Outsourcing agreements – digging down into KPIs, service levels and service credits

Service Levels (sometimes referred to as KPIs)

As discussed above, these are contractual commitments from the supplier as how the services in an outsource arrangement will be performed. For example, the supplier will respond to a default request within x hours.

The nature and extent of service levels in a contract will depend on what is being supplied and the importance of the supplies to the customer. If the supplies are business critical to the customer, then the supplier should expect a broad range of robust service levels designed to ensure a quality service.

Our general advice when agreeing service levels is that they should be:

• Clear and objective – service levels should be clear and capable of being objectively measured. Avoid subjective statements such as “in accordance with industry practice”

• Simple – the more complicated they are, the more difficult they are to measure and enforce and, as a result, the less effective they become for both parties;

• Focussed – on what is really important to the customer.

Breach of contract

Suppliers should take real care when agreeing service levels. Unless they are carefully drafted, a service level is a contractual obligation which, if breached, could entitle the customer to sue the supplier for breach of contract and claim compensation for any losses they have suffered as a result.

One way of doing this is stating in your contract that the services level are offered on a “reasonable endeavours” basis only.

Service credits

These are financial amounts which are set in the contract and become due to the customer if a service level is breached by the supplier. They are normally designed to offer reasonable compensation to the customer for its loss arising from a breach of service level.
Customers also like them because they create a motivation and incentive for the supplier to perform.
Suppliers may be prepared to offer service credits but should consider doing so on the following terms:

• Service credits should be at a reasonable, not punitive level

• A supplier should cap the aggregate level of service credits in any measurement period

• Ideally the service credit should be the customer’s sole and exclusive remedy arising from the breach of service level – a supplier should not pay a service credit and then get a compensation claim on top from the customer.

Service levels and service credits are complex contractual arrangements and we would recommend taking legal advice on these to ensure that they are fair and appropriate in any given situation. Contact Steve Thomas on 01242 246 489 or at [email protected]