We recently took an indepth look at what service level agreements mean for your organization. These important agreements define the working relationship between two parties, and their expectations for performance. But what happens when a vendor is unable to meet their performance level obligations?

That is where service credit requests come into play.

Today, SVT will explore this important aspect of vendor contract management by discussing what happens when there is a breach of SLA, and how to manage service credit requests. 

What Are Service Credit Requests?

As a service vendor, you are obligated to provide a certain level of service to your clients. These performance requirements are defined in writing by your service level agreement (SLA). SLA requirements can include things like uptime standards, incident response times, security level requirements, and other performance based metrics. 

If a vendor is unable to meet these contractually obligated performance standards, it can result in a breach of the SLA. When a breach of SLA occurs, the client may demand a service credit or even termination of the underlying agreement for repeated or lengthy failures. 

A service credit is a way of compensating a client for service disruptions or failure to meet other levels of service as defined in an SLA. Service credits ensure that a client receives the value of the service they paid for, even when things don't go according to plan. 

To be eligible for a service credit, a client must be able to show that the contracted vendor has failed to achieve the performance requirements outlined in the SLA.

How Do Service Credit Requests Work?

A key part of vendor contract management is determining the criteria for when service credits can be applied. These terms must be explicitly stated in the service level agreement to be enforceable. 

Some common criteria include the severity of the disruption, the duration, and the overall impact of the disruption on the client's business.  

How Are Service Credits Calculated?

There are several methods for calculating the value of service credits. The methods to be used should be explicitly outlined in the SLA. Some common forms of calculating service credits include:

• Percentage Based Calculations - These deduct a fixed percentage of the monthly service fee per hour of service downtime or performance interruption. 

• Tiered Percentage - This method applies a different percentage discount for different types of service issues. For example, a critical outage may have a higher tier of service credit applied compared to a minor disruption. 

• Per Incident Credits - A fixed credit can be issued for each individual incident. This can also be tiered based on the severity of the incident. 

• Time Based Calculations - A specific hourly credit rate may be applied based on the number of hours of downtime or performance interruption. 

In nearly all cases, service credits are determined by the severity of the incident, the duration of the outage/disruption, and/or the impact on the customer's business. 

How to Handle a Service Credit Request

As a service provider, you will inevitably have to handle a service credit request. That makes it essential to have a clearly defined process for handling service credit requests in your service level agreements. Your SLAs should be specific in defining the timelines for submitting, reviewing and approving service credits. Here is a sample process for effectively handling a service credit request. 

1. Document the Incident - Gather incident reports, system logs, and any other relevant data about the incident. 

2. Evaluate Your SLA - The documentation gathered in step 1 will be used to assess the impact of the service disruption with respect to the performance metrics outlined in the SLA. If the disruption causes the service to fall below the standards set, then the customer may be eligible for a service credit. 

3. Calculate the Service Credit Amount - The method for calculating service credits should be specified in the terms of the SLA using one of the methods mentioned above. Severity of outage, duration, and business impact are all used to calculate the impact of a breach of SLA. 

4. Issue the Credit - Once you've gathered all the documentation and calculated the credit amount, you can automatically issue the credit to the client's account.

5. Review the Issue Internally - At this point, it's best practice and frankly good common sense to review what caused the service outage and take steps so that it doesn't occur again. 

Examples of Breaches of SLAs That Can Result in Service Credit Requests

Lastly, we'll look at several examples of breaches of SLAs that can result in a service credit request. 

Cloud Service Provider Outage

The SLA between a cloud provider and client may call for uptime of at least 99.99%. A major outage occurred, exceeding the allowed downtime. Assuming a monthly fee of $10,000, the client would be eligible for a service credit calculated based on the excess downtime. The specific credit amount would depend on the terms of the SLA, which might involve a fixed rate per hour of downtime or a percentage of the monthly fee. 

Software System Failure

A software vendor has released an update, however a bug causes the new update to crash the system, keeping the system down for 2 hours. The SLA specifies a per incident fixed credit for overages more than 60 minutes, set at $500. A $500 credit is issued to the client as compensation. 

Network Connectivity Issue

The SLA guarantees an uptime of 99.95%, yet connectivity issues caused one incident for a total of 3 hours of downtime. The SLA calls for a tiered service credit. Service outages are considered a tier 1 outage, with a fixed credit of $1,000 being issued for outages over 1 hour, but less than 5. 

Conclusion

Clients rely on service providers to fulfill their service obligations. When those obligations are not meant, service credits are issued to help the client recoup the loss of service. Because of the financial stakes, it's critical to ensure that your vendor contracts explicitly state the agreed upon service levels, as well as outline procedures for calculating the value of service credits to be issued. 

At SVT Law Advisors, we have been helping organizations with vendor contract management and other common legal issues for over 25 years. SVT can draft comprehensive service level agreements that allow you to enter into business relationships with confidence.

Don't wait any longer to get the legal direction and advice your organization needs to effectively navigate vendor contracts. Contact SVT today for a free consultation and let us show how we can help you make the most of your professional business relationships.