* The ins and outs of SLAs
When it comes to cost savings, discounts and credits for poor service most people operate on a “more is better” principle. Is this really the best approach for service-level agreement credits?
Most vendors will limit their maximum exposure on SLA credits to 15% or 20% of fees collected. Some will allow up to 100% credit in a given month, but no more than 20% annually. These caps mean that, although poor performance could reduce the supplier’s profit margin, it would generally not create a loss for the supplier. If they are willing to risk more they either have great confidence in their delivery abilities or sizeable margins from which to work. Or maybe they are just very aggressive at adding business at any cost.
Generally, the larger and more established the provider, the less revenue they put at risk for service level credits. The big guys have the established name and bigger client list and can therefore put less revenue at risk as they are presumed to have good service. Smaller providers will often put more of their revenue at risk in the form of service level credits to compensate for their presumed higher risk to the customer. This is somewhat backwards in that the smaller company likely has to compete on price, may have higher costs, and likely has lower margins from which to cover credits. And yet, smaller providers already know that their performance is key to building their business. They are already highly motivated to provide excellent service.
Most providers will not refund cash, but rather will provide service level credits to the next month’s bill. Such service credits generally cannot be applied against fees due under any other agreement with the provider. The credit clause of the SLA is usually very clear that the credit is the client’s only remedy to service problems. One exception to this is a termination clause for repeated poor performance. Termination will become an option for the customer following repeated or consecutive performance problems. It is not uncommon for the provider to pay some switching costs for the customer invoking a termination clause in larger outsourcing relationships.
Some SLAs allow the provider to earn back service level credits for subsequent good performance, or to accumulate their own credits for good performance to avoid future service level credits. Some SLAs will even include a service level bonus for performance above a stated level. Where service level credits essentially decrease the price, service level bonuses increase the price triggered by higher performance levels. These are far less common than service level credits as most customers buy a level of service required for their business and have no desire to pay more for service above their required level. More common is where providers have an opportunity for more compensation if they are directly involved in increasing revenue through their exceptional performance.
Service level credits should be used as an incentive system designed to obtain good performance. It does not serve the customer to get a monthly discount for poor performance. You could just save all the expense and do without the service if it was not critical to your business. The reality is that the service is needed by your business or you would not likely be focused on establishing an SLA for the service.
So should you get all the credits you can in an SLA? Credits are really not going to serve your business needs. I would focus negotiation efforts on the rights to terminate for repeated poor performance, with enough credits to keep your provider focused on delivery. And where appropriate, ensure the provider will pay the cost of switching to another provider if the service is not consistently up to the performance standards. Better to have a clear exit right for substandard performance, and have the provider cover the cost of switching providers if the service is not consistently up to your needs.
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