Service Level Agreement: What Every SaaS Buyer Needs to Know

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Before signing any SaaS contract, one crucial element is the service level agreement (SLA). An SLA is not merely a contractual formality; it defines the scope, quality, and accountability of the services you will receive.

There are SLA clauses that bind both the buyer and the vendor, ensuring that both parties adhere to agreed-upon standards for smooth operations. Failure to comply with these SLAs can result in penalties or contract termination by either party.

In this blog, we’ll focus on the buyers. As a buyer, you should negotiate the SLA terms meticulously to have a long-lasting SaaS contract and a positive vendor relationship.

So, let’s know what these clauses are in service-level agreements. And why should you pay attention to it as a SaaS buyer? This article provides you with the intricate details of SLAs, including their importance and best practices.

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What is a service level agreement?

A service level agreement, or SLA, is a formal SaaS agreement that outlines the level of support and service a SaaS vendor should deliver to the customer. These agreements are a crucial part of the buyer-vendor relationship.

They shouldn’t be overlooked, or you might have to deal with poor customer service, data breaches, liability issues, etc. SLAs guarantee that you can expect a certain level or standard of service, with specified remedies or deductions if the service is not met.

An SLA usually includes:

• Scope & QOS (Quality of service): Defines precisely what services are covered and the standards of performance you can expect. This includes specifics on the features, functionalities, and service levels the provider is committed to delivering.
• Request turnaround time: Details how quickly the provider responds to and resolves service requests or issues. This sets clear expectations for how soon you can expect support and solutions.
• Uptime guarantees: Specifies the percentage of time the service will be operational and accessible. This is crucial for understanding the reliability of the service and minimizing potential disruptions to your operations.
• Performance metrics: Outlines the key performance indicators (KPIs) used to measure the service’s effectiveness. This could include response times, transaction speeds, or other relevant benchmarks that gauge service quality.
• Penalties: Describes the repercussions for the provider if they fail to meet the agreed-upon service levels. This could involve financial compensation or other restitution to address service shortfalls.

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Why are SLAs important?

SLAs are important because they set clear expectations between the SaaS buyer and vendor. They outline the specific service levels the vendor must meet, ensuring both parties know what to expect and can hold each other accountable.

It helps to identify:

• Level of service: SLAs clearly outline the expected performance levels for the services provided. This ensures that the vendor and the customer know what to expect regarding technical quality and efficiency.
• Accountability: SaaS buyers can use SLA metrics and hold vendors responsible in case of a data breach or loss of revenue due to application downtime.
• Risk mitigation: SLAs have clauses for risk management and backup plans. They specify the actions to be taken in case of application downtimes. It ensues that the impact on the customer's operations is minimized.
• Customer satisfaction: Clearly defined SLAs build trust by setting clear expectations and ensuring vendors deliver as promised. This leads to healthy vendor relationships and prolonged contracts.
• Cost management: SLAs can help in managing costs effectively. By specifying the service levels and associated costs, you can effectively budget and spend accordingly, preventing unexpected costs.

Consider service level agreements like a shield that can protect you from legal issues and lawsuits. SLAs are used in various contract agreements to ensure that standards are guaranteed and upheld.

Having a customer SLA promotes accountability in the SaaS industry, creating clearer expectations for those involved.

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What are the types of service level agreements in businesses?

There are three different types of SLAs:

1. Customer SLAs

It is a tailored agreement between an individual customer and the service provider. This type of SLA is customized to fit the specific needs of the customer and includes:

• Service specifications: Detailed descriptions of the services provided, including uptime guarantees, response times, and custom features.
• Support terms: Information on how and when support will be provided, such as response times and support channels.
• Cancellation terms: Conditions under which the customer can terminate the agreement and any associated penalties or notice periods.
• Additional terms: Any bespoke terms agreed upon, such as specific service levels or additional services requested by the customer.

For example, if a small business signs a contract with a cloud storage provider, the Customer SLA might include customized backup solutions, specific data retention policies, and a tailored response time for support requests.

2. Service-based SLAs

It is a standardized agreement covering a single service for all customers who purchase that service. This type of SLA applies universally to all customers of that service and includes:

• Standard service levels: Uniform performance metrics and guarantees applicable to everyone using the service, such as uptime percentages and response times.
• General terms: Standard terms and conditions that apply to all service users, without customization for individual needs.

For instance, a SaaS provider offering a project management tool might have a Service-Based SLA guaranteeing 99.9% uptime and a standard 24-hour response time for support tickets, applicable to all customers using the tool.

