drafting service level agreements: best practices for

Drafting Service Level Agreements: Best

Practices for Corporate and Technology

Counsel Structuring Key Provisions, Anticipating Common Areas of Dispute, and Streamlining Negotiations

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

TUESDAY, MARCH 20, 2018

Presenting a live 90-minute webinar with interactive Q&A

Matthew A. Karlyn, Partner, Foley & Lardner, Boston

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-961-8499 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can address

the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 2.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

©2015 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500

Drafting Service Level Agreements: Best Practices for Corporate and Technology Counsel

Matt Karlyn

[email protected]

March 20, 2018

mailto:[email protected]

©2015 Foley & Lardner LLP

Why are Service Levels Important?

Commitment from provider to provide the services to an agreed standard

Incentivize provider performance

Ensure customer pays for what it gets

Cooperation between customer and provider

Builds trust

Service levels are a critical part of information technology agreements – invest the time and resources to negotiate appropriate service levels and corresponding remedies.

6


What is a Service Level?

1. Title

2. Description

3. Measurement Window

4. An agreed level of service

Expected Service Level

Minimum Service Level

5. Calculation

7


Service Level Agreement Structure

Specific information related to Service Levels commonly located in exhibits to a master services agreement

Reference in the master services agreement to the service level requirements in the exhibits – The MSA typically states that a provider will provide services

– The SOW typically states what will be provided

– The SLA typically states how the services will be provided

Some service level-type requirements that are commonly found in the master services agreement and not in an exhibit: – Root cause analysis and resolution

– Cost and efficiency reviews

Warranties and other contractual terms are important but – Difficult to enforce

– Damages are hard to prove / might be capped by limitation of liability

8


Service Level Agreement Structure

Minimum Service Levels and Expected Service Levels

Percentage of performance vs. actual number, for example:

– 99% of responses within 1 hour

– No more than 1 miss in each calendar month

Key Performance Indicators vs. Critical Service Levels

Services are described in a Statement of Work

– SOWs must contain enough detail to ensure both parties know exactly what is to be provided

9


The Service Level Agreement

General Requirements

Definitions

Provider Responsibilities

Additions, Deletions and Modifications

Service Level Failures

Cooperation

Measuring Tools

Reporting

Continuous Improvement

Earnback

Key Performance Indicators

Critical Service Levels

10


General Requirements

Objective and purpose of the service levels

Commencement date

Critical factors that may have an affect on the provider’s ability to provide the services in accordance with the service levels:

− Materials, equipment provided by the customer

− Customer’s failure to meet its requirements

− Outside factors

− Disasters

11


Disaster Exception to Service Levels

except as set forth below in this Section 1.1, for a period not to exceed the first thirty (30) calendar days (the “Initial Disaster Period”) following the declaration of a disaster, as described in the Disaster Recovery Plan, and while any affected Services are being provided by the disaster recovery services provider, Provider shall be excused from complying with the Service Levels that, as a result of the disaster, cannot be met through the exercise of best efforts; provided, however, that, (a) during the Initial Disaster Period Provider shall use its best efforts to comply with the Service Levels, and ensure that the disaster recovery services provider complies with the Service Levels, with respect to the affected services, (b) in no case shall Provider be excused from complying with the Service Levels that are not materially affected by the disaster, (c) in no case shall Provider be excused from complying with the Service Levels with respect to Services that continue to be provided by Provider in the same manner notwithstanding the disaster, (d) in no case shall Provider be excused from complying with the Service Levels that can otherwise be met through the exercise of best efforts, and (e) notwithstanding the foregoing or anything to the contrary contained in this Exhibit C (Service Level Agreement) or elsewhere in the Agreement, for any Availability Service Levels including D1.2, D1.4, D1.5, D2.2, D2.5 and D3.6, the minimum Service Level shall be reduced to ninety-eight percent (98%) and Provider shall, and shall ensure that Provider’s disaster recovery services provider shall, meet or exceed such ninety-eight percent (98%) Service Level during the Initial Disaster Period.

