Service-Level Agreement (SLA): Why It's Important and How to Write One

A service-level agreement (SLA) is a formal contract that defines the specific level of service a vendor promises to deliver to a company, including details like performance metrics, responsibilities, and remedies if service levels aren't met. SLAs provide value for companies (aka customers) and vendors (aka service providers) alike.

SLAs are common in the technology sector, including for cloud services, IT services, and managed services, and telecommunications, but other types of companies use them as well. Learn more about service-level agreements, including why they're important, and how to put one together. Afterward, strengthen your knowledge of cloud computing and IT with the IBM Information Technology (IT) and Cloud Fundamentals Specialization.

What is a service-level agreement (SLA)?

A service-level agreement (SLA) is a contract or document that outlines a commitment between a service provider and a client. In this instance, the client tends to be a company and the service provider is known as the vendor. SLAs include details of the service, the standards the provider must adhere to, and the metrics to measure performance. If any of the stipulations are not met, an SLA may also clarify remedies, such as pricing discounts.

SLAs ensure that vendors provide the service outlined in the contract and any recourse a company may pursue if the vendor does not fulfill its obligations. SLAs are particularly important in technology, cloud services, telecommunications, and managed services industries, where service reliability and performance are critical to business operations. However, some SLAs can be between departments within a company.

Why are SLAs important? 

A service-level agreement is an important business procedure with several benefits for organizations, teams, and vendors: 

• An SLA establishes trust and peace of mind among all parties involved. 

• In specifying the services provided, terms and conditions of the service, and the standard of performance measurement, an SLA aligns everyone’s expectations.  

• A consistent and collaborative SLA practice can lead to new business opportunities. Vendors can offer clients transparency, address concerns, and describe a high level of service when all parties contribute to an SLA draft.  

While SLAs are most common in the technology industry, you can use them in any industry, including B2B marketing and others.

3 types of service-level agreements

There are three types of SLAs.

1. Customer SLA is an agreement between an organization and a third-party vendor providing a service. For example, an organization might hire an office supply company or a design agency to fill specific business needs. 

2. Internal SLA is an agreement between teams within an organization. For example, the sales team might enlist the marketing team for support in generating leads. 

3. Multi-level SLA is an agreement between multiple parties, such as an organization and multiple vendors, more than two teams within an organization, or a vendor providing services to customers with different service plans. For example, sales and marketing teams within an organization might find they need to enlist the help of a third team—customer support—to improve customer satisfaction. 

 What does a service-level agreement contain?

Although SLAs can vary across industries, vendors, and types of services rendered, several key components of a standard service-level agreement exist. These include:

• Agreement overview

• A list of stakeholders 

• Stakeholder goals  

• A description of services

• Service levels

• Service performance metrics

• A list of services excluded from the agreement

• Conditions of cancellation 

• A plan if goals aren’t reached 

How to write an SLA in 5 steps

Follow the steps below to write a service-level agreement: 

1. Define the service. 

Your SLA will need to define and outline the service clearly. Be sure to cover these points: 

• List of stakeholders and points of contact, along with their roles.

• Service scope, including specific services provided, as well as services excluded. 

• Customer obligations, including the amount the customer will pay and how frequently.

• Vendor obligations, including specific actions the vendor needs to take.

• The specific conditions for canceling the agreement, such as when goals remain unmet over a specific time period. 

2. Verify service levels.

Service levels quantify the performance or output of a service. For example, a call center might define a service level as the number of calls answered every hour, while a bakery might define a service level as the number of baked goods delivered to a client per day. Service levels look different for every SLA. Work with stakeholders to verify the deliverables and deadlines. 

3. Determine performance metrics.

Clear performance metrics mean stakeholders can determine whether a service has been rendered successfully. Some examples of potential SLA metrics include:

• Quality of the output: You can measure technical quality for application development by assessing factors such as program size, coding defects, and platform alignment.

• Defect rates: The number of errors in outputs, which can include coding errors, missed deadlines, and incomplete backups.

• The cost of meeting SLA goals: Some IT customers may include business process metrics into the SLA by using key performance indicators that it already uses to determine business success.

• Security: Network security breaches can happen, and they can be costly to deal with. Adding an extra layer of protection in the SLA can help ensure preventative measures are taken.

Include a statement about the methods for monitoring metrics, such as through different software and business tools or during regular team meetings. 

4. Prepare the service-level agreement document. 

Prepare your service-level agreement document using the information you gathered in the first four steps.

What is an indemnification clause?

An indemnification clause is an important component in the SLA, in which the service provider agrees to compensate the customer (most likely a company) for any breaches of service warranties. Indemnification means the service provider must pay the customer for any litigation costs that occur as a result of this breach.

5. Review the SLA with all stakeholders. 

Before finalizing the SLA, review the details and invite all stakeholders to offer feedback. After all stakeholders agree to every item, gather signatures on the final SLA and distribute it.  

What is an earn back?

Some vendors or customers might ask for the ability to earn back service credits if the service has been performed at or above the standard level of service for a certain period of time.

SLA best practices

Here are five tips to keep in mind as you create an SLA.

• For every SLA, ensure all stakeholders agree to everything before the service delivery begins. 

• Design an SLA with end users in mind. Who ultimately benefits from the services rendered? How will they benefit? How can the SLA ensure that end users’ needs and desires are met?

• Set realistic and achievable service levels. 

• Reserve time to review the SLA, even after the service delivery begins, to make necessary adjustments. 

• Use precise terms to define the service, service level, conditions, performance metrics, etc., so stakeholders understand the SLA. 

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