Desktop version

Home arrow Computer Science

  • Increase font
  • Decrease font


<<   CONTENTS   >>

Cooperation

In many cases, the supplier’s ability to provide the services in accordance with the service levels, and to promptly respond to and resolve service level issues, requires that the supplier work not only with the customer, but also with the customer’s other suppliers, third-party vendors, subcontractors, and other people and entities. Cooperation between the supplier and all of these stakeholders is essential and should be a requirement in the agreement. Suppliers are frequently obligated to provide a single point of contact for prompt resolution of service level defaults and any other failures regardless of whether the service level failure was caused by the supplier, the customer, or by a third party.

Service Level Provisions Commonly Found in a Service Level Agreement or Attachment

While the terms described above are commonly located in the main body or terms and conditions of an IT agreement, the specific details with respect to the service levels are more commonly located in a separate service level agreement or attachment that is commonly attached to the main agreement as an exhibit. The terms below are commonly found in a service level agreement.

Measurement Window and Reporting Requirements

In each service level agreement, it is important to specify how frequently service levels are to be measured and reported. As a general matter, consider specifying that, for example, service levels are to be measured on a monthly basis and a report is to be delivered to the customer by the supplier with a few days (no more than ten) after the end of each month. This is commonly referred to as the service level measurement window. With respect to reporting, be as specific as possible. Service level agreements commonly describe how many copies of each report are to be delivered and the format (e.g., Microsoft Excel) of the report. Customers typically retain control over the reporting requirements and should be permitted the opportunity to change the requirements upon notice to the supplier.

■ Prior to any requirement that the supplier meet the service levels, the supplier should be required to implement and have in place the appropriate measuring tools to equip the supplier with the ability to measure its performance against the service levels. Failure to implement such measuring tools will impact the supplier’s ability to report on whether the services are actually being provided as required.

■ The service level agreement should clearly state the reporting requirements such as:

  • - hard copy, soft copy, and online reporting requirements;
  • - when each report must be delivered;
  • - to whom each report must be delivered;
  • - whether multiple copies of reports are required;
  • - whether supporting information is required to substantiate each report; and
  • - whether summary reports are required and the frequency of such reports (e.g., quarterly or annually)

Maximum Monthly At-Risk Amount

Service level agreements frequently contain terms that cap the supplier’s liability for service level or performance credits at a percentage of the fees paid by the customer to the supplier. For example, the parties may agree that the performance credits in any given calendar month will not exceed the fees paid or to be paid by the customer to the supplier in that month. In larger IT transactions, the parties may agree that the total at-risk amount for each month is a percentage (e.g., 25%) of the fees paid or to be paid by the customer to the supplier in the month in which the services failed to meet the service levels.

Performance Credits

Performance credits are a credit to which the customer in an IT transaction is entitled to in the event that the supplier fails to perform the services in accordance with the service level to which the performance credit is assigned. Performance credits generally reflect, in part, the diminished value for the services delivered as compared to the service levels and other contractual commitments and generally do not represent damages, penalties, or other compensation remedy that may result from a supplier’s failure to meet the service levels and other contractual commitments. Care should be taken to avoid service levels as a customer’s sole and exclusive remedy for the supplier’s failure to provide the services in accordance with the service levels and other contractual commitments. Often, performance credits are a specified amount (e.g., $500) or a specified percentage (e.g., 25%) of the fees paid or to be paid for the particular service that is the subject matter of the service level failure. For example, in a simple hosting transaction, you might see three to five service levels focused on:

■ download time during critical hours;

■ download time during noncritical hours;

■ availability during critical hours;

■ availability during noncritical hours;

■ response time; and

■ incident resolution time.

For each of these categories, a service level and a credit would be assigned. Tire credit could be a specific dollar amount the customer would be entitled to in the event the supplier failed to meet the service level, or it could be a percentage of fees to be paid to the supplier during the measurement window (e.g., a month or a quarter).

In larger and more complex IT transactions, it is appropriate to develop total category allocation pools. The parties would develop a total pool (e.g., 200%) and then assign a portion of the pool to the service levels. This portion of the allocation pool assigned to each service level operates as a weighting factor. In these cases, it is appropriate to establish upward and downward limits on the portion of the allocation pool that can be assigned to each service level. For example, in some cases, it would be appropriate to limit the assigned amount to no more than 25% and not less than 5%- In this way, the parties can allocate the risk associated with service level failure appropriately and fairly. Ultimately, when this more complex approach to performance credits is used, the actual performance credit will be determined mathematically by multiplying the assigned performance credit allocation percentage by the total monthly at-risk amount. The service level agreement should clearly describe this methodology and, where appropriate, use examples. For example, the following could be included:

For each Critical Service Level Failure, Supplier shall pay Customer a Performance Credit that will be computed in accordance with the following formula:

Performance Credit = Ax B

where

A=Performance Credit Allocation Percentage

B = Monthly At-risk Amount

For example, in a month that supplier fails to meet a critical service level, assume that (i) supplier’s monthly charges (i.e., base monthly charges for all services) during the month in which the critical service level failure occurred were $500,000, (ii) the maximum monthly at-risk percentage is 14%, and (iii) the performance credit allocation percentage for such critical service level is 20%. Tire performance credit due to customer for such critical service level failure would be computed as follows:

A = 20% (the Performance Credit Allocation Percentage) multiplied by

B = $70,000 (the Monthly At-Risk Amount = 14% of $500,000)

= $14,000 (the Amount of the Performance Credit)

In addition to the foregoing, it is essential the service level agreement specify in detail all of the requirements with respect to performance credits. It is frequently the case that service level parameters are heavily negotiated between the parties to the transaction. Topics to consider include the following:

■ What will be the limits on performance credits, if any, if more than one service level failure occurs in the same measurement period? The best-case scenarios for customers is that the sum of all performance credits applicable would be credited to the customer, even if multiple service level failures occur within the same measurement window. Suppliers will want to limit recovery and may require that only the highest of the performance credits apply. In cases where there is a monthly at-risk amount, performance credit recovery would be limited to the monthly cap.

■ Notification of service level failure frequently comes from the supplier, since the supplier will often be the first, and sometimes only, party that becomes aware of the failure. Timing requirements for notification are essential. A specific timeframe (e.g., no more than fifteen minutes after becoming aware of the service level failure) is preferable, but if the supplier won’t commit to that, a broader timeframe (e.g., promptly after becoming aware of the service level failure) can be used.

■ Tire parties will want to determine ahead of time whether performance credits are to be the customer’s sole and exclusive remedy associated with the supplier’s failure to provide the services in accordance with the service levels.

 
<<   CONTENTS   >>

Related topics