12


Definitions

Define each term used in each service level

Examples of terms to define:

− Monthly Maximum At Risk Percentage: With respect to each calendar month, 18% of Provider’s fees for Services in such month

− Critical Service Level: Those Service Levels that have a performance credits associated with service level failure

− Key Performance Indicator: Those Service Levels that don’t have performance credits associated with service level failure

− Earnback: The right of provider to earn back performance credits for Critical Service Level failures

− Performance Credit Allocation Percentage: The total of the percentages (e.g., weights) of all Critical Service levels, which shall not exceed an agreed upon amount (e.g., 250%).

Minimums and maximums

13


Provider Responsibilities

Initiating problem investigations

Reporting service level failures promptly

Reporting potential incidents and problems promptly

Meeting service levels as quickly as possible after

transition

Reporting on root cause analyses and providing

frequent updates

Recommending improvements to ensure service

levels are met

14


Customer Responsibilities

Support the service delivery process

Provide access to premises and personnel as

necessary for the provider to provide the

services

Provide training as necessary

15



Key Performance Indicators (KPI) vs. Critical Service Levels (CSL)

KPIs

− Additions and deletions of KPIs at customer’s discretion

− Formula for service level metric to be determined by the parties

For example, average applicable service measurement for the most recent 3 calendar months, or if no data, process for measuring performance

− Modifications to KPIs on mutually agreed basis

16



CSLs − Additions generally permitted after 12 or 18 months of service

− Service level set by a pre-determined process, for example:

Where measurement data exists, the average of the most recent 3 consecutive months of service

Where no measurement data exists, set up a measurement period and set service level

− Additions, modifications and deletions to CLSs don’t change the “performance credit allocation percentage” or the “monthly maximum at risk percentage”

All additions, deletions and modifications to service levels in accordance with change control process

Promotion of KPIs to CSLs

Demotion of CSLs to KPIs

17



Performance Credits

− “Performance Credits” shall mean a credit to which

Customer becomes entitled pursuant to the Agreement.

All Performance Credits described are to reflect in part

the diminished value for the Services delivered as

compared to the Service Levels, or other contractual

commitments, and, unless otherwise set forth in the

Agreement, do not represent all damages, penalties, or

other compensation remedy that may result from any

failure to meet such Service Levels or other contractual

requirements.

18



Performance credit = specified dollar amount

In more complex cases:

– Performance credit = the performance credit allocation

percentage x the monthly at risk amount

Multiple failures

Reports

Payment of performance credits

Recurrence of the same issue

Additional remedies

19


Cooperation

The achievement of the Service Levels by Provider

may (and is likely to) require the coordinated,

collaborative effort of Provider with Third Party

Vendors that contract directly with Customer.

Provider will cooperate and provide to such parties a

contact to help ensure the prompt resolution of all

Service Level Failures.

20


Measuring Tools

■ Ensure provider has proper tools and methodologies

to actually measure and report on the service levels

■ Must be implemented prior to transition complete (or

prior to the start date for the applicable service level)

■ Failure to measure = service level failure

21


Reporting

■ Each service level has a measurement period

■ Reports delivered within a specified period after measurement period (e.g., 10 days)

■ Failure to deliver reports timely = service level failure for the applicable service level

■ Hard copy and/or online

■ Availability of supporting data

■ Quarterly and annual service level reports (in addition to regular reporting requirements)

■ Task force to review service level performance on a regular basis – Monthly, quarterly annual meetings

– Included in governance structure of transaction

22


Continuous Improvement

Service levels should reflect improvement in service

over time

Improvements to meet evolved customer

requirements

Improvements to reflect provider’s ability to provide

higher quality of service

For example:

− After first 12 months of service adjust service level to the

average of the highest 10 months in the last 12 months

− Appropriate limits on service level adjustments

23


Earnback

Minimum / expected service level framework

Earnback only applies to expected service level

− No earnback on failure to meet minimum service levels

Earnbacks should be tied to continuous

outperformance of the expected service level

− provider’s actual performance for a particular service

annualized in excess of the expected service level

24


The Service Level Standard

■ If currently performing the service

– What service level is being met today?

