Service Level Agreement

Role of Service Level Agreement in Outsourcing

An Service Level Agreement is a written document between a provider and receiver of services. It defines the specific standards according to which services are to be provided.

Every Service Level Agreement serves as a formal agreement that clearly outlines the details between the service provider and the recipient. It outlines the expectations of the receiver and gives clarity on the service provider’s responsibilities. It enables ease of communication between them. An SLA agreement can be established between an organisation and the service provider, or even between a businessman and a service provider. Every vendor’s contract becomes more meaningful with this agreement. If any side defaults on adhering to the guidelines, this type of agreement furnishes appropriate remedies for the same. Let us now understand what outsourcing means before delving deeper into the world of service-level agreements.

Outsourcing and Its Significance in an Industry

Outsourcing is the business practice of hiring an outsider or third party to furnish your organisation with the services you request. In simple words, the operations of your business are performed outside the premises of your organisation. These could be in human resources, accounting, information technology, business development, and catering. There are many organisations that have their own in-house departments for these services. There are others who outsource these services as it is time-efficient and the organisations save a lot of revenue in terms of medical benefits, house rent allowance, provident fund, and other such payments.

A few crucial reasons for outsourcing are as follows:

  • Many organisations face a shortage of full-time employees who have the expertise to perform specific responsibilities, e.g., payroll processing, information technology services, logistics, and back-end services.
  • enhances the overall efficiency of the various departments. An outsourced resource is more focused on the responsibilities allocated because it utilises all its energies towards the fulfilment of the distinct goals laid down by the organisation.
  • Many organisations believe that outsourcing furnishes them with more innovative methodologies, which helps the organisation carve a niche for itself and reap attractive benefits.
  • Outsourcing can be done for a large time frame or for small intervals of time. If, e.g., you wish to outsource the entire information technology services, the partnership is of a longer tenure.


What are Service Level Agreements (SLAs)?

Service level agreements are mutually agreed upon terms and conditions in the form of a contract between a service provider and the receiver of the services. They are popularly referred to as vendor contracts. They affirm the standard of services expected by the organisation or business person in question and provide clarity on the responsibilities of the service provider. These can be established for different departments of an organization, like human resources, sales, project management, or even technology. You can easily gauge the performance of the service provider in the following manner:

  • Conduct a regular review of the goals assigned to it for rendering services towards a specific function of the organization.
  • Measure the service provider’s performance as per the targets set by your organisation.
  • periodical review of the success of the said departments as this will indicate whether they are up to the expectations defined for the service provider.

Application, Use, and Contents of SLA in the Case of Outsourcing

 Contents of an SLA in Outsourcing

There are three types of SLA agreements. These include:

  • Service-oriented: A single service is provided to all the clients.
  • Customer-oriented: The service provider offers services to one single client based on his/her requirements.
  • Multiple-level: This type of agreement involves the provision of the same types of services to different sets of clients across the organisation.

The two key content inclusions include the services and the management. The services include:

  • Details of the various services the vendor will furnish to the clients. The written contract cannot be disputed.
  • Expected Standards of Service
  • The conditions under which the services will be available
  • The time frame for each level of the services, e.g., during peak hours and off-peak hours,
  • The various responsibilities of the vendor and the client/management
  • The exact volume of the work that will be given and delivered between the two sides is unknown.
  • Maintenance of quality services based on mutual agreement
  • Remedies in the case of any unfulfilled service obligations
  • Clear guidelines to measure performance and determine success levels
  • Both sides understand the terms and conditions of the written contract.

A service level agreement spells out your expectations of the providers as well as their responsibilities.

  • The key elements of any successful SLA application include the following details:
  • The purpose of the service
  • The standards of service are set as per the customer’s expectations.
  • A performance-measuring system to understand the realisation of the objectives
  • The situations under which the SLA becomes ineffective
  • implications in the event of the service provider’s inability to fulfil the objectives of the clientele.

Use of an SLA in Outsourcing

An SLA agreement worded in an effective manner assures impactful engagements in outsourcing. An SLA details the commitments made by service providers to their respective clients and the metrics to measure the performance as per the clients’ expectations. The preparation of this application involves a highly cautious analysis and requires legal consultation as both sides would like to protect their vested interests. The use of an SLA agreement lies in the fact that once this contract is signed by both parties, they cannot dispute what they have agreed upon. They have to abide by the written contract unless one of them fails to comply with the same.

The Importance of Metrics in a Service Level Agreement

  • It is always practical to define the metrics so that the service provider, as well as the client, have clarity on what is expected and agreed upon mutually. An SLA’s metrics help in measuring the performance of the service providers. Some of these include:
  • Availability of services during peak hours of business.
  • The response time of service providers—the total time the service providers take to revert to inquiries
  • Resolving issues—the time service providers take to resolve issues
  • Breach of security—The measures taken by the service providers
  • Measuring the levels of success in specific business areas where the service provider provides services
  • In the case of sub-quality services and constant irregularities, penalties in the form of, e.g., repayments are included in the SLA.
  • Overall performance levels after the service providers have initiated operations

The Importance of the Indemnity Clause in a Service-Level Agreement

An indemnity clause in a service-level agreement is crucial for this written contract. If the service providers default on the provision of services, whether from a quality or time-based perspective, they will have to remedy the same by redressing the said client/s. Such a clause protects one party from suffering liabilities because of the other party’s inability to fulfil the stated objectives. The clause is drawn in a way that offers protection in all commercial transactions to the parties involved in case of a breach of duties.


An SLA agreement serves as a secure and legally binding contract for both the vendor and the customer in question. The expected performance standards are mutually agreed upon, as are the penalties in case of any default by the service providers. If the service providers do not meet the expected standards of service consistently, the contract can be terminated without any disagreement.

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