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Need of Service Level Agreements in Outsourcing Contracts

by Mariya Parackal

SLAs are a crucial service contract component between the service provider and the customer. The essential steps to align between the sales and marketing departments are creating an SLA that provides specific and measurable features. An SLA offers remedies to the customer and defines what they receive from the service provider. 

The following answers and tips help you to craft effective Service Level Agreements with the outsourcing partners and technology vendors. 

Service Level Agreements

What is Service Level Agreement?

A service level agreement (SLA) is also known as an operating level agreement (OLA) that defines the level of service expected by a customer from a service provider. This agreement can exist between an external service provider and company or customer, and also between two departments within that business. This contract is a crucial part of the service providers and outsourcing companies. 

SLAs features are:

  • Specific details with priorities, responsibilities, and guarantees
  • Measurable services at a target level
  • Problem management procedures
  • Details of fees and expenses 
  • Disaster recovery procedures
  • Tracking and reporting guidelines

SLAs are of three types:

  • Customer Service Level Agreement: An agreement between the service provider and the client. It defines to deliver a certain level of service to the client. 
  • Internal Service Level Agreement: An internal SLA is concerned only about the parties inside the company. So when an SLA is open with customers, it has a separate SLA between the sales and marketing teams. 
  • Multilevel Service Level Agreement: This agreement supports the customers or various departments within the business. If there are more than one service provider and clients, this SLA provides the expected outline of both parties.

Why SLA is important and Why you need an SLA?

A service level agreement is essential for service providers that help to manage customer expectations. SLA also benefits customers while describing the performance characteristics of the service. Most of the service providers establish a service agreement to set up general terms and conditions to work with customers. 

SLA’s set the expectations for the performance of service provider, penalties for missing targets, and bonuses for exceeding expectations. Outsourced SLA’s drafted to control a specific project while the outsourcing projects customized for customers. SLAs developed to approach new service-level commitments, while cloud computing and managed services become common. 

Here are the reasons why you need SLA with your outsourcing partner. 

Clarify Customer commitments: A clearly defined customer expectations will reduce the chances of customer disappointments. Promise to a customer will help to focus more on customer requirements.

Critical performance on customer service: SLA helps the vendor to understand how to integrate into a quality improvement process and to improve customer satisfaction by focusing more on their requirements and priorities. 

Focus on internal processes: An SLA sets clearer and easier internal objectives by establishing measurable standards of vendor performance.     

Non-performance Penalties: SLA will boost the vendor to attain customer commitments. Non-performance is costly if SLA causes penalties, and if promises are not accomplished, the vendor will be penalized.

SLA strategy can increase new business: If the competitor is absent-minded, there are chances for customers to leave. They might look for a new professional partner who listens and respond to their needs. Keeping this in mind, leveraging business SLAs are a powerful sales tool. It can also break or make the deal. Don’t promise excellent SLAs without asking about the current customers and their experience with your SLA. 

An SLA is a fundamental part of vendor contracts. It brings the contracted services together into a single document and states the metrics and responsibilities of both parties. SLAs should be aligned with business objectives. A misalignment can cause a harmful impact on dealing price, quality of service, and customer experience. 

Some of the basic SLA benefits provide by a reliable service provider are:

  1. Definition of the parties involved in the agreement
  2. Goal and scope of the agreement and time of service delivery 
  3. The variables used to evaluate the quality of service
  4. Mutual responsibilities for both service providers and clients. 
  5. The procedure to prepare the report, execute service request and Implement change requests. 
  6. The procedure of SLA amendment

SLAs are not only used by service providers but also in most of the IT industries such as internet service providers, cloud computing service providers, managed service providers, etc.. The organization creates an SLA to measure its services and to compare with outsourcing vendors.

What are the components of SLA?

The SLA details not only includes the description of the provided services and their service levels but also measure metrics of services, responsibilities of both parties, penalties for the violation and removal of metrics. 

Here are some of the key components of SLA:

Agreement Summary – An agreement overview is the first item on your service level agreement. It explains the basics of agreement, including the parties involved, the start date and a general introduction of the services provided. Summarize the service you agreed to deliver to the party and measure the success of that service. 

Definition of Services – An SLA requires descriptions of each offered service. The details include delivery of service, offered maintenance, time is taken for the operation, list of technologies and applications used, existing dependency and a proper outline of the process. 

Exclusions – To avoid confusion, remove the specific services that are not offered. It will reduce unwanted assumptions.  

Service Level Performance – The service provider and client have to check the list of performance measurement metrics and should agree on the parameters they have used to measure the service level performance. 

Penalizing – If the service provider doesn’t fulfill the SLA then they should give compensation to the client/company. 

Periodic Review – All the KPIs should be reviewed periodically to make any change in the process

Termination – An SLA should define the conditions at which the agreement can be close or at what time it needs to expire. There must be a deadline for both parties. 

Stakeholders and Signatures – Stakeholders are the parties included in the agreement. All the stakeholders and participants involved in the contract should sign the document to show they approved the process. 

SLA for Reporting Metrics in Agile Development 

In an Agile Development project, you need an SLA commitment from the outsourcing partner to get the periodic report of development metrics. Companies using Agile development methods can utilize new techniques to measure the level of services. Consider the below metrics:

Lead Time – It is the time between a product order and delivery to the customers. In software development, it is the time taken from the project concept to software completion. From one project to another you want to measure the increased speed of software delivery. 

Sprint Duration – Using conventional development methods, track the duration of Sprints completed per week or days. The development teams using Agile have Sprint activities to be measured over time. 

Sprint Volume – You have to set the volume of Sprints needed for a Version. Check the total number of Sprints required for the metrics. Variations in volume mean you have an unequal plan for different Versions. A fall in team productivity is because of the developer’s change or reassignment of work and this results in a decrease in the number of Sprints.

Production Issues – Measure the number of reported production issues and the time it took to close the issue. 

When it comes to what else needs for your SLA, Monitor your progress by reviewing the metrics on a regular basis. And ensure the sales and marketing departments can access the SLA reports of each other. This is a transparent step for both parties to address issues or compliment each other. 


A software industry that has years of experience is the best place to find a benchmark for software development. Armia Systems have the experience of signing SLAs with many clients and services. 

Signing SLAs with us gives you guaranteed quality for the service and the service provider will work within the tasks and responsibilities. If you have any service level agreements to get signed with us, share your quote with us.

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