– Is a higher level of service desired?

■ If not currently performing the service

– What factors are important to the customer?

Reliability

Availability

Timeliness

25


Service Level Definitions

■ Give each service level a descriptive title

■ Make descriptions clear

■ Choose a measurement window

■ Provide a descriptive calculation and test each

calculation to ensure they work

■ Ensure all terms are consistent with MSA, SOW,

supporting documents and defined terms

26


KPI Example

No. Title Description Service Level

1. Production Support

KPI

1.1

Severity 1 Response The number of Severity 1

Incidents Provider

responds to within

the Expected and

Minimum Service

Levels in each

calendar month.

Measurement Window Calendar Month

Expected Service Level None

Minimum Service Level No more than 1 Severity 1 Incidents responded to in more than 15 minutes in

each calendar month.

Calculation The actual number of Severity 1 Incidents with a Response Time greater than 15

minutes in each calendar month. Each report on this Service Level shall

include a rolling 3 month trend.

KPI

1.2

Severity 2 Response The number of Severity 2

Incidents Provider

responds to within

the Expected and

Minimum Service

Levels in each

calendar month.



Minimum Service Level No more than 1 Severity 2 Incidents responded to in more than 1 hour in each

calendar month.

Calculation The actual number of Severity 2 Incidents with a Response Time greater than 1

hour in each calendar month. Each report on this Service Level shall

include a rolling 3 month trend.

KPI

1.3

Severity 1 Repeated

Incidents

Number of repeated Severity

1 Incidents in each

calendar quarter.

Measurement Window Calendar Quarter


Minimum Service Level No more than 1 repeated Severity 1 Incidents in each calendar quarter.

Calculation The actual number of repeated Severity 1 Incidents in each calendar quarter.

Additional Description This Service Level tracks the number of repeated Severity 1 Incidents (including

outages) related to the Services from reports generated from the

Problem and Incident Management System, in the environment. This

measure is an indicator of the stability of the environment.

27


CSL Example

3. Production Support

CSL

3.1

Severity 1 Resolution 20% The number of

Severity 1

Incidents

Resolved by

Provider

within a 4

hour Incident

Resolution

Time in each

calendar

month.


Expected Service Level Less than 1 miss in each calendar month.

Minimum Service Level 1 miss in each calendar month.

Calculation The actual number of Severity 1 Incidents that have an Incident

Resolution Time greater than 4 hours in each calendar

month.

Additional Description Incident records as recorded by Provider are used to determine the

number of Incidents resolved on time.

Incidents created at an inappropriately elevated Severity Level will

be closed and excluded from the calculation as long as the

record is closed and re-entered at the appropriate Severity

Level within 1 hour of the applicable Incident Response

Time.

CSL

3.2

Severity 2 Resolution 10% The number of

Severity 2

Incidents

resolved by

Provider

within an 8

hour Incident

Resolution

Time in each

calendar

quarter

Measurement Window Calendar Quarter

Expected Service Level Less than 1 miss in each calendar month.

Minimum Service Level Less than 3 misses in each calendar month.

Calculation The actual number of Severity 2 Incidents that have an Incident

Resolution Time greater than 8 hours in each calendar

quarter

Additional Description Incident records as recorded by Provider are used to determine the

number of Incidents resolved on time.

Incidents created at an inappropriately elevated Severity Level will

be closed and excluded from the calculation as long as the

record is closed and re-entered at the appropriate Severity

Level within one hour of the applicable Incident Response

Time.

