What is SLA (Service Level Agreement)? How to set internal SLAs to ensure compliance?

In today's era of booming technology, businesses are becoming increasingly reliant on services provided by third parties. To ensure service quality, build trust, and foster effective collaboration, the Service Level Agreement (SLA) plays a crucial role.

This article will delve into the essence, core components, and the significant impact of SLAs on businesses. Let's explore SLAs' essential role in establishing partnerships and driving success in today’s dynamic business environment.

What is SLA?

A Service Level Agreement (SLA) is a commitment made by a service provider to the customer using that service. This commitment goes beyond just the quality of the service and often includes aspects like quantity, availability, provider responsibilities, and other agreed-upon factors.

SLAs usually come with penalties or accountability measures if the service provider fails to meet the agreed-upon terms. For instance, an e-commerce company might promise to refund the shipping cost if they fail to deliver an order within 2 hours from the time the customer placed it, as officially stated on the company's website.

What is internal SLA?

Though SLAs were initially associated with internet service providers, they are now commonly used across the information technology world and beyond. Many large and small companies use SLAs within their internal management to ensure they meet the SLAs they've committed to with their customers.

This is because different departments or teams within an organization often have interdependent tasks, where one department becomes the "customer" of another. The performance of one team directly affects the efficiency of another. The best way to manage and optimize this collaboration is by monitoring SLAs internally.

There’s a significant distinction between process management and project management. Projects typically consist of unpredictable and separate tasks, while processes are pre-established by the business, making them more predictable and easier to control. Therefore, when tracking internal SLAs, the most effective method is through process flow monitoring. Internal SLAs are often listed in the job function, or in the process documentation. 

Example of an internal SLA

For example, in a Contract processing workflow with six steps, if a company promises to complete all paperwork for a customer within 48 hours, it can break this down into six corresponding SLAs for the different departments involved.

Benefits of internal SLAs

Whether SLAs are used between a business and its customers or internally within a company, their fundamental purpose is to measure performance. SLAs come with pre-defined standards and agreed-upon accountability between the involved parties.

These are some benefits of establishing internal SLAs: 

• Improves workflow efficiency and compliance with customer-facing SLAs.
• Clarifies responsibilities and expectations, enhancing internal relationships.
• Quickly identifies delayed tasks and bottlenecks for timely interventions and solutions.
• Provides accurate employee performance measurement for reviews, rewards, or corrective actions.
• Fosters a professional, transparent work environment with better task prioritization and goal alignment.

Types of SLAs

Here are some common types of Service Level Agreements (SLAs):

1. Customer-level SLA

A customer-based SLA is designed to cover all the services provided to an individual customer. It outlines the specific service details, availability, responsibilities, escalation processes, and cancellation terms tailored to that customer’s needs. For example, an IT company might have a customer-level SLA with a corporation that uses multiple IT support services, ensuring all services are covered under one agreement.

2. Service-level SLA

A service-level SLA focuses on a specific service provided to multiple customers. All customers using the same service receive the same SLA terms. For example, if an internet service provider offers a standard broadband package to several clients, the service-level SLA would define the terms, speed, and uptime guarantees for that service.

3. Multi-level SLA

A multi-level SLA is layered to accommodate different customers or service tiers within one agreement. This type of SLA is useful for businesses offering multiple service levels or pricing plans. For example, a cloud storage provider might have a multi-level SLA where basic, premium, and enterprise customers have varying storage capacities, support levels, and guaranteed uptimes under a single, flexible SLA framework.

SLA vs. KPI

The main difference between a Service Level Agreement (SLA) and a Key Performance Indicator (KPI) is their purpose and scope:

• An SLA is a formal agreement between two parties, focusing on meeting specific service standards.
• A KPI is an internal metric used to gauge the performance of services, processes, or employees against business goals.

Example: 

• An SLA might state that a software provider must maintain 99.9% system uptime or respond to critical support issues within 1 hour.
• A company might track a KPI such as customer satisfaction rating or average resolution time for support tickets.

How to set and track internal SLAs

Here’s a detailed guide on setting up and monitoring employee SLAs, along with some important considerations. You can apply this approach to your business as needed.

Step 1: Identify the requirements and expectations of all internal parties  

The key to this step is to find the core factors that accurately reflect an employee’s performance, ensuring that they are measurable and analyzable.

You can create opportunities for employees to contribute their thoughts by conducting a small survey or holding internal meetings. Don’t forget to prepare some current performance reports as references to ensure the requirements are realistic and the expectations are not too ambitious.

Additionally, speaking directly to external customers, partners, and stakeholders can help you collect constructive feedback. What is your company doing well? Is the sales department providing a satisfying experience? What can be optimized further?

Step 2: Agree on the SLAs  

Avoid overwhelming your business with too many SLAs, but ensure there are enough to meet your business goals.

If any performance indicators (such as KPIs) are already in place, consider incorporating them into an SLA. 

The SLA must be agreed upon by all involved parties. A common solution is to meet in the middle. For example, the customer service department may aim to resolve customer requests in one day, while the technical department may need five days to complete their tasks. In this case, three days might be a reasonable SLA.

Once agreed upon, the SLAs should be documented or formalized into the company’s policies. This ensures that the SLAs are clear regarding both responsibilities and benefits.

Step 3: Establish a reward and penalty system for SLA compliance  

Rewards and penalties are the driving forces that encourage employees to meet internal SLAs effectively.

Penalties for violating SLAs can be progressively scaled, starting with reminders, warnings, written notices, and eventually leading to reduced bonuses. Rewards can include one-on-one praise, public recognition, and performance bonuses. These rewards and penalties shouldn’t be too harsh, just enough to motivate employees.

Keep in mind that certain unforeseen circumstances may affect SLA compliance, such as external service disruptions or simple technical issues like internet outages.

Step 4: Implement monitoring systems and tools  

To ensure employees adhere to SLAs and managers can track performance metrics effectively, an internal monitoring system is necessary.

For some businesses, a simple Excel spreadsheet and a dedicated team member may be sufficient to track and measure SLAs. However, this can be labor-intensive, as it involves processing large amounts of raw data and using complex Excel formulas. Additionally, one person cannot feasibly oversee every internal process, particularly those involving multiple departments.

At this point, businesses must assess whether the manual tracking of SLAs consumes more resources than the benefits it provides. If the costs outweigh the gains from improved efficiency, it’s clear that the business should consider more efficient alternatives.

You can opt for smarter, more specialized tools with automated features to track SLAs, with many practical benefits:

• Save labor and time on task management
• Provide fast and highly accurate SLA measurements
• Instantly alert managers to SLA violations or bottlenecks in workflows
• Store data long-term and automatically compile performance reports
• Integrate with collaboration and management tools for enhanced efficiency
• More cost-effective than manual tracking solutions

Step 5: Regularly review and improve SLAs  

The market landscape and customer expectations are constantly evolving, which means your business strategy and the SLAs you commit to must also adapt. Additionally, when workload volume or employee resources/tools change, your SLAs need to be adjusted accordingly.

If SLAs aren’t reviewed and improved regularly, they can quickly become outdated and ineffective, falling short of both employee capabilities and customer expectations.

Most companies revise their SLAs every 1-2 years. However, the faster a company grows, the more frequently SLA reviews should occur, sometimes even on a quarterly basis.

Tips: For newly established SLAs, it’s a good idea to implement them on a smaller scale first. This allows you to test their effectiveness before gradually expanding them throughout the organization.

Internal SLA best practices  

While most people agree on the use of SLAs for external relationships (with customers, partners, media, etc.), there is often hesitation when it comes to implementing internal SLAs within a business.  

The reason is straightforward: internal SLAs are closely tied to individual employee responsibilities.

Here are some tips to help you effectively communicate SLAs to employees and make their implementation smoother within your organization:

• Keep SLA names simple so employees can easily remember and follow them. For example, instead of saying, “SLA requires confirming a customer order within 15 minutes of the order being placed successfully”, you can refer to it as “Order confirmation SLA – 15 minutes” in your tracking documents.
• Exclude non-working days or hours from SLA timing. For example, if an SLA is set at 24 hours and a task is assigned at 9 am on Friday, the deadline would be 9 am on Monday (since Saturday and Sunday are non-working days).
• Break down SLAs into steps rather than just assigning them to entire departments, so you can track accountability and effectiveness for each task. For example, in the contract handling process, even if "Processing terms" and "Getting signatures" are consecutive steps handled by the Legal department, they should have separate SLAs.
• Make SLAs transparent and accessible within the organization for everyone involved.

In conclusion  

Service Level Agreements (SLAs) are more than just formal contracts; they are the backbone of strong customer relationships and reliable service delivery. While SLAs with customers are widely recognized, internal SLAs between departments can be a game-changer for operational efficiency. 

If your business promises customers 24/7 support, internal agreements between your support and IT teams are vital to fulfilling that promise. By creating a structure where performance is consistently measured and optimized, internal SLAs ensure that the business operates like a well-oiled machine, delivering both internal and external success.