Service Level Agreements
A properly constructed Service Level Agreement ("SLA") is an essential part of any effective long term service delivery engagement. With that advent of so many different, hosting, Software as a Service offerings in the marketplace the SLA is the primary mechanism used to help keep those hosted and service offerings on-track over the term of the service delivery obligation, often referred to as the subscription term.
In an effective SLA you need to look at the metrics that combine in order to provide the customer with the desired service, perhaps the timely ability to access the host would be one metric; the ability of the SaaS provider to respond to a service claim within a stated period of time (the time specified might vary based upon the severity of the service issue (critical, moderate, minor are often used)), downtime might be another metric. Typically an SLA promises a service response within a designated time, that time is measured against actual performance and reported monthly and quarterly, and where the actual result achieved for that month is less than the promised SLA response metric then the customer would generally be entitled to a service credit. The service credit is most often calculated as a % of the monthly SaaS invoice rate.
As you review the SLA please remember while it may seem the same as a warranty in some respects, i.e. a defect, a response and a remedy; in other ways its fundamentally different. The SLA doesn't tie into your service acceptance whereas the warranty does; therefore the SLA does not impact revenue recognition, and aside from the Service credit remedy applied to the next subscription fee, the SLA does not impact the vendors transactions cash flow; whereas often a portion of the purchase price for a good or service is tied to completion of the associated warranty period.