28


Issues that Arise

Exceptions, exclusions and assumptions

Service levels should be specific

− Avoid “reasonable” and similar terms

Inconsistencies with underlying agreement and SOW

29


Root Cause Analysis

Conducted within a specified period of time after

service failure

– Analysis of the cause of the failure

Identify cause of failure

Specified timeframe for correcting issue that caused

failure

Implement process for avoiding issues in the future

Cooperate with customer to correct failures that

were identified as not caused by provider

30


Root Cause Analysis

Upon Provider’s discovery of, or, if earlier, Provider’s receipt of a notice from Customer in respect of, Provider’s failure to provide any of the Services in accordance with the Service Levels or this Agreement, Provider shall within a reasonable period of time (and in any event within five (5) business days), conduct a Root Cause Analysis to identify the cause of such failure. Provider shall, within the timeframes prescribed in the applicable Statements of Work, or if no such timeframes are prescribed in the applicable Statement of Work, within five (5) business days (or a longer period of time if Approved by Customer) after such discovery or notice: (i) correct such failure without charging Customer additional fees (except as provided below); and (ii) if such failure is not capable of being corrected within such timeframe, provide Customer’s with a written report detailing the cause of and procedure for correcting such failure as promptly as possible and provide Customer with reasonable assurances that (a) applicable corrective steps reasonably calculated to be a permanent fix have been taken, (b) a short term workaround has been implemented and Provider will use its best efforts to implement a permanent correction as soon as possible, and (c) such failure will not recur and that any correction shall not result in additional fees to Customer. If the Root Cause Analysis demonstrates that such failure was not caused by Provider, Provider shall timely cooperate with Customer in correcting such failure and Provider shall be entitled to reasonable fees, consistent with and not in excess of Fees charged for similar Services to Customer and similar services provided to Provider’s other customers, for such efforts to the extent involving incremental resources. If the Root Cause Analysis demonstrates that such failure was wholly or partially caused by Provider, Provider shall also timely cooperate with Customer in correcting such failure; however, Provider shall not be entitled to any fees.

31


Termination Rights

Precise termination rights for service level failure

– Failure to meet 1 or more of the same CSL for 3

consecutive months

– Failure to meet 1 or more of the same CSL for 4 of the

last 6 months

– Failure to meet 1 or more the same KPI for 6

consecutive months

– Performance credits exceed 50% of the total monthly at

risk amount in any 6 month period

– Failure to meet any CSL marked as ***Tier 1***

32


Service Availability

Provider may stop delivering services to client, due to: − a server being down, − failure of a telecommunications link, − a natural disaster causing damage to the provider’s data

center, − provider withholding services because of a fee dispute, or − provider closing its business because of financial

difficulties

Result: − Client has no access to

the services (which may be supporting a critical business function), and

any client data stored on the provider’s systems

33


Service Availability

Client needs to be able to

− continue to operate its business, and

− have access to its data at all times.

To mitigate risk client should obtain

− appropriate uptime service level and remedies

− customer data ownership rights and provider’s delivery

of regular data backups

− disaster recovery and business continuity protections

− provider’s agreement not to withhold services

− protections against provider financial instability

34


Service Availability – Service Levels

Include uptime service level to ensure service

availability is aligned with the client’s expectations

Also, include appropriate remedies to incentivize

provider to perform in accordance with service

levels (meaningful remedies)

Uptime service level and the corresponding

remedies discussed in more detail in later slides

35

Scenario: Server is down, or failure of a telecommunications link


Service Availability – In-House Software Solution

Risk mitigation

− Consider requiring the provider to make available or

develop an in-house software solution

if provider stops providing “software” services, your operations

could be dead in the water

“Software” services are typically unique and more difficult to

replace than infrastructure services

Inclusion of an “in-house” solution provision is very dependent on

the nature of the software provided as a service

The more critical the application, the more important it is to

explore an in-house solution – even if it is escrowed

36

Scenario: Server is down, or failure of a telecommunications link


Service Availability – Disaster Recovery and

Business Continuity

■ Risk mitigation:

– Include a provision requiring the provider to continue to make the services available, even in the event of a disaster, power outage, or similarly significant event.

