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21st February 2019 No Comments

How To Avoid Disaster By Having Well-Drafted Service Level Agreements

In early 2018, KFC gave a real-life example of the importance of service level agreements (SLAs) in a manner which far outweighs anything one could learn at business school. The fast-food chain, owned by Yum Brands was forced to shut down hundreds of its UK based restaurants after its new supplier, DHL, experienced ‘operational issues’ which led to the non-delivery of chicken, fries, coleslaw and other menu items

It was suspected that DHL and its software partner, Quick Service Logistics, failed to properly match up data from KFC’s ordering process to its new system. Franchisees used to just-in-time delivery simply ran out of stock.

In a case of ‘chickens coming home to roost’, a humbled KFC returned to its original supplier, Bidvest Logistics, shortly after the fiasco in which it tried to save money by going with a cheaper provider.

Bidvest’s Paul Whyte happily crowed in a press statement:

“We are delighted to welcome KFC back to Bidvest Logistics. As the UK’s leading foodservice logistics specialist, we understand the complexities of delivering fresh chicken. KFC is a valued customer, and we will provide them with a seamless return to our network.”

Note the dig at his rivals in the statement? But who could blame Mr Whyte, who undoubtedly made KFC pay through the nose to have orderly distribution restored? After all, Bidvest was forced to make 225 staff redundant after losing the KFC contract.

Fortunately for KFC lovers, all is now well in the world; there has not been a single delivery mishap since.

The KFC incident shows that, although perhaps dull, accurately drafted SLAs can make or break a business. Mostly used by IT companies who are providing managed support services, a badly drafted service level agreement can cause untold grief, financial losses and significant reputational damage.

What is a service level agreement?

An SLA determines how a supplier will deliver their services to a company. Crucially, the agreement will set out the metrics regarding how the delivery of service will be measured and remedies and consequences if these performance measures are not achieved.

Why should I put a service level agreement in place?

They say nothing is certain but death and taxes. I would add another factor for the modern age – computer system outages. For this reason, SLAs are an essential element of any long-term IT supplier relationship, ensuring delivery objectives are meticulously set out, as well as the basis for measurement of performance.

For example, an SLA may define what is classed as a Business-Critical Failure. This could take the form of a software or firmware error which materially impacts the operations of the customer’s business, the marketability of its service or product, prevents staff from doing work, or disables major functions of the software. A perfect case in point being the O2 outage of December 2018 that affected over 30 million customers who were unable to use mobile data across a two-day period. The outage was the fault of network infrastructure giant, Ericsson, who had inadvertently allowed a software certificate to expire.

When it comes to how a supplier would deal with such an incident, an SLA should stipulate how swiftly a support request should be acknowledged, and the number of hours allocated for the supplier to fix the problem. The agreement should then make explicit that if the provider fails to fix the problem within the set timeframe, the customer will be entitled to a remedy, for example, a service credit. Or in the case of O2, potentially tens of millions of pounds in compensation – not to line their CEO’s pockets, but to pass on to their affected customers.

So what can go wrong in a service level agreement?

As with all contracts (and most things in life), the devil is in the detail. Or lack thereof. For example, an SLA may state that the supplier must keep systems available at all times. But what is meant by ‘available’? And does ‘at all times’ mean 24/7 or just office hours?

Suppliers fear that an SLA may leave them exposed to multiple breaches, some of which could be the customer’s fault. And customers are afraid that if they lay down draconian penalties to rival that of the Spanish Inquisition, suppliers will simply take their monthly revenues and never answer their phone or emails when a problem occurs.

How can careful drafting help avoid SLA disaster?

For both supplier and a customer, a respectful, long-term relationship benefits both parties. The longer someone works with you, the more they understand your systems and business, leading to more rapid response times. And for suppliers – well we all know it takes far less resource to keep a client than to find a new one.

A well-drafted SLA can ensure relationships are maintained and all parties understand what is expected of them. And guess what? As well as penalties for missing targets and SLA can include rewards for consistently meeting them and other examples of over-achievement.

Contract termination leads to expense, wasted time, and occasionally negative publicity. Therefore, it should be a last resort. It is far better to insert remedy and alternative dispute resolution clauses to provide for serious breaches of service levels.

At Technical Terms, we can ensure your SLAs do not lead to a PR catastrophe as experienced by KFC and O2. We take the time to work out the expectations of both parties to the SLA and ensure there is no ambiguity in the drafting. Doing so will ensure your commercial relationships are preserved and the best interests of your business protected.

Technical Terms provides in-depth legal advice and drafts bespoke commercial contracts. If you require further information on how you can enjoy less risk, more opportunities and greater control of your business, please contact us on 01904 899794 or message us

Categories: Contracts

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