3. Multi-level SLAs

It offers a tiered approach, providing different service levels and performance metrics depending on the level or tier chosen by the customer. This type of SLA allows for customization based on the customer’s needs and includes:

• Basic level: A lower tier with standard service levels, such as a basic uptime guarantee and longer response times.
• Premium level: A higher tier with enhanced service levels, such as higher uptime guarantees, faster response times, and additional features.
• Custom levels: Options for further customization allowing customers to select specific features or performance metrics that best meet their needs.

For example, a telecommunications company might offer a Multi-Level SLA with basic service for standard connectivity and a premium service for high-priority clients, with the latter offering faster installation times, higher uptime guarantees, and dedicated support.

Each type of SLA addresses different customer needs and service scenarios, ensuring clarity and accountability in service delivery.

Check this table to understand different aspects of customer, service-based, and multi-level SLAs:

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Another type of SLA is the Internal SLA. This is a formal agreement between different teams within an organization, specifying service expectations and performance standards. It details the nature of the service provided, performance metrics, support availability, responsibilities, and penalties for failing to meet agreed standards.

Internal SLAs help enhance accountability, streamline processes, and boost efficiency by setting clear expectations and improving team communication. For instance, an SLA between IT and HR might define response times for technical support and account setup, ensuring prompt and effective service within the organization.

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Who needs an SLA?

SLAs are integral to any agreement between a service provider and a customer. So, both parties require SLAs.

1. Buyers: Buyers can use SLAs to ensure the SaaS provider meets their requirements per the agreed-upon terms and conditions.

• Ensure servicequality: Buyers need SLAs to make sure that the SaaS provider meets the agreed-upon standards, such as uptime and support response times.
• Manage risks: SLAs outline what happens if the service provider fails to deliver. It helps buyers manage risks like service outages or performance issues.
• Hold providers accountable: SLAs allow buyers to hold service providers accountable if things go wrong based on the agreed terms.

2. Vendors: Vendors can use SLAs to clearly understand the customer’s expectations and use them to differentiate from other competitors. SLAs can also help vendors prevent customers from disclosing app information or granting unauthorized access to third parties. Likewise, you can hold vendors accountable in case of data breaches or theft.

• Set clear expectations: Vendors use SLAs to define their services and how they will perform, avoiding buyer misunderstandings.
• Stand out from competitors: A well-defined SLA helps vendors show their commitment to high-quality service, setting them apart from others in the market.
• Protect information: SLAs include clauses to protect sensitive information and prevent unauthorized access, safeguarding the vendor’s systems.

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What Should Be Included in Every Service Level Agreement?

When crafting a Service Level Agreement (SLA), it's crucial to include key components that define expectations and responsibilities clearly, ensuring a mutual understanding between service providers and clients.

1. Agreement summary

SLAs are highly detailed. That’s why a customer-based SLA must have an agreement overview. This is where everything is expressed briefly and in summary.

Here, all services should be outlined, and who is involved in the business transaction should be mentioned. The response time, available services, deadlines, description of services, and metrics should also be included, allowing the customer to check on every detail immediately.

2. Calculated figures

The SLA should also include calculated figures when needed. They don’t have to be highly specific, but an estimated graph of the growth, speed, and possible sales that can be done should be ideally highlighted in the SLA.

3. Scope and quality of service

The type of service that a SaaS buyer can expect and the quality of the service will be stated in the SLA. You can hold the cloud service providers liable if the scope or quality of the service is not met. It also works when the vendor's product has defects.

As a purchaser, it's essential to consider both the scope and quality of service, as technical issues may arise, and vendors are responsible for resolving them.

4. Roles and responsibilities

This section defines the stakeholders involved in this agreement and their roles and responsibilities relevant to the agreement. The vendor and the buyer will have various roles and responsibilities within the agreement.

5. Uptime guarantee

The vendor will include an uptime guarantee in an SLA. It will provide a clear expectation of the availability and performance the SaaS vendor is committing to deliver.

The uptime guarantee might change depending on the product and vendor, and it is typically negotiated and agreed upon between the vendor and the customer.

6. Cancellation conditions

While SLAs ensure the cloud services are received, it's important to note that they usually have an expiration date. They are often designed to apply for a certain amount of time rather than indefinitely.

Sometimes, there are also instances when the service provider and the buyer want to stop the partnership and look for new vendors. This is inevitable and expected in an IT service level agreement, so a cancellation condition should be provided initially.

Some vendors might charge a termination penalty if the contract is terminated prematurely; all these details should be stated in the SLA.

7. Compensation goals unmet

Ensure that the SLAs include provisions for compensating for unmet goals. SLAs are legally binding agreements that should be honored, and if the agreed expectations are not met, there should be corresponding consequences.

The compensation part of the SLA should clearly explain the consequences and what the compensation would be if this happened. As a customer, you’re better protected this way, and you’re much more assured knowing that you have this to rely on when promises are not kept.

