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Presumptive Service Levels

It is frequently the case when negotiating an IT transaction that insufficient data exists to determine the appropriate standard for service. In such a case, it is common for the parties to agree to a measurement study period that is used to establish the appropriate standard. In such a case, the following terms and responsibilities should be included in the contract:

■ Tire supplier should be required to begin measuring its performance against the presumptive service levels on an agreed-upon date following initiation of the supplier’s provision of the services.

■ During the measurement period, the parties must monitor and analyze the supplier’s performance against the presumptive service levels.

■ During the measurement period, the parties should meet to discuss the presumptive service levels given all relevant factors such as the customer’s business needs, the supplier’s performance during the measurement period, applicable industry standards with respect to the presumptive service level, nonrecurring events responsible for degradation in service, and steps that both parties have taken and could take to improve service level performance.

■ At the end of the measurement period, the presumptive service level will be changed to a set service level determined by the parties.

■ The contract should contain a formula and process for converting presumptive service levels to set service levels. For example, the set service level could be the midpoint between the presumptive service level and the supplier’s actual performance during the measurement period. If the presumptive service level is 96% and the supplier achieved a 98% performance during the measurement window, the service level would, in this example, be 97%. In many instances, this is not appropriate, for example, where the supplier’s performance never dipped below 98% during the measurement window. Then, the customer has a good argument that the set service level should be no less than 98%. As a result, the contract should include the opportunity for each party to challenge the result of the conversion formula if a party can establish that the formula does not establish a reasonable result given all relevant factors.

Exceptions to Service Levels

In most cases, suppliers will want to ensure that certain failures to meet the service levels are excused. These cases usually focus on the following types of causes of service level failure:

■ The customer’s provided equipment, telecommunications, or software failures that are beyond the control of the supplier

■ The customer’s failure to implement changes in systems, hardware, or software that are reasonably required and for which the customer has been provided a significant amount of notice

■ A significant third-party event that causes service delivery failure

■ A force majeure event

■ A disaster in which disaster recovery and business continuity obligations are not a required element of the transaction

Care should be taken to review all exceptions to performance carefully to ensure they are properly tailored and not overly broad.

While almost every service level agreement contains an exclusion for force majeure events, this does not mean that a customer should be left with no remedy. When such an exclusion is present, the customer should modify the force majeure provision along the following lines: “In the event a force majeure event impacting Vendor’s provision of the Services continues for a period of more than five (5) business days, Customer may terminate this Agreement by providing written notice to Vendor. For the avoidance of doubt, in the event Vendor’s provision of the Services is the subject of a force majeure event, the fees to be paid by Customer hereunder shall be equitably adjusted to reflect the period in which performance was impacted.”

Supplier Responsibilities with Respect to Service Levels

It is important to understand that suppliers have control over their performance and will typically be the first to know if there is a service deficiency or failure. It is imperative that service level obligations include the supplier’s responsibility to promptly notify the customer when problems arise and quickly initiating investigations, root cause analyses, and remediation efforts. What’s more, if the supplier becomes aware of a potential problem or anticipated interruption in the provision of service or the supplier’s ability to provide the services in accordance with the services levels and the agreed-upon standards, the supplier should be obligated to notify the customer and take all efforts necessary to avoid the interruption or degradation in service. Written recommendations for improvement in the services to avoid future degradation in the supplier’s performance are also frequently required.

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