May 01 2006

Service Level Savvy

Once the province of corporate giants, Service Level Agreements can help small businesses lock in great deals — if they do their homework.

Large companies that spend a lot of money with a service provider — be it a phone company, Internet service provider (ISP), Web hosting firm or application service provider (ASP) — typically have the clout to demand the best terms and the highest quality of service. But smaller companies can effectively use the same tool, a service level agreement, or SLA, to negotiate the best available deal.

An SLA is a contract between a service provider and the end user that should contain a specified level of service — typically a guaranteed level of system performance and/or uptime — as well as support options, enforcement or penalty provisions for services not provided, a specified level of customer support, what software or hardware will be provided and for what fee.

A company’s size isn’t as important as knowledge of the market in negotiating an SLA, according to Jerald Murphy, senior vice president and director of research operations at Robert Frances Group in Westport, Conn. “We’ve found from our research that if you’re a good negotiator, you don’t have to be big to get really good deals,” Murphy says. “It’s more important to understand what the going rates are.”

While large enterprises can often get service providers to guarantee transaction response times of less than three seconds or onsite repairs within 30 minutes of a support call, smaller companies can opt for less stringent performance guarantees to get comparable deals, Murphy notes. He and other “vendor management” veterans offer these tips on negotiating better SLAs:

1. Don’t pay for what you don’t need. Many smaller companies don’t need the same high level of availability or throughput as large companies do, Murphy says. When he negotiates SLAs for Arrow Electronics Corp., Stephan King, director of IT service management, first considers what his customers really need. “We always think we need [availability] 18 hours a day and three-second response time, but you’re going to pay for it.” King says. “Maybe a five-second response time would be good enough.”

2. Understand all the components of a system that determine service level. Hosted applications are usually made up of complex systems with many moving parts, such as the application server, Web server, database server, application-specific code and data. Customers should know which components the service provider is responsible for and who to call when something goes wrong, experts say.

3. Collaborate with business staff on SLAs. Just as financial and legal people typically review service contracts that IT departments negotiate, it’s important for IT staff to “look under the hood” of the SLA for a service procured by a company’s business leaders, according to Ron Strout, senior vice president of corporate systems and global treasury at State Street Corp. in Boston. Recently, one of his company’s executives purchased an analytics application without consulting the IT staff, only to find that the system doesn’t work, and the SLA doesn’t stipulate repair times or penalties.

4. Ensure regulatory compliance. If a vendor supplies raw computing services for your company’s financial data, make sure the SLA addresses compliance with regulations such as the Sarbanes-Oxley Act of 2002 and the Health Insurance Portability and Accountability Act, or HIPAA, which hold the company — not necessarily its service providers — responsible for sloppy internal controls or the disclosure of sensitive customer information.

5. Review all SLAs with legal counsel. Sloppy contracts or those that can’t be enforced are invitations for trouble.

6. Think locally. Large companies can get a good deal almost anywhere, but smaller companies may find their best deals from local service providers, experts say.

7. Create competition. Even if you have a favorite vendor, make sure that company knows it must compete for your business, Murphy adds. “The fact that they know there are other bidders increases the probability that you can get a better deal.”

CEO takeaway
Four questions every CEO should ask before signing an SLA:
• How many bidders were there for our business and were any of them local?
• Do we really need the level of service we’re paying for?
• Has IT staff reviewed the agreement to make sure it can hold up its end of the deal?
•Has legal counsel reviewed the SLA to ensure that it’s enforceable and meets all regulatory requirements?