8. Points of contact

SLAs should identify points of contact to enable customers or buyers to reach out to service providers when needed. Selecting a vendor with a well-defined structure for handling customer services is essential, allowing for prompt communication and swift resolution of issues.

9. Performance metrics

In this section, you can find the necessary KPIs that can be tracked or measured to analyze the performance of the SaaS vendor. This increases accountability and ensures the vendor doesn’t fail to provide the supposed services.

Performance metrics include turnaround time, resolution time, application uptime, and availability.

10. Penalties

Breach of contract by the SaaS buyer, early contract cancellation, failure to protect the data, slow turnaround time, etc. are some instances that are subjected to penalties.

SLAs will contain all the penalties and the instances, and both the vendor and the buyer must adhere to them.

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Key components of an SLA

Even though service level agreements have various clauses, there are some key clauses that you must pay attention to:

• Agreement scope: This defines what services are included in the agreement and what is not. It makes clear what you can expect from the provider.
• Subscription and pricing plans: This section outlines the pricing structure and subscription plans, including any additional costs or fees that might apply.
• Data ownership and security: This clause specifies who owns the data and how it will be protected. It also covers measures to ensure data security and privacy.
• Liability: This defines who is responsible if something goes wrong, such as service failures or data breaches, and what compensations are available.
• Termination and auto-renewal: This section explains how either party can terminate the agreement and the terms for auto-renewal, if applicable.
• Customer support and maintenance: This covers what support and maintenance services are provided, including availability and response times.
• Product modifications: This clause outlines how changes to the product or service will be managed and how you’ll be notified of any updates or modifications.

To learn more about these clauses and SLA examples, click here.

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When do I need an SLA?

Here are the indicators that you need an SLA:

1. High-value transactions: An SLA is crucial to ensure that the service provider meets specific performance standards when dealing with high-value transactions. This agreement protects your investment by clearly outlining the service expectations and providing remedies if those expectations are not met.

2. High-risk environments: In high-risk environments where the failure of a service could lead to significant operational disruptions or financial losses, an SLA is necessary. It defines the provider's obligations and the consequences of failing to meet them, thus managing potential risks effectively.

3. Complex or custom solutions: When the service is complex or customized, an SLA is essential to outline precisely what is included and how it will be delivered. This helps manage expectations and ensures that the provider meets specific requirements unique to your business.

4. Legal or regulatory requirements: Certain industries have legal or regulatory requirements requiring SLAs. For example, data protection regulations often require formal agreements to ensure compliance with data security and privacy standards. An SLA helps you meet these requirements by clearly outlining the provider's obligations.

5. Service level differentiation: If you choose from different service levels or tiers, an SLA is important to detail each level's specific terms and performance metrics. An SLA allows you to compare different service levels transparently, making it easier to select the one that best fits your needs.

6. Repeated business: If transactions are repeated between the service provider and you, get an SLA. If it’s a one-time event, the terms and conditions will suffice. However, if this service provider is already a part of your business processes, it’s safer to require an SLA so that you’re much more protected.

7. Supplier handling multiple companies: It’s common for companies and organizations to intertwine when running a business. It’s common for companies and organizations to intertwine. Getting an SLA is easier if you have been transacting with a service provider who works with other industries. SLAs are agreements that keep everything organized.

8. High-value SaaS sold: When purchasing high-value SaaS solutions, an SLA provides added protection and assurance about the quality and performance of the service. It clearly defines what is expected from the vendor and what you can expect in return.

9. Crucial service: If the SaaS application is critical for key business operations, an SLA is essential to ensure that the service meets high standards and that you have recourse in case of issues. It guarantees that the service provider will deliver on their promises.

10. SaaS stack size: If your SaaS stack consists of 50 or so applications, you must get SLAs from all the existing and upcoming vendors to ensure that all your data is kept safe from breaches.

You can also include an indemnification clause in these SLAs that will prevent the vendor from holding you responsible in the case of a data breach. Data security is vital for an organization as they run on it, so you must clearly define your SLAs to keep your data secure and stay protected from liability issues.

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Best Practices for Negotiating SLAs in SaaS

Following these straightforward practices ensures that your SLA is clear, effective, and tailored to your needs.

1. Understand your business needs: Start by determining your business needs from the SaaS service. This includes specific features, performance levels, and your business's special requirements.

Consult with key members of your team who will use the service to ensure the SLA covers all important aspects. Their input will help you identify critical needs and consider all details.

2. Set clear performance metrics: Establish specific targets for service performance, such as uptime guarantees (e.g., 99.9% uptime) and response times for support requests (e.g., within 1 hour).

