Service Level Agreement (SLA)

Trusting another party to deliver on their promises is never easy. Even established brands with respectable reputations sometimes don’t live up to what they’ve said they can do.

So, that becomes the challenge: Businesses need to convince potential customers that they can hold up their end of the bargain to get the sale, and customers need to feel confident in that promise.

Service Level Agreements can help, functioning as a key element of many business contracts.

What is an SLA: Service Level Agreement Definition

A Service Level Agreement (or “SLA”) is a document that outlines the minimum level of service for work agreed upon by two different parties. Often, these two parties are between a company and their potential client.

An SLA is often part of a contract that the parties may negotiate before signing and agreeing to work together. It typically includes the following:

Performance guarantees for the work or service delivered (often including uptime for SaaS brands)
Details regarding specific deliverables and any details around them
The estimated timeframe for project completion
The time of the contract's validity
Data privacy and security
Non-disclosure agreements (NDAs), though this is often covered in a standard contract
Detailed steps for what happens if the service isn’t met, potentially including refunds, credits, or other penalties

Many B2B And SaaS businesses approach SLAs as an extension of their standard contracts, though the two are often technically separate.

The Three Types of SLAs

SLAs are most commonly used between a company and its customer, but there are technically three different types of SLAs.

These include the following:

Customer SLAs. These are agreements between a customer (often an organization) and a third-party service vendor. A restaurant, for example, might hire a marketing agency to help improve its social media presence.

Internal SLAs. These are agreements between teams within an organization. There often aren’t strict financial penalties attached, but they are used to help ensure different teams are on the same page.

Multi-level SLAs. These are also sometimes called “multi-party SLAs,” and are agreements between more than two parties. An organization may hire multiple vendors in conjunction together, for example.

Standard two-party customer SLAs are the most commonly used, which we’ll primarily focus on in this guide.

Are SLAs Legally Binding?

Service Level Agreements are not automatically legally binding, but they can be.

Contracts can be legally binding, and SLAs are often meant to act as contract extensions. If an organization felt that a vendor violated an SLA and failed to honor penalties, they could take that business to court over it.

This, however, can be an extremely long and expensive process. Depending on the locations of the businesses, it may be wildly impractical (if not impossible) to successfully take them to court.

Vendors, therefore, should do everything in their power to only offer SLA terms they can reliably meet, and customers should still proceed with caution if they feel a vendor’s promises are too good to be true.

Why SLAs Are Important

Service Level Agreements offer the following benefits to both parties:

Establishes trust among all parties involved
Service details are fully transparent for all parties to agree upon and review, both before and after signing

Maintains expectations from all parties
Customizable for each client as needed, even if the standard contract stays the same

While providing historical, transparent data on past performance does help build trust in availability, SLAs are critical in ensuring customer confidence in your service.

SLAs provide a clear definition of expectations. Both parties agreeing to what constitutes an “acceptable level” of service can be difficult, so being precise with contract SLAs helps prevent future misunderstandings.

What Kinds of Businesses Use SLAs?

SLAs are primarily used in Enterprise contracts where the service provided is business critical, but they can be used by businesses in any industry— even between freelancers and small businesses.

For companies like payment platforms or web hosting services, customers are taking a big risk in trusting a third party to maintain availability and performance.

What to Include in SLAs

Business SLA agreements should include all the information needed to set expectations for both parties, including acceptable service levels, response times, exclusions and exceptions, and potential penalties.

1. Acceptable Service Levels

It may seem obvious, but you need to state what service level you agree to provide. You’ll also include definitions of what “available” means, what an “outage” is, and what “maintenance” includes.

Availability – usually stated as a series of 9s (i.e., 99.99%), it’s the amount of time your service is available over a time period. Check out Uptime.is to translate SLA availability percentages into seconds and minutes.
Performance – usually stated as a ping response time. How responsive is your service? If service degrades past a certain speed, customers may not be able to use your service correctly.
Customer Support – usually stated in response and resolution times. Customers want their questions answered quickly and effectively. A customer support SLA prevents signing up for a service and then being hung out to dry when you have questions.
Security – what lengths do you go to when protecting customer data? If a breach occurs, an SLA can help explain what protection should have been in place (ie 2 factor auth, security clearance for engineers, etc)

Response Times

How quickly will your team acknowledge and resolve the issue when something goes wrong? Magneto does a great job of breaking down response time by the severity level of the case. They also provide customers with the exact steps they will take to resolve problems.

Exclusions and Exceptions

Does an hour of scheduled maintenance count against guaranteed uptime agreements? Maybe only if the customer doesn’t receive a 24-hour notification. How about DDoS attacks? Are there terms of use that need to be followed in order for the SLA to apply? Wolfram clearly explains any exceptions in their SLA Exclusions clause.

Make sure to include any exceptions to the SLA, otherwise your customer might come calling for compensation.

Penalties

What happens if an SLA isn’t met? The contract should also include any penalties or credits as a result of a missed SLA. This can be broken down by level of service or amount of downtime. PagerDuty’s penalty agreement below is an excellent comprehensive example.

If a penalty wasn’t included in the original SLA, the customer may be able to terminate the agreement penalty-free due to breach of contract.

Who Provides a Service Level Agreement?

If you’re a vendor, you'll want a standard SLA agreement template on-hand and ready to go.

This preparedness can show potential clients that you want to be transparent while also showing your experience. It can also streamline the contract negotiation process while keeping you in the driver’s seat.

If the vendor doesn’t have an SLA template, the customer may provide their own. If they do, make sure your legal team and all teams impacted (including the teams providing deliverables and the customer service teams) are happy with the terms as-written.

Is an SLA is part of a customer negotiation, run the terms by the same teams again to make sure that it spells out what you can offer while also protecting you.

What Happens if You Breanch an SLA

SLAs can be legally binding. You should assume that any SLA you sign is as legally binding as the contract you’ve signed. Count on not breaching it.

Even if they weren’t legally binding, you don’t want to breach one. It means that you didn’t live up to what you promised a customer, and you’ll likely have a lost customer and a hit on your reputation.

If you do breach an SLA, though, be proactive and transparent about it. Contact customers directly, ideally with a proposed solution in mind. Transparency can earn you a great deal of goodwill. (Check out our experience with outage communication here).

And if you do breach an SLA, prepare to face the penalties. You may not receive the full payment expected, or have to refund part of a payment or deposit that’s already been made.

How to Document SLA Progress & Performance

If you are using SLAs, you need to be able to measure your performance so that you can convey progress to your customers.

For marketing agencies offering deliverables like 20 social media posts a month, this is easy.

This may be more difficult for SaaS startups, however, who may have SLAs that make uptime, technical performance, or customer support promises.

If you can’t show your uptime, response time or performance reliably and quickly – how will customers be able to hold you to guarantees?

As a subscription financial analytics company ourselves, we recommend the following tools to measure SLA performance:

Pingdom or New Relic to demonstrate uptime and outages
Customer support portals like Zendesk to track tickets filed, response time, and customer satisfaction rates
Product analytics tools that show in-app usage, so customers can’t be dishonest about not being able to access to the tool when they’re using it

Without reliable tracking tools, you’re left comparing your word against your customers. Contractually, that’s not a position any company wants to be in.

Final Thoughts

SLAs can be an important part of not only winning contracts but maintaining positive relationships with your customers.

You wouldn’t go to a general contractor and say “build me a three bedroom, two bathroom house” and call it a day; you’d want every single detail ironed out, as you should. And the same is true for business contracts.

Set transparent expectations, and be prepared to keep them. Anything you promise to win the contract… be ready to deliver on it.

Want to learn more about SaaS business management and optimization? Check out our blog here.