Beware of making an SLA a scrap of paper

Tomas Nielsen, eFocus Magazine

SLAs, the so-called Service Level Agreements, have become a standard part of agreements in the information technology industry. However, they do not necessarily form a sufficient basis for the supplier-client relationship. As a rule, SLAs are made where IT services are provided, particularly in connection with outsourcing projects. Their importance is usually twofold. Firstly, they represent an agreement on the level (of quality) of the services that are to be provided on the basis of the master agreement. Secondly, they are comprised of a penalty clause (or other respective sanctions), ensuring a due provision of IT services.

For an SLA to be effective, it has to stand for a really unambiguous and specific agreement of the parties. This is where the businesses often have to face the first issue - how to adequately and exhaustingly define the quality of services? Unfortunately, this respect of the SLA cannot be underestimated or circumvented in any manner. In case of a scheduled outsourcing of services, the client should always have a clear idea of what individual services will be requested. The requested parameters have to be clearly defined for any of such services and - naturally - must be measurable. Equally important, it always has to be specified what the set parameters mean. The specification, for instance, that the service "internet" has to be accessible with a 99.9% parameter, does not qualify as a specific agreement, where it fails to include a specification of the period under review, or whether or not accessibility also covers the time beyond working days, whether or not inaccessibility of a single work station qualifies for overall inaccessibility etc. A detailed specification of the service parameters is not a simple task; yet it is so essential for the provision of the necessary guarantees to clients.

The second area worth paying attention while drafting an SLA is a clear specification of the calculation method of the sanction for failure to comply with the set parameters. There is a series of judgments declaring contractual penalty clauses void due to their lack of being specific. This may result form a rather vague calculation method of the penalties, but also from the unclear scope of obligations to be complied with under the threat of a penalty. In resolving a dispute, the vagueness of the legal nature of the penalty the parties have chosen will again qualify for an insufficient specification. This is particularly true about SLAs not operating with legal terms; using terms such as "kredity" (credits) or "penále" (fine) etc. Such an approach cannot be automatically deemed as incorrect, albeit it is more than desirable that the master agreement (i.e. the agreement to provide services) clearly defines whether or not such "credits" mean a contractual penalty or typically a price rebate. If the parties agree on a system, where the credits denote rebate units, it is necessary to take into account that the client will not be able to claim penalties in excess of the value of the stipulated price of services. On the contrary, where the credit system is based on contractual penalties, the parties should be particularly aware of two features of the contractual penalty. Firstly, the courts are entitled to reduce an unreasonable contractual penalty within the so-called moderation up to the quantum of damage incurred. Although the courts avail themselves of such right rather seldom, it cannot be avoided; hence, the client may lose the benefit of the stipulated contractual penalty which is that its quantum need not be proven in a complicated manner (compared to the damages) - this always depends on the particular agreement. The second important aspect of a contractual penalty is that the beneficiary (aggrieved party) is not able to claim damages for the breach of obligations covered by the contractual penalty, unless otherwise provided by the contract. It may thus be agreed that the right to claim damages not be prejudiced by the contractual penalty at all, but also, for instance, that only damages in excess of the quantum of the paid contractual penalty be payable (in this case, the client has a much easier position in recovering at least parts of the damage incurred).

For both contracting parties, it is also essential to set up the mutual dependency of the individual services and sanctions for failure to comply with them. If a business - for instance - requests services such as access to the internet, access to a remote accounting application and access to the e-mail service; in a majority of cases, the outage of the first service will logically lead to outage of the other services. Does this mean that the sanctions for the individual services will be summed up or not? The solution always depends on the particular situation. Where the services are being provided with identical parameters, the quantum of the contractual penalty for inaccessibility of the internet may be set as the highest penalty; covering thereby the outage of the other services. Doing so, it shall be born in mind that the individual services may be made available one after another (e.g. in case of a server restart etc.). Where the access times of a particular service are different (typically internet all week long, accounting and the like only on business days), the said model will not be fitting, since an internet outage at weekend will usually not have the same impact on the economics of the business as the outage of the other applications during working hours.

SLAs should include provisions specifying the persons commissioned with the monitoring of the parameters, the recording method of such measurements and the payment method of the potential sanctions. Even though it seems obvious at the first sight that the service quality should be monitored by the client, since it primarily serves their protection, this need not be the optimal model. It is the service provider who possesses the technical equipment and know-how for the measurement of the service parameters and who should be interested in supervising that the services are being provided in line with the contract. The solution again depends on the particular project and the client's technical equipment and manpower. Where agreed that the parameters are to be primarily monitored by the provider, explicit conditions for the validation of the results are to be agreed and stringent sanctions imposed for the abuse of such capacity. Where - on the contrary - the quality of the services is measured by the client; the provider should request that the communication be set so as he may effectively challenge the results of the monitoring in case he disagrees. This relates to the issue of the sanction payment. Specifically in cases where the quality of the services is measured by the provider, it may be agreed that the identified outages be automatically reflected in the next invoice. Naturally, procedures for the resolution of potential disputes are to be set - where the provider or client disagree with the outcome of the monitoring for the period under review, will the payment of the penalty be suspended until the dispute is resolved, or is the provider obliged to pay it and, if the dispute is settled to his favour, may he claim such payment made?

A rather common weakness of the SLAs is their immaturity for the life cycle of the cooperation. Even contractual parties that pay sufficient attention to the draft of the SLA prior to the making of the contract sometimes make the mistake of forgetting about the SLA when amending the service contracts. Such agreements should always contain an outline of the procedure to be adopted when changing the setting of the services, extending the number of services or reducing them. This procedure should include an update of the SLA; not only an amendment of the respective new services (or leaving out the terminated services), but also an interconnection and reflection of the individual SLA items upon its update. SLAs should be focused on by contracting parties during the whole period of service provision. In addition to the regular monitoring of the compliance with the set parameters, the parties should be meeting and optimising their SLA step by step in respect of the individual conditions, so that the agreement allows for the enhancement of the service effectiveness and indeed helps both of the parties to a successful implementation of the project; otherwise, SLAs will become a mere formal scrap of paper.