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Creating a no nonsense and robust service level regime for any IT service.

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By  Hinal Patel Published  September 3, 2007

As the title suggests, this month's column is about service levels and how to create a sensible service level regime no matter what the IT service is. You may be wondering why a lawyer is writing an article about service levels when this is primarily a technical issue. Well, rest assured, we are not here to tell you how many IT desktop installations or calls answered by your call centre is appropriate for your organization - that is the domain of the IT experts. Lawyers should, however, have an interest in the structure and content of the service level clause/schedules/annex or agreement (SLA) because the SLA forms a significant component of the overall legal (and commercial) risk profile in an IT services contract. Moreover, it is typical for contractual rights and/or remedies to be triggered by service level failures and your lawyers need to ensure that the correct rights and/or remedies are triggered by the various service level failures that may occur.

The starting point for a no nonsense and robust service level regime is for the customer to carefully consider what IT services or parts of the IT service are important to it and whether those services (or parts) can be sensibly measured. The parties will need to strike a balance between ensuring the supplier is required to meet an acceptable standard of performance for key service(s) at an acceptable price against having too may service levels which may become difficult and/or costly to measure and manage. It is also advisable for the customer to consider qualitative as well as quantitative measures. For example, when the 118-118 telephone directory service was launched in the UK, service levels were weighted heavily upon call answer times rather than accuracy of service. The result was that the service providers were giving out wrong numbers in order to meet the strict service level regime - not a satisfactory result.

Once the customer and the supplier have agreed on the IT services that will have service levels applied to them, the parties can proceed to documenting the service level regime. We suggest the following approach:

1. Identify the service level

The parties need to agree and clearly set out in the SLA what the service level for the particular service is. Without this vital piece of information, the SLA will have no value. You will need to call on your IT experts to determine what the service level is.

On complex and/or large outsourcing transactions, the parties often agree a ramped-up or staged improvement in the service levels over an agreed period. This gives the supplier a period of time in which to improve the performance of its services to the desired level. This is typically because the supplier is starting with inferior resources or processes (from the customer) which it has to improve in order to improve the service levels.

2. Identify when and how the service level is measured

The parties should consider how often the service is to be measured and how the service level is calculated. It is not uncommon with IT services for the service to be measured on a daily basis but it would usually be unmanageable for the service level to be calculated on a daily basis. In our experience, calculations on a monthly basis are more common (not least because it tends to tie into the payment regime) and hence, a calculation will need to be carried out that converts the daily level of performance into a monthly level of performance. This actual performance level can then be compared against the agreed service level.

3. Identify when there is a service level breach

The actual performance level that is determined under 2 above has little significance unless it is made clear in the SLA when the supplier's performance amounts to a service level breach. Customers in particular should bear in mind that it is not always the case for a failure to meet the service level to instantly amount to a service level breach.

4. Identify what the consequence is of a service level breach

This is where the SLA has its teeth. Careful consideration needs to be had to the various remedies available to the customer which vary from escalation within the supplier's organization, to the payment of monies back to the customer, through to the customer terminating the agreement. It is in the customer's interest to be balanced in its approach - a heavy financial remedy is not always appropriate and indeed, may force the supplier to deliver an even poorer service. At the same time, the supplier must be incentivised to improve its services.

5. Identify what, if any, exclusions there are from the service level regime

In certain instances, the service levels or some customer remedies may not apply. This will depend on, for example, the services being supplied, perhaps the stage at which the services are being supplied and third party dependencies. Customers should note that exclusions should be considered on a case by case basis - it is not always appropriate.

When the parties embark upon the service level discussion, they should always bear in mind that the service level regime is a performance management tool - its sole purpose is not to penalize the supplier for poor performance. In fact, it is increasingly common for suppliers to be rewarded for over-performance and indeed this is entirely appropriate if there are significant cost benefits to the customer by a supplier over-performing. Notwithstanding this, customers need to have effective incentives and remedies in place that focus the supplier's attention to meeting the agreed performance standards - after all, the customer is paying for this level of performance.

In addition, with longer term contracts, it is always prudent to keep the service level regime under regular review so that the service levels and remedies are always appropriate and continue to incentivise the supplier.

As indicated in our previous column, 'why technology outsourcings continue to fail', whenever a service is being provided externally or outsourced to a supplier, preparation is one of the keys for success. Our advice is not to leave the service level discussion to the latter stages of the contractual negotiations - the discussion should be front and centre, particularly on large and complex IT service procurements. After all, where the parties get to on the service level regime may well increase the price for the services and the customer will want to know this sooner rather than later.

The author, Hinal Patel, is Senior Legal Consultant with DLA Piper (Dubai).

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