possibility of dispute over whether the cost is validated. If the vendor continues to meet or exceed SLA expectations, the TPRM team might use this as justification for continuing the relationship.
- Driving efficiency. SLAs are a great tool to incentivize vendors. When vendors are offered bonuses or other benefits for meeting SLAs, they may be more likely to strive for excellence.
Examples of Vendor Service Level Agreement Categories
A common challenge of SLAs is not knowing where to begin. There are so many different categories of vendor SLAs, it can be difficult to know which ones to apply.
A vendor that interacts directly with your customers requires different SLAs than one who only provides a product to your organization. The specific SLAs you use will be unique to your organization, based on the product or service provided by your vendor. Here are a few examples:
- Operational: This category verifies that the vendor's service is working as it should.
- Accessibility – Client should have access to the service 24/7.
- Uptime – Services shall have a [percentage] uptime.
- Credits – If vendor is unable to provide the uptime minimum for [amount of time], client will be entitled to the service level credits below:
- Percentage uptime: 99.5%-100% = 0% Credit percentage (1 month service fee paid)
- Percentage uptime: 97.5%-99.5% = 15% Credit Percentage (1 month service fee paid)
- Percentage uptime: <97.5% = 25% Credit Percentage (1 month service fee paid)
- Non-operational: This category covers the periods when the system is not functioning, either because of issues or scheduled maintenance.
- Maintenance – Routine system maintenance will occur [list maintenance times].
- Downtime – The client has a right to terminate based on consistent downtime.
- Priority levels – Priority levels are based on the severity of an error or downtime of service. The more severe and the more it affects the SLA, the higher the priority, thus resulting in a faster escalation/resolution period and should be resolved within hours. The lower the priority, the slower amount of time to escalate/resolve the issues, this could be in hours or even days.
- Critical – Priority 1
- High – Priority 2
- Medium – Priority 3
- Low – Priority 4
- Escalation – Issues must be escalated based on priority level.
- Resolution – Issues must be resolved within [amount of time] after escalation.
The process of defining your vendor SLAs and using them to track vendor performance may seem a bit overwhelming at first. However, it’s an important step in vendor contract management that helps drive efficiency within your organization.