Make sure these metrics are easily trackable and measurable. This allows you to monitor service performance effectively and ensures that the vendor meets the agreed standards.

3. Define service scope precisely: Clearly describe what services are covered under the SLA, such as software updates, customer support, and maintenance.

Also, specify what is not included to avoid any ambiguity. This clarity is essential to avoid conflicts and ensure you receive the expected services.

4. Include risk management clauses: Add clauses that address how potential problems, such as service outages or data breaches, will be managed.

This helps ensure that there are clear procedures in place for dealing with issues. For example, the SLA might include provisions for refunds, service credits, or other forms of compensation.

5. Establish clear roles and responsibilities: Clearly outline the vendor's and your organization's responsibilities. This includes who is responsible for what tasks, such as providing support, performing maintenance, and handling updates. Ensure that there is no overlap or confusion about who handles specific tasks.

6. Review and update regularly: Periodically review the SLA to ensure it meets your needs as your business and the service evolve. Regular reviews help you stay aligned with current requirements and make necessary adjustments. Make updates to the SLA if there are changes in your requirements or in the service provided.

7. Negotiate flexibility: Ensure that the SLA includes provisions for flexibility so that adjustments can be made if your needs change or if the service evolves.

This flexibility is important for adapting to new requirements or changes in your business. Include mechanisms for revising the SLA without having to renegotiate from scratch.

Managing Service Level Agreements with a SaaS Contract Management Software

Organization’s still use outdated approaches, like spreadsheets, to manage and track their SaaS contracts. This practice is prone to errors and breaches; sometimes, your team might lose the contracts.

But, did you know that you can manage SLAs and other crucial SaaS documents more efficiently using specialized tools? One such tool is CloudEagle.ai.

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It is a SaaS management and procurement platform with contract management features that centralize your SaaS contracts and protect sensitive documents from data breaches and cyber-attacks.

Instead of relying on spreadsheets, companies can centralize all their vendor contracts in one secure dashboard. This centralized approach allows for easy access and tracking of agreements.

Check out this customer success story from Aira and how they streamlined contract management using CloudEagle.ai.

With CloudEagle.ai, managing your contracts becomes effortless. You can upload all your contracts to the platform, where it will automatically extract and map metadata to each vendor or application. This feature simplifies tracking, reviewing, and retrieving contracts during SaaS renewals.

Understand How This Process Works:

Upload contracts: Start by uploading all your contracts to the CloudEagle.ai platform. This can be done easily through an intuitive interface that supports multiple file types.

Automatic metadata extraction: Once uploaded, CloudEagle.ai’s advanced AI scans each contract to extract important metadata. This includes details such as renewal dates, billing frequencies, payment terms, and auto-renewal clauses. The AI organizes this data and maps it to the corresponding vendor or application.

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Dashboard: All extracted metadata is then compiled into a single, easy-to-navigate dashboard. This gives you a clear and comprehensive view of all your contract details and spending information.

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Renewal management: CloudEagle.ai initiates renewal workflows up to 90 days before contract expiration. It automatically assigns tasks to relevant stakeholders, ensuring timely approvals and minimizing the risk of missed deadlines.

Check out this inspiring story of how Wefunder automated contract renewals with CloudEagle’s renewal reminders.

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Timely reminders: To keep you on track, CloudEagle.ai sends automatic reminders for important dates like renewal and opt-out deadlines. These reminders are delivered through Slack and email, ensuring you never miss a critical date.

Seamless integration: The platform integrates with major contract repositories such as DocuSign, Workday, Ironclad, Google Drive, Dropbox, and Box. This feature allows you to import contracts from various sources effortlessly, while CloudEagle.ai’s AI organizes and extracts metadata for a unified view.

If you want to learn how to negotiate the best deals and secure optimal contract terms during procurement, listen to what Terry Larock, Head of Procurement at Tipalti, shared on the recent SaaS Mastermind podcast.

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Wrapping up

In conclusion, SLAs are crucial when purchasing SaaS services. These legally binding agreements define a vendor's services and set clear expectations for performance and accountability.

As a SaaS buyer, you must understand SLAs and ensure that your vendors provide them before finalizing contracts. This article has highlighted the importance of SLAs, what they typically include, and why they matter.

When negotiating with a vendor for a new application, request an SLA. Don't worry about the hassle of storing these important documents in scattered locations.

Instead, relax and use SaaS contract management software like CloudEagle.ai to keep all your contracts organized and easily accessible.

If you’re currently managing contracts with spreadsheets or in employee inboxes, consider centralizing your contracts with experts to help improve organization and efficiency.

Schedule a demo with CloudEagle.ai to discover how to manage your SaaS contracts and agreements more effectively.

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