Service Level Agreement _SLA_ Boot Camp

							by: Andy Quick

Service Level Agreements, or "SLA's" are tricky but useful mechanisms for managing the risk of
an on-going relationship with IT service providers. Unfortunately, most SLA's that show up in
service contracts as worthless, cosmetic paper additions. SLA's can be extremely powerful tools
to help you and your service provider get the most out of a relationship.

What is an SLA?

A service level agreement (SLA), in its most basic form, is a contractual commitment to meet
specific goals. If, for example, you sign up for a hosting contract with a provider, you may desire
an SLA that measures the up-time of your website. If you outsource your help desk, you may
want an SLA that measures the time it takes to answer the phone. Usually, an SLA includes a
penalty and/or reward framework. For example, many web hosting companies offer a refund
based on the number of hours your website is unavailable. On the flip-side, an SLA may include
an extra bonus to your help desk provider if all calls are answered within 30 seconds. The
following are typical examples of SLA's:

"All help desk call will be answered within 90 seconds"
"95% of all bills will be printed and delivered on time"
"The website will be available 99.99%"
"Project X will be delivered within 2 weeks of the planned schedule"

What isn't an SLA?

An SLA is not a way to cut your costs. Rather, SLA's are mechanisms for managing risks,
sharing pain, and benefiting from success. Many SLA's are setup as "outs" to contracts that allow
customers to penalize technology providers for non-performance. Although penalties do reduce
costs and they do send a strong signal to service providers to improve their service, neither you
nor the service provider "win" if an SLA is missed. Think of an SLA as a shared goal.

SLA Philosophy

The best SLAs are setup to allow both you and your service provider to share in the success and
failure of an agreement. If you intend to turn over the operation of your billing system to a
service provider, getting the bills out on time is critical. Whether you do it yourself or partner
with someone, if you fail to produce invoices, you delay incoming revenue. In this example, your
SLA should inspire your vendor to deliver on performance levels that have an actual impact to
your business. Let's say your current billing accuracy is 90%. If you increase this accuracy to
95%, you have directly improved your company's bottom line. If you intend to outsource this
function, your SLA should include a shared billing accuracy reward to the service provider if
they help you improve revenues.

Make It Count
Some web hosting plans offer an up-time measure that, if not met, will result in a refund to you.
Unfortunately, this "refund" may be calculated as a credit based on the time that your site was
down and your monthly hosting fee. For example, if you pay $100 per month for hosting
services, and your site is down for 1 hour, your credit may only be 14 cents! $100/720 (number
of hours in a month) = $0.14. If, on average, you sell $50 worth of goods through your website
each hour, 14 cents isn't much of a blow to your hosting company. I recognize that my example
is slightly exaggerated. Many hosting companies offer a more material penalty and most web
sites do not generate $50 in sales per hour. But you can see how this penalty and SLA is mis-
aligned with the business model. If you know you make $50 per hour in sales through your
website, your hosting company should incur a much greater penalty for not keeping your website
up and running! Whether you negotiate an SLA with a hosting company or a large IT company,
create an SLA that is specific to your business and truly establishes risk sharing (i.e. we "win" or
"loose" together).

Devil In The Details

A good SLA has four critical components: description, target, measurement, and penalty/reward.
If you have an SLA that is missing one of these components, you run the risk of losing the
benefit of having the SLA to begin with. In the web hosting example above, the SLA sounds
good, but the actual measurement and penalty weigh heavily in the favor of the hosting company
(they have little to loose!) Make sure your SLA's are well defined and agreed upon before you
ink the deal. Here's an example of a good SLA:

Description: Billing - All bills will be rendered, printed, and mailed on a timely basis to ensure
unbilled revenue is minimized.
Target: 90%
Measurement: Ratio of number of planned bills / number of bills actually produced. The
calculation is based on the number of records in the billing input file compared against the billing
output log file which lists the bills actually rendered.
Reward/Penalty: If billing accuracy is below 90%, penalty is calculated as 1% of the unbilled
revenue for that billing run. If billing accuracy is above 90%, a bonus is calculated as 1% of the
additional revenue billed.

In this SLA example, your service provider stands to loose or gain substantially based on their
performance. Similarly, your company stands to loose or gain substantially based on the
performance of the service provider. Depending upon your daily billings, 1% could be
significant. Note the specificity of the SLA measurement and calculation in my example. If you
are not very specific with the calculation methods, actual performance against service levels are
open for debate.

Negotiate Up Front

Many businesses strike deals with IT companies and leave SLA's as an open item. Many IT
service providers will want to establish a "base line" period where SLA's are measured and then
negotiated. In many cases, this request is reasonable, especially if an IT company has little to no
understanding of your environment and your current performance record. However, if you wait
to negotiate service levels until after you ink a deal, you loose tremendous leverage with your
provider unless you really think you can walk away from the deal. Ideally, choose a provider that
is willing to negotiate a service level up front. In my experience, these SLA negotiations are
much more difficult on the back-end.

Raise the Bar

A service level agreement should be changed periodically. Let's look back at my billing SLA
example. Let's assume that after 1 year of service, your provider is billing at an accuracy, on
average, of 95%, and in turn, you are rewarding them consistently for beating the original service
level. It's time to raise the bar! If your provider can increase your accuracy from 90% to 95%,
maybe they can increase your accuracy from 95% to 99%. Raise the SLA bar (target) to 95%,
and only reward them if they beat this new level of quality. By providing the right incentives to
improve upon service levels, both you and your service provider can benefit.

The Shorter, The Better

I have seen service contracts with dozens and dozens of SLA's. If you establish multiple SLA's,
you and your service provider will have broad visibility into performance levels. However,
establishing many SLA's can water down the over-arching performance of a service provider.
Put simply, a service provider can "make-up" poor performance on one SLA by beating the
performance target of another SLA. To keep things simple, pick the few critical success factors
of your business and establish applicable service levels that your provider can truly focus on.

Service Level Agreements should be established as a "dashboard" for you and your service
provider to share in the success and failure of your arrangement. SLA's are less effective if they
are established as contract "outs" or as penalty frameworks, because they fail to drive a
partnering relationship. Negotiate SLA's which, if met or beaten, truly benefit your company and
your service provider. Always define SLA's to the lowest level of detail possible before you
finalize the arrangement since negotiations become even more difficult after the deal is executed.
And never commit to an SLA that could hurt you but not your provider.

This article was posted on May 15, 2002