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For small businesses the advantages of outsourcing services are numerous. For example, suppose you choose to engage an IT service provider. In that case, you will need to negotiate and sign a Service Level Agreement (SLA), a commitment between a service provider and a client, like your company.

In this article, we will answer all your questions relevant to Service Level Agreements, so you can have peace of mind, and be confident that the type of SLA you sign protects your commercial interests and delivers the results you require.

What is outsourcing?

Outsourcing is where a business engages a third-party provider to take over the delivery and/or management of functions and processes that had been performed in-house until that point. IT is one of the most common functions to be outsourced, others include:

  • HR
  • Finance
  • Accounting
  • Legal process
  • Front office call centres
  • Marketing
  • Other customer-related services

Outsourcing provides small businesses with the opportunity to access skills and expertise without having to employ someone.

What are the advantages and disadvantages of outsourcing?

There are many advantages to business outsourcing, such as:

  • Cutting expenses
  • Increasing productivity and efficiency
  • Expert input
  • Immediate understanding of your costs
  • Competitive edge
  • Reduction in staff issues

There are some disadvantages to business outsourcing too, such as:

  • Loss of Managerial Control 
  • Negative impact on staff
  • Data protection and confidentiality risks
  • Lack of consistency
  • Financial and reputation risks
  • Less flexibility

Why is a Service Level Agreement important?

If you outsource a function of your business, you need to know the service provider is going to deliver what they commit to and add value. An SLA sets out the key performance indicators (KPIs) around timing, budgets, and the standard of service required. 

An SLA is a legally binding contract, therefore, if its terms are breached, you, as the customer, may be entitled to bring a claim for damages, specific performance, or another contract law remedy.

As a customer, what should you take into consideration when negotiating an SLA?

When you first receive a draft of the IT provider’s SLA, take into consideration the following:

  • Does the provider show a commitment to remain current with IT developments?
  • Do you have a benchmark that illustrates the provider is competitive in terms of pricing and delivery terms?
  • Is there evidence that the provider is compliant with relevant laws and regulations, for example, the UK GDPR?
  • What are the market standards around IT service provider performance?

Having these questions in mind can help you identify areas in the agreement that require classification and/or negotiation.

What is in a Service Level Agreement?

A standard IT SLA will contain clauses related to the following:

  • The type of service being delivered
  • The expected performance level and response times
  • How issues are to be reported and addressed
  • The mechanism for monitoring the delivery of KPIs and reporting outcomes
  • Details regarding the security of the provider’s IT system and work practices
  • Waivers and indemnities
  • Processes and procedures around disaster recovery and other consequences of an IT breach
  • Service credit mechanisms
  • The adding and removing of service levels
  • A dispute resolution process

How to manage Service Level Agreements?

It may be tempting to create an SLA for every IT process and procedure your business requires to ensure you get value for money from the service provider. However, such an approach can swiftly lead to diminishing returns. 

Generally, ten to fifteen service levels (with additional KPIs potentially sitting behind this figure) provides the framework required to ensure you receive value from the outsourcing. In this way, the provider does not become overwhelmed with reporting and administrative duties that dilute its ability to focus on delivering the agreed work and affect the service quality.

What is a service credit?

Many outsourcing agreements contain a service credit mechanism which gives the customer a ‘credit’ if the IT service provider does not meet the contracted performance standard set out in the agreement. 

Service credits are used to motivate the provider to focus on the KPIs that are most important to you as opposed to providing an opportunity to reduce the cost of outsourcing. 

Therefore, the threshold trigger for a service credit is normally at the low end of what is agreed by all parties to be a satisfactory service. 

Service credit caps, weightings, and multipliers are used as methods of ensuring service credits are reasonable and proportionate.

Are an SLA and XLA the same type of agreement?

An SLA and an XLA are different types of documents and the Experience Level Agreements (XLAs) are now eclipsing the standard Service Level Agreements (SLAs). 

The reason for this change is that SLAs measure whether the process is working. Whereas XLAs measure outcomes and value provided to the customer by setting KPIs around the end-user experience and increased productivity. 

The XLAs measure beyond whether the IT service or project is delivered on time and within budget. It is concerned with how much value the service or product has added to your business and how successfully your needs have/are being met. 

Get legal assistance from LawBite

An IT SLA is one of the most important supplier contracts your small business will enter into, so if you are wondering how to create a service level agreement, it is always worth investing in having an IT Solicitor examine the agreement to ensure you completely understand its implications and that it protects your best interests in case the service provider fails.

LawBite has years of experience helping startups and small businesses achieve their long term commercial ambitions. 

To find out how we can provide legal advice, support you and either negotiate or review an existing IT Service Level Agreement, book a free 15-minute consultation with one of our lawyers today.


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In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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