– Continuity of services should be provided through a secondary server, data center, or provider, as appropriate.

■ Review any related provider policies and procedures ■ Example:

37

Scenario: Natural disaster is causing damage to the provider’s data center

Example: Provider shall maintain and implement disaster recovery and avoidance procedures to ensure that the Services are not interrupted during any disaster. Provider shall provide Client with a copy of its current disaster recovery plan and all updates thereto during the Term. All requirements of this Agreement, including those relating to security, personnel due diligence, and training, shall apply to the Provider disaster recovery site.


Service Availability –

Withholding of Services

Include a provision prohibiting the provider’s

withholding of services

Example:

38

Scenario: Provider is withholding service because of a fee dispute

Provided Client continues to timely make all undisputed payments, Provider warrants that during the Term of this Agreement it will not withhold Services provided hereunder, for any reason, including but not limited to a dispute between the parties arising under this Agreement, except as may be specifically authorized herein.


Service Availability – Bankruptcy; Financial Wherewithal

Include a bankruptcy provision − provides the client the right to terminate the

Agreement in the event of a provider bankruptcy

Include a transition assistance services provision − requires the provider to assist in transition of the

services to a 3rd party provider or to the client, in the event of expiration or termination of the Agreement

However, once the provider has declared bankruptcy, Provider’s ability to assist the client may be limited

39

Scenario: Provider is closing its business because of financial difficulties


Service Availability–

Bankruptcy; Financial Wherewithal

(cont’d.)

If the client is not confident of the provider’s

financial stability, then consider adding a provision

that enables the client to identify provider’s

financial issues in advance

− Require the provider to deliver periodic reports on its

financial condition

Example:

40

Scenario: Provider is closing its business because of financial difficulties

Quarterly, during the Term, Provider shall provide Client with all information reasonably requested by Client to assess the overall financial strength and viability of Provider and Provider’s ability to fully perform its obligations under this Agreement. In the event Client concludes that Provider does not have the financial wherewithal to fully perform as required hereunder, Client may terminate this Agreement without further obligation or liability by providing written notice to Provider.


Service Levels

Most common service level issues: − uptime − service response time − simultaneous visitors − problem response time and resolution time − data return − remedies

2 main purposes: − assure the client that it can rely on the services in its

business and provide appropriate remedies if the provider fails to meet the agreed service levels

− provide agreed upon benchmarks that facilitate the provider’s continuous quality improvement process and provide incentives that encourage the provider to be diligent in addressing issues

41


Service Levels – Uptime Service Level

Requires that the services will have an uptime (i.e.,

availability) of a certain percentage, during certain hours,

measured over an agreed upon period.

Ensure service availability is aligned with customer’s

expectations and business needs (e.g. peak season)

Example:

42

Provider will make the Services Available continuously, as measured over

the course of each calendar month period, an average of 99.99% of the

time, excluding unavailability as a result of Exceptions, as defined below

(the “Availability Percentage”). “Available” means the Services shall be

available for access and use by Client. For purposes of calculating the

Availability Percentage, the following are “Exceptions” to the service level

requirement, and the Services shall not be considered Un-Available, if any

inaccessibility is due to: (i) Client’s acts or omissions; (ii) Client’s Internet

connectivity; and (iii) Provider’s regularly scheduled downtime (which shall

occur weekly, Sundays, from 2 am – 4 am central time).


Service Levels – Uptime Service Level

Downtime − Scheduled downtime

Customers should receive written documentation of a provider’s scheduled downtime

Ensure the schedule creates no issues for the customer’s business

− Downtime monitoring Provider should be proactive in detecting downtime (e.g., require

the provider to constantly monitor the “heartbeat” of all its servers through automated “pinging”)

Measurement Window − Providers tend to want longer measurement periods (e.g.,

quarterly) dilutes the effects of a downtime and thus masks periodic

performance issues that may temporarily impact the business and eliminates meaningful remedies

43


Service Levels – Service Response Time Service

Level

Services that fail to provide timely responses to its users are effectively “unavailable”

Therefore, include a service level that sets forth maximum response times for a customer’s use of the Services − a specific service level target depends on the facts and

circumstances in each case (e.g., transaction complexity, processing required, whether services are being accessed over an Internet connection or a leased line)

Example:

44

The average download time for each page of the Services, including all content contained therein, shall be within the lesser of (a) 0.5 seconds of the weekly Keynote Business 40 Internet Performance Index (“KB40”) or (b) two (2) seconds. In the event the KB40 is discontinued, a successor index (such as average download times for all other customers of Provider) may be mutually agreed upon by the parties.


Service Levels – Simultaneous Visitors

Does customer expect the services to support multiple simultaneous users?

If so, include a service level explicitly specifying a requirement that aligns with customer’s expectations

46


Service Levels – Data Return

The client should also consider adding a data return service level, if services involve − a critical business function, or − sensitive client information

Measures the time period between the client’s request for data and the provider’s return of such data in accordance with the timeframe requirements of the agreement

Provides additional assurance that customer will be able to receive its data and continue to operate, in the event that provider stops providing services or concerns of a loss of service arise

47


Service Availability –

Client Data

Explicitly specify client’s ownership of any

information stored by the provider for the client

Require that provider

− deliver periodic copies of all client data to client, and

− perform regular data backups to an off-site storage

facility

48


Service Levels – Problem Response Time

and Resolution Time Service Levels

■ Providers often include only a response time measurement, which typically falls short of what is necessary

– Response Time

n measures the time period from when the problem is reported to when the provider notifies the client and begins working to address the issue

■ Also, include a resolution time measurement

– Resolution Time

n measures the time period from when the problem is reported to when the provider implements a fix or acceptable workaround

49


Service Levels – Remedies

Credits − Typically, remedies for failure to hit a service level start

out as credits towards the next period’s service

Right to Terminate − If repeated failure occurs, the client should have the

right to terminate the agreement without penalty or

having to wait for the current term to expire

Example:

50

In the event the Services are not Available 99.99% of the time but are Available at least 95% of the time, then in addition to any other remedies available under this Agreement or applicable law, Client shall be entitled to a credit in the amount of $_____ each month this service level is not satisfied. In the event the Services are not Available at least 95% of the time, then in addition to any other remedies available under this Agreement or applicable law, Client shall be entitled to a credit in the amount of $_____ each month this service level is not satisfied. Additionally, in the event the Services are not Available 99.99% for (a) three (3) months consecutively or (b) any three (3) months during a consecutive six (6) month period, then, in addition to all other remedies available to Client, Client shall be entitled to terminate this Agreement upon written notice to Provider with no further liability, expense, or obligation to Provider.


Additional Provisions Tied to Service Levels

n Services Generally – Statements of Work – Transition-In

n Warranties – Quality of service – Deliverables

n Customer Satisfaction n Governance n Change Control Process n Installation and Acceptance Testing n Limitation of Liability

– Application to performance credits n Termination n Disaster recovery / force majeure n Remedies n Audit

51


State of Indiana v. IBM Corp. Case No. 49D10-1005-PL-021451

Indiana was granted the ability to terminate the Agreement without penalties in the event of a “material breach”

Agreement was silent on what constituted a “material breach”

Up to court to determine what constituted a “material breach”

Was the State of Indiana entitled to terminate its agreement with IBM for material breach?

52


State of Indiana v. IBM Corp.

10 year, $1.3B agreement to modernize welfare eligibility system

Indiana sued IBM for $1.3 billion, claiming breach of contract

IBM countersued for the value of equipment it was obligated to leave with the State

As a result of known modernization problems in other state systems, the agreement attempted to lighten performance obligations by disclaiming warranties of “uninterrupted or error-free operation” and referring to the modernization transition time-table as “preliminary”

53



“[N]either party deserves to win this case.”

The Court found that the State failed to meet its

burden to show that IBM committed a material

breach, despite a record showing that “IBM did not

perform well in some respects.”

The State was able to achieve a “new welfare system

that works better” as a result of the modernization

efforts with IBM

− This factor carried “great weight regarding whether

there is a material breach or not.”

54



“All in all, the State was not deprived of benefits it reasonably expected from the contract, although some benefits were not received as smoothly as the parties would have expected.”

While IBM’s performance was “premature and problematic” and key performance metrics for timeliness were “consistently missing the mark,” IBM’s performance was “steadily improving during 2009, especially in the months leading up to the October 2009 termination.” − Court reasoned that IBM’s failures had the “likelihood of

being cured” and were “apparently in the process of being cured.”

55



n Award of over $12M to IBM in its counter-suit to a

breach of contract action filed by the State of

Indiana (in addition to $40M awarded to IBM on

summary judgment in the same action)

56



Agreement contained detailed performance standards for − Critical transition milestones − Transition key performance indicators − Key performance indicators − Service level metrics − …with liquidated damages provisions the State could

enforce if IBM failed to meet those standards

But, the amount of liquidated damages were nominal ($500 - $5,000) and the service level metrics were not applicable during the transition period

57



Challenges were met during transition

− U.S. economic disaster

Indiana’s unemployment went from 4.5% in

December 2007 to 9% in November 2009, resulting

in a 31% increase in government benefit applications

A series of floods and other natural disasters in 2008

which forced the State to shift resources from

modernization to disaster relief

Despite problems, scope expanded 11 times (adding

$178M to the contract price)

58



After repeated problems, State moved to “Plan B” –

a hybrid approach

State terminated the contract after 19 months

Despite acknowledging that KPI metrics for

timeliness consistently missed the mark, the Court

noted

− IBM’s performance improved over time

− Excused initial poor performance because of economic

uncertainty, natural disaster, administrative difficulties,

internal political environment

59



Several of the obligations the State claimed as “material breaches”

− Application backlog

− Food stamp error rates

− Timeliness

− The number of appeals from adverse decisions and the reversal rate of appeals

− Employer turnover or staffing levels

− …were not the subject of performance standards in the agreement

60



Further …

− Because IBM could, and did, pay liquidated damages whenever it missed a performance metric during transition, the Court found that IBM’s failure to meet those metrics did not constitute a breach of the agreement

The $12M award

− Included both the fair market value of the IBM equipment the State retained after termination

− Early termination close out payments

− Prejudgment interest (but not deferred fees or mandatory change fees)

61



6 weeks, 92 witnesses, 7,500 exhibits

Lessons learned… − Draft service level metrics and other performance requirements

clearly and precisely

− Include specific lists of obligations that the provider must meet, in addition to service levels themselves

− Ensure that the time periods to which the service levels apply are clearly indicated

− Clearly articulate the different damages the customer is entitled to recover should the provider fail to meet the metrics

− Break up performance requirements into specific deliverables, with defined consequences for bad performance

− Consider spreading risk across multiple providers

− Create detailed governance that includes reporting on, and procedures for addressing, failures to meet the service levels

62



IBM’s failure to satisfy the performance metrics did not violate the purpose of the agreement − What is the objective?

− How are the performance metrics and service levels affected by the objectives?

− What is a “material breach”?

− What are the requirements to provide notice and cure?

− What are the performance requirements?

− What are the rights when performance metrics are not met? Termination

Liquidated damages or other penalty

Right to cure

63

©2015 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500

Matt Karlyn

Partner

(617) 502-3239

[email protected]

QUESTIONS?

drafting service level agreements: best practices for

Documents