7 Ideas for Negotiating a Smarter SLA

If you’ve been unlucky enough to spend time combing through a service level agreement because of a problem with a service provider, you already know this: Negotiating and then enforcing the SLA can be one of the biggest headaches of an outsourcing project. Forget the complex technical stuff that you specialize in. We’re talking about an intricate contractual agreement that defines your outsourcing project in detail — and can affect it on a daily basis for years. The SLA can make the difference between a solid relationship that lasts for years and keeps both parties happy — or something just the opposite.

To glean some tips on what makes a smart SLA — and how to negotiate and monitor one — we talked with Washington, D.C.-based outsourcing attorney Bruce Leshine, with Levine, Blaszak, Block & Boothby, LLP. His firm specializes in negotiating telecommunications and technology agreements for enterprise customers. The firm works only with buyers as its clients, never suppliers, and represents both smaller clients and a large number of Fortune 100 companies worldwide. Mr. Leshine, who specializes in IT outsourcing contracts, has been both a systems engineer and a finance director for an IT vendor in prior lives, so he’s well suited for his current line of work.

Mr. Leshine’s suggestions are part of a larger overhaul of service level agreements in general that he’s begun proposing to clients. That larger overhaul involves making several substantial changes to an SLA — changes that favor you, the buyer. Among other things, Mr. Leshine argues that the traditional SLA system of offering “credits” to the buyer when the service provider fails to meet a performance threshold is nearly useless. The credits have little value to the buyer, and offer little incentive to the provider to avoid incurring such penalties.

As part of moving away from that system, Mr. Leshine advocates some other fundamental changes as well — all of which he successfully negotiated into a client’s contract earlier this year. In that case, he represented a mid-sized regional medical center in the Pacific Northwest that was outsourcing its IT functions.

Here are seven ideas from Mr. Leshine for a smarter service level agreement.

–> IDEA #1. Get a lawyer on your side.

Before you even start negotiating the SLA, Mr. Leshine’s first suggestion is this: Get a lawyer. Although IT clients often view attorneys as unnecessary roadblocks to progress on a deal, Mr. Leshine says he’s reviewed enough SLAs at the last minute to know that clients miss a lot. “It’s a problem with outsourcing transactions in general,” he says. “People believe that they can review documents just because they’re intelligent, and they’re technical. But they’re only reviewing what they can see.”

That is, the CIO or project lead may be able to spot problems with what’s already specified — but what about what’s missing? Mr. Leshine says clients seldom think, for example, to make sure that the contract specifies who gets the software at the end of the contract. If the contract says all software is awarded to the service provider, a CIO might spot that and object — but if there’s no mention of the disposition of software, the lay reader isn’t likely to catch the omission. “If you’ve never done this before,” Mr. Leshine says, “all you can do is review [the agreement] on an exception basis. You notice things that don’t seem quite right. But if something isn’t there, you’d never know it.”

–> IDEA #2. Start with a standard contract.

What about simply using a standard contract offered by your service provider, something that’s commonly done? Is that such a bad idea? The service level agreement itself generally comes from one of two sources: Either the buyer prepares something specifying performance standards, or — more often — the service provider offers a boilerplate contract that’s been modified for your situation. “Who takes the first crack at it isn’t that big a deal,” Mr. Leshine says. “In representing [buyers], I’m amenable to seeing what the supplier has to offer first. It can be very good for the customer, actually.”

In short, there’s no reason not to start with the service provider’s contract — as long as you know what you’re looking for as you read through it. And that’s where the attorney comes in.

–> IDEA #3. Get rid of performance “credits.”

Now that you have an attorney advising you, consider implementing some of Mr. Leshine’s fundamental changes to service level agreements. After all, just because SLAs have traditionally been structured a certain way, do you have to follow along? Not at all, according to Mr. Leshine.

To go back to the “credits” example: In a traditional service level agreement, when a service provider fails to meet one or more of the conditions in the agreement — to keep servers up and running at least 95 percent of the time, say — the buyer is awarded “credits.” Instead, Mr. Leshine proposes a model that emphasizes fixing problems quickly. To do that, he gets rid of performance credits altogether and moves to a more direct correlation between problems with the service provider and your means of resolving them.

–> IDEA #4. Raise the performance bar.

Levine first suggests setting a higher baseline for performance expectations.

Traditionally, the buyer requires the service provider to simply meet existing levels of service. The supplier agrees to a penalty if that level isn’t met. But what if you’ve decided to outsource precisely because you aren’t happy with current in-house levels of IT service? What if you want to improve standards and set a higher bar? Mr. Leshine suggests including just that in the contract.

In working with the Pacific Northwest hospital, he brought in consultants who specialize in helping medical centers outsource IT services. The consultants helped the hospital ascertain where service levels should be set, and the contract then specified those standards. Since the request was unusual, the contract gives the service provider a year to come up to the new performance levels.

–> IDEA #5. Assign “performance decrements.”

With new performance levels in place, what happens if the service provider fails to perform? Mr. Leshine’s method assesses what he calls performance decrements. If those decrements exceed an agreed-upon threshold over a set period of time, you as the buyer can act to fix things. The contract can specify a meeting of a designated committee made up of buyer and service provider representatives. The committee works to immediately identify the causes of the problem and propose remedies. If necessary, the contract requires the service provider to use outside consultants to fix the problem. In that way, the SLA emphasizes — and gives you the tools for — immediate attention from the supplier until a problem is corrected, rather than the simple reduction in your bill that credits represent.

With this model, Mr. Leshine says, you have tools to force relatively quick fixes when problems arise — a far better enforcement method than being awarded a handful of credits for poor performance.

–> IDEA #6. Use leverage to negotiate.

Since practically every traditional SLA is based around the “credit” concept and an existing service baseline, what says that a service provider will agree to your different demands? Short of having an attorney like Mr. Leshine in your corner, what can you do?

First, Mr. Leshine says, don’t put yourself into a negotiation in which you’ve waited until problems are almost insurmountable to outsource, and you now need an outside IT supplier to save you. “You don’t have much leverage in that situation,” Mr. Leshine points out.

More important, as the buyer, you need to think about outsourcing as you do anything else your company procures — and shop around. “Think about competitively procuring these services,” Mr. Leshine says. “Don’t just buy from the first guy to knock on your doorÉ Your greatest leverage is talking to other potential suppliers.”

Finally, you can push the service provider to accept what’s important to you — the new conditions in your SLA — by making concessions on something else in the contract, something that’s important to the supplier. It could be anything, but once you find out what it is during negotiations, use it to give you the leverage you need.

–> IDEA #7. Stay on top of the deal.

The most important thing you can do as a buyer, Mr. Leshine says — and the best way to avoid what he calls “the nuclear bomb” of an exploding service level agreement — is to pay plenty of attention to detail in planning and negotiating the outsourcing agreement initially. “Don’t leave anything to be discussed or settled later,” Mr. Leshine counsels. “Don’t ever think that something bad won’t happen. It’s difficult at the beginning — you’re in love, why should you think about negative things?” But, he says, that’s precisely the time to think about all the possibilities. That way, if a problem crops up, you’ve already laid out rules to handle it, and “it doesn’t fester into a larger problem that you can’t resolve without screaming and arguing.”

By looking at service level agreements in a new way, you can drastically change the balance of power in an agreement to favor you, the buyer. Getting rid of outdated “credits” for failed performance is just the beginning. From there, consider setting a new performance baseline and staying on top of the SLA, especially during the earliest stages. Finally, for an agreement of any substantial size or duration, consider getting an experienced outsourcing attorney to negotiate on your behalf.

Useful Links:

Levine, Blaszak, Block & Boothby, LLP

Using Performance Decrements in SLAs

“Smart Contracts Make Smooth Flights,” written by Justin Castillo, Levine, Blaszak, Block & Boothby

“Negotiating a More Perfect SLA,” written by Mark Johnston and Justin Castillo, Levine, Blaszak, Block & Boothby

“Negotiating Managed Network Contracts,” written by Deb Boehling and Bonnie Lo, Levine, Blaszak, Block & Boothby