Management Information Systems, 13TH ED.
MANAGING THE DIGITAL FIRM
Kenneth C. Laudon ● Jane P. Laudon
continued