Service Level Agreements in Information Technology Contracts

Breakout Session #: E13

Stacia Roesler (Sr. Licensing Executive)

Sachin Bhatt (Asst Atty Gen, State of Maryland)

Date: Tuesday, July 26

Time: 2:30pm-3:45pm

Presentation goals At the conclusion of the class you should: 1. Understand how an SLA suite works in an IT contract 2. Understand how SLAs are calculated 3. Understand the principles of selecting SLAs and creating an SLA suite 4. Be able to articulate the difference between liquidated damages and penalties 5. Be able to identify risks to avoid when negotiating SLA language 6. Be aware of SLA variations and complexities such as earnbacks and overweighting

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SLAs: What are they?

• A payment to Customer for damages due to anticipated services not being received

• Service level credits should be characterized as liquidated damages, not a penalty

• In many jurisdictions (and countries), penalties are not enforceable because the injured party is not to profit unjustly from the breach

• Therefore the liquidated damage amount must be reasonably related to the services not received: a “genuine pre-estimate of loss” and “not excessive in comparison to the loss”

• Contractually binding---typically not just goals (see next slide)

Types of SLAs

• Goals only, no credits applied, but repeated failures can yield termination

• Simple, with a % credit attached • Complex, with multiples of a % (but still

a cap) that more quickly reach the cap • Complex with earn-backs, designed to

improve performance over time (hard to manage)

Selecting SLAs • Should be attached to the most important

services (otherwise dilutes the desired effect) • Should incentivize what you want (i.e. the

delivery of good service) • Should not be a negative incentive (more on

this later) • Must be something you can objectively

measure • Must state HOW it will be measured (in

detail) • Must be clearly written, with sufficient detail • Press the tech personnel until you have a

good SLA: if you can’t understand it, the judge won’t understand it

Decide when the SLAs start • Be very precise in your contract about

when the SLAs start • Different SLAs can start at different

times • Typically, SLAs start at go-live or X

months thereafter • Be fair: Supplier probably won’t be

staffed to fully support SLAs during ramp-up time

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SLA Defined Terms

• SLA = Service Level Agreement • SLC = Service Level Credit • At-Risk amount = total cap on credit

payments • Applicable Charges = Those charges that

will be creditable if an SLA is missed (e.g., usually excludes monthly SOW work, pass-throughs)

• Monthly Fees = Those charges that comprise the work against which the credit(s) will be calculated

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Make sure Applicable Charges are clear • SLA should be clearly tied to

invoice items • Decide if it will apply to all invoice

items, or by CLIN, by Tower, etc. • Typically variable monthly items

such as pass-throughs, ad hoc SOWs and labor hours are excluded (unless you have a s/w development contract)

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Capping the credits • Total “at-risk” payment credits should be capped at

between 10-20% of Monthly Fees • Monthly Fees must be well-defined

- Tie it back directly to your Pricing schedule (be precise with included section references or line items)

- Usually includes steady-state monthly charges - May or may not include monthly T&M charges - Shouldn’t include Milestone payments

• Intent is to minimize Contractor’s profit for poor performance, not eat into his operating costs

• Credits that are too excessive will be considered a penalty • Credits that are too excessive will create greater

performance problems by handicapping the Contractor financially

• Be sure to “model” SLAs against anticipated monthly invoice to test the impact and reasonabiility

Overweighting • Typically each service level goal has a

percentage attached, up to 100% combined

• Overweighting allows more service levels, totaling up to 250 or 300%

• Total payment (“at-risk”) cap remains unchanged, so vendor hits cap sooner because of hugher number of SLAs

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SLA example http://doit.maryland.gov/contracts/Pages/TaskOrderServiceLevelAgreementInstructions.aspx

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Calculating the SLA • Suppose that we have a $1.2 mil annual

contract billed at $100K per month, where all monthly fees are eligible as applicable charges

• Suppose that we have agreed SLAs with an at-risk total cap of 10% and no earnbacks or forgiveness

• Suppose that the vendor has failed the monthly uptime requirement, which carried a credit of 2%

• The calculation is $100,000 x .02 = $2,000

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Legal Issues with Service Level Credits • 2 key legal issues with

service level credit (“SLC”) – Whether SLC is a liquidated

damage or a penalty – Whether SLC is customer’s

sole and exclusive remedy

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Liquidated Damage vs. Penalty • Liquidated damage: a specific

amount expressly agreed to by the parties as the amount of damage to be recovered for a party’s breach of an agreement

• Penalty: an amount far exceeding the amount of damage that would be sustained

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Public Policy In contract law, one of the goals of remedies is to make the aggrieved party whole. A penalty provision would be inconsistent with this policy since the penalty will usually create a windfall for the aggrieved party. A penalty clause will not be enforceable in most jurisdictions A properly drafted liquidated damages clause, however, will be enforceable.

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Is SLC liquidated damage or penalty? • A court will likely find a SLC as a liquidated

damage, thus enforceable, if – It is a reasonable estimate of potential

damage; and – Damages were difficult to estimate

accurately • A court will likely find a SLC as a penalty, thus

unenforceable, if – the amount grossly exceeds the damages

that might reasonably have been expected from the breach

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Is the SLC the sole and exclusive remedy? • Service providers should negotiate to “yes”

– The SLC, as liquidated damage, is the customer’s sole financial remedy and bars customer’s right to seek actual damage

• Customers should negotiate to “no” – The SLC is a price adjustment reflecting the

reduced value of the services received, and not a liquidated damage. Consequently, customer is also entitled to seek actual damages for breach.

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Is the SLC the sole and exclusive remedy? • The outcome of this negotiation often resolves

somewhere in between the two extreme positions just discussed. Some possible “meeting of the minds” could be • The SLC is treated as a price adjustment, but if damages are also

sought, the SLC will be deducted from the damages. • The customer is entitled to make an election between the SLC or

a claim for damages. • The SLC is treated as the exclusive financial remedy provided

performance is no worse than a minimum threshold. If it goes below the threshold, then damages may also be sought.

• The SLC is treated as the exclusive financial remedy but if customer terminates for breach, then damages may also be sought.

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Is the SLC the sole and exclusive remedy? • Legal limitations on which

approach is enforceable – General rule: a liquidated damage

clause will foreclose all other remedies at law unless a contrary intention is expressed

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Is the SLC the sole and exclusive remedy? • But, contract law is mostly governed by

laws of the individual states. So, you have to be familiar with what limitations to recovering damages might be relevant to your contract • In Maryland, even a valid liquidated damages

clause does not exclude other legally recognized remedies such as as equitable remedies

• In New York, customers do not have a right to elect between SLC and actual damages. A provision allowing right to elect will not be enforceable

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SLC and Chronic Service Failure • Chronic service failure occurs when there

is provider persistently fails to satisfy the service level. – The SLA should define what constitutes

chronic service failure • There should be a provision allowing

customer to terminate the contract for chronic service failure. – It should include express language

allowing customer to pursue damages in addition to the SLC.

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Managing SLAs • Once in place, needs to be measured and

enforced. • Failure to do so could:

– Create an internal audit hit – Compromise your contractual rights – Deprive your firm of appropriate income

• Important to include a clause allowing annual SLA adjustments, adds, deletes – Usually adjustments to percentage assignments can

be done unilaterally, within certain limits – Deletes can also be done unilaterally – Adds require mutual agreement and sometime a

measurement period

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Earnbacks and forgiveness • Make sure earnback isn’t “at discretion”

(can cause questions of impropriety) • Earnbacks and forgiveness should be

designed to improve quality • Typically require either meet or beat SLA

for X months to earn the forgiveness • In such a scenario the credits are in

suspense and not paid to customer until the earnback period has expired.

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• Sachin Bhatt

– Sachin.bhatt@Maryland.gov

• Stacia Roesler – Stacia.Roesler@Microsoft.com

Contact Information

Appendice: Example of very badly written SLA, with corrections on the next slide No. Metric Name Service Level Metric Liquidated Damages

1 Help Desk Response

The help-desk support shall have normal business hours from Monday to Friday, 7 am to 7 pm Eastern Standard Time, and the average response time to High priority request shall be within 15 minutes. The response time to Normal and Low priority request shall be 2 hours. All resolution times shall not exceed 4 hours for “High” priority request. All other issues resolutions (i.e. for Normal and Low priority request) shall be resolved within 24-72 hours.

• Failure to meet average response time for Emergency failures each month will result in a reduction in total monthly payment by 5%.

• Failure to meet average response time for High priority each month will result in a reduction in total monthly payment by 5%.

• Failure to meet average response time for Normal priority each month will result in a reduction in total monthly payment by 5%.

• Failure to resolve 99% of High priority within 24 hours each month will result in a reduction in total monthly payment by 5%.

• Failure to resolve 99% of Normal and Low priority each month will result in a reduction in total monthly payment by 5%.

2 Network Availability

Network communication data exchange shall be maintained at level of 99.5% uptime and 100% data reliability.

Failure to meet availability will result in reduction in total monthly payment as follows: •< 99.5% and > 98% availability – 5% reduction •< or = 98% and > 97% availability – 10% reduction •< or = 97% and > 96% availability – 15% reduction •< or = 96% availability – 20% reduction

3 Unscheduled Network Downtime

Contractor shall minimize or eliminate unscheduled network downtime to .5% or less.

Failure to meet .5% or less unscheduled network downtime for month will result in a reduction in total monthly payment by 5%.

4 Scheduled Downtime/ Maintenance

System must be fully operational. Scheduled maintenance and downtime shall only occur during non-business hours and shall not exceed six (6) hours per thirty (30) days. The Contractor shall provide two weeks (14 days) notice and approval prior to any scheduled downtime.

Failure to meet availability will result in reduction in total monthly payment as follows: •For each additional hour (which starts at six hours and one minute) shall result in a deduction of one (1) percent of maintenance costs.

5 Application Availability

All application functionality and accessibility shall be maintained at 99.5% uptime performance levels.

Failure to meet availability will result in reduction in total monthly payment as follows: •< 99.5 % and > 98% availability – 5% reduction •< or = 98% and > 97% Service availability – 10% reduction •< or = 97% and > 96% Service availability – 15% reduction •< or = 96% and > 95% Service availability – 20% reduction •< or = 95% and > 90% Service availability – 50% reduction •< or = 90% Service availability- 100% reduction

6 System Response

The System’s on-line transactions shall be processed in one (1) second for transactions that do not change data and transmitted within a three (3) seconds response time for transactions that do change data.

Failure for transactions to meet response times as defined for 95% of the transactions will result in reduction in total monthly payment as follows: •< 95% and > 93% availability – 5% reduction •< or = 93% and > 91% Service availability – 10% reduction •< or = 91% and > 89% Service availability – 15% reduction •< or = 89% Service availability – 20% reduction

9 Maintenance Windows

Maintenance window shall be scheduled for the same time each week, during non-business hours (excluding Sundays) for a maximum of 4 hours, to perform scheduled preventive maintenance activities.

Failure to complete maintenance in 4 hour window shall result in a reduction in total monthly payment by 5% for every 4 hours over window. For example: •4 hours over – 5% reduction •8 hours over – 10% reduction •12 hours over – 15% reduction •Over 16 hours – 20% reduction

10 Continuity of Operations

Contractor is responsible for working with each state to assist in the technical aspects (including response time) in the event the Continuity of Operations plan is put into effect.

In the event that a VMW State enacts it Business Continuity Plan, the Contractor shall respond to the state and provide assistance within four (4) hours to make the System operational for the state. Contractor will be assessed fee equal to the amount of $25,000 per each 4 hour period until a response is received.

Measurement Description Performance Standard

SLA credit

a. Service Level The service level (SL) quantifies the percentage of calls (X%) answered within a target timeframe (typically within Y seconds). Service levels are to be measured by half-hour or hour increments and reported on a daily, weekly or monthly basis based on Task Order requirements.

85% of calls are to be answered within 20 seconds.

100% of all calls are to be answered within 30 seconds.

This metric does not apply to calls that are fully serviced or abandoned in the IVR or an Automated Attendant.

X%

a. Average Speed of Answer (ASA)

The average speed of answer (ASA) determines how quickly a call is answered within a target timeframe from the time the call enters the ACD system to the time a live call CSR answers the call. ASA levels are to be measured by half-hour or hour increments and reported on a daily, weekly or monthly basis based on Task Order requirements.

30. seconds X%

d. In queue or on-hold time

Hold times for all callers, including Limited English Proficient and hearing impaired consumers. If hold time will be greater than 2 minutes, the caller should be able to choose to be called back by a CSR.

< 120 seconds in queue or on hold AND

90% of all call backs made within 4 hours.

X%

d. Abandoned Call Rate The abandonment rate is the percentage of all callers (X%) that hang up once in the ACD or IVR queue within a target timeframe. The abandonment rate is measured either in real time or hourly and shall be reported on a daily, weekly or monthly basis based on Task Order requirements. Calls that are abandoned by the caller within 5 seconds are excluded from the ACR calculation.

TASK ORDER MANAGER SELECT BETWEEN 5% to 10% (default is 10% if not otherwise specified):

X%

X%

d. Busy Signal The percentage of calls unable to get through and receive a busy signal.

< 2% X%

d. Data Capture Rate The acceptable minimum rate for capturing data on incoming calls. Data Capture on calls includes Call Center statistics, Customer Ticket Tracking database information, and agency database information collection (e.g. - Registries).

> 90% X%

d. ACD Performance Complaints

The number of callers complaining about Call Center service expressed as a percentage of all calls, as documented by call center tickets for individual case tickets. ( Repeat complaints regarding the same incident will not be considered an additional incident.).

< 1% X%

TOTAL %

(NOT TO EXCEED 10%) X%

If the Requesting Agency elects to apply an SLA credit methodology to the Task Order, The Task Order Manager may assign SLA credits to each of the performance parameters set forth in chart 3.8.A below, totaling in the aggregate a cap of not more than 10% of the Monthly Charges. For purposes of SLA credit calculation, Monthly Charges is defined as the invoiced charges (during the month of the breach) for CSR Call/Contact Time and Automated Services as set forth in Attachment F, Pricing. Beginning on the SLA Activation date, for any of the Performance Standards not met during the monthly reporting period (or weekly in the case of the State Election Board), the SLA credit for that individual Measurement shall be applied to the Monthly Charges. The SLA Activation date means the date that services and charges commence for CSR Call/Contact Time and Automated Services.