As an IT service provider, you probably refer to service levels when marketing and selling your products. This is a vital way of demonstrating the quality of your services and attracting potential customers. However, you may face penalties if you fail to fulfil any claims you make about your service levels. You can offset this risk by limiting your responsibility to meet these performance requirements under your service agreement. This article explains:

  • what service levels are;
  • what a service credit is; and
  • your options to incorporate these concepts into your service agreement.

What are Service Levels?

A service level is a promise to provide your IT services in accordance with defined performance criteria. Such guarantees are common in the IT industry to assure customers that you will meet their expectations. 

For example, common types of services levels within the IT industry include:

  • uptime; and
  • response or resolution time.

The key performance indicators (KPIs) that you choose to measure whether you have achieved a service level can depend on:

  • the type of service;
  • what you are willing to offer;
  • what the industry standard is; and
  • customer expectations.

Uptime

An uptime service level typically states a percentage time that a hosted service will be accessible. The percentage of availability is your uptime. Your service agreement should detail this KPI and how it will be measured.

For example, a software as a service business might include a clause like this: “We will use commercially reasonable efforts to make our software as a service available at least 99.8% of the time during each calendar month”.

To ensure that you are not unfairly held accountable for failing to meet these service levels, you should also detail some exclusions for specific causes or contributing factors. These could include:

  • scheduled maintenance, where you have planned for the service to be unavailable for a period and have notified your customers;
  • third-party issues, such as where you outsource your hosting to Amazon Web Services and Amazon crashes; or
  • there is a natural disaster which impacts your ability to meet the uptime requirements.

Response or Resolution

A response or resolution service level sets out how quickly you will respond to or resolve a support request made by a customer. 

For example, you may promise to reply to support requests from your customers within two hours.

You may also commit to resolve that problem within 48 hours. 

For example, a response service level for a support request may read like this: “We will respond to any service request submitted via our support portal within one business day of receiving your submission”.

Support service levels are often categorised based on priority, meaning you agree to respond more quickly to a request which has a higher impact on the customer’s business. 

For example, you may choose to prioritise the support requests of customers experiencing an outage which prohibits them from using your service. On the other hand, a lower priority support request will have limited business impact, such as altering the type of access an authorised user has to the service.

What Are Service Credits?

Service credits are often included in IT service agreements as compensation for customers if you fail to meet your service levels. This means you will offer the customer a credit against future payments for your service to compensate for your inability to meet the agreed-upon performance standards.

Just like service levels, service credits can be graded so that a severe failure will attract a higher rebate than a minor failure. This ensures that the credit they receive is proportionate to the:

  • service level that you fail to fulfil; and
  • the severity of that failure.

It is a good idea to impose thresholds that limit the risk of your customers accruing too many service credits. You can achieve this by:

  • excluding minor failures from collecting any service credits; and
  • requiring that your service levels repeatedly fail before any granting any service credits.

For instance, your service agreement might outline that: “A customer will only accrue service credits where the service provider fails to meet a support request service level twice within a calendar month”. 

You could also choose to add a cap on the amount of service credits to which a customer can be entitled, such as 20% of the monthly fee.

What Are the Different Types of Service Levels You May Provide?

No Service Levels

In some circumstances, you may not need to promise service levels to your customer. Particularly, smaller customers are less likely to expect that you offer service levels.

The type of service you provide will also influence whether you need to offer service levels. If your service is critical to the operation of your customers’ businesses, they will likely want some certainty that it will be available when they need it. 

For example, an e-commerce business will want their web host to assure them of strong uptime service levels. This is because all of their sales depend upon the successful operation of their website. 

However, if your service is an additional tool which a customer only uses occasionally, they may be less concerned about service levels.

For instance, if a company uses cloud servers to back-up their data, they may not demand that you offer service levels. This is because their business does not depend on their capacity to access the back-up files.

If there are no customer expectations for service levels, it is in your interests to leave these out of your service agreement. This is because you want to avoid unnecessarily binding yourself to performance standards, which customers could use against you if an issue arises.

Service Levels Only

If your customers expect that you will offer service levels, you can choose to include these assurances in your services agreement. Despite making these promises, you do not need to offer compensation if you do not meet your service levels.

Under this approach, you will still set out the service levels that you agree to adhere to within your service agreement. However, you will not detail what happens if you fail to meet the service levels. In this scenario, the customer may be able to pursue the issue in court for breach of contract if you do not meet a service level. Although, this is unlikely as legal disputes can be a time consuming and costly procedure for customers.

You may also choose to draft your service levels in a way that reduces the degree of assurance that you are giving. 

For example, you could promise to “use commercially reasonable efforts to respond to all support requests within three hours” instead of outright committing to “respond to all support requests within three hours”. Qualifying the statement by claiming to do as much as is “commercially reasonable” will lower expectations upon you to fulfil the service levels.

Right to Terminate

You can also provide your customers with the right to terminate if you fail to meet your service levels. A right to terminate means that they can withdraw from your service contract earlier than you had agreed to.

For example, if your web hosting platform fails to meet the uptime that you promised six months into a one year subscription, your customer could terminate the agreement and seek a refund for half of the yearly fee that they paid.

As it involves potentially losing a customer, you should reserve the right to terminate for a serious failure to meet the service levels, such as repeated and extended outages to the service. 

However, assuming the service levels you set are readily achievable, the risk for you will be relatively low. Additionally, offering a right to terminate may satisfy the customer of your commitment to deliver a quality service and avoid the need to provide service credits. This can be favourable for your business because customers that may have accrued service credits for minor failures will generally not be able to terminate. This allows you to avoid financial loss to your business unless there is an ongoing material problem with your services.

Service Credits

You may need to offer service credits if you work with customers that expect you to provide compensation for your failure to uphold your service levels. When offering service credits, you need to clearly detail what the service levels are so that any under-performance can be accurately measured. You should also set out a system to calculate what compensation is required to offset certain issues.

The purpose of this is to reduce disputes over when service credits are due and the amount of credit due. In setting out how customers can accrue service credits, you should draft in exclusions to prohibit customers from collecting service credits where you are not responsible for the breach.

Where the customer is given service credits as compensation, this should be the customer’s only recourse for compensation. This means that you should prevent them from also having a right to terminate or bring a court claim for damages

Damages are a sum of money awarded by the court to a party who has suffered some kind of loss. If you fail to fulfil the service levels that you promised under your service agreement, the court can order you to compensate your client for any losses that this has caused.

You will need to expressly state this condition in your services agreement.

Multiple Forms of Compensation

In some circumstances, offering service credits to customers as the sole form of compensation may not be sufficient. You may also need to offer a right to:

  • terminate; and
  • seek monetary compensation.

It is not in your interests to offer multiple forms of compensation. This is because it creates more risk for your business to suffer financially. However, sometimes you must do so to attract your customer’s business. This is especially true if you work with large enterprises and the service you offer is essential to the functioning of their business.

If you offer multiple forms of compensation, you should ensure that your customers do not overly benefit. You can achieve this by constraining the way that a court calculates multiple forms of compensation to the customer. This will limit your financial accountability and risk.

For example, your service agreement should state that any service credits paid to your customer will be deducted from any monetary compensation ordered by a court. This prevents your customer from being compensated twice for the same service level failure.

Key Takeaways

As an IT service provider, you need to decide whether you will offer: 

  • service levels; and 
  • any remedies for a failure to meet those service levels. 

This will depend on the type of service you provide and the type of customers you work with. Where you include service levels in your services agreement, you should include limitations on how and when the service levels apply. You also need to clearly set out what remedies are available to the customer and place restrictions on those remedies. This is important so that you minimise your commercial accountability for any issues that occur out of your control. If you would like help drafting your service levels and appropriate remedies, contact LegalVision’s IT lawyers on 1300 544 755 or fill out the form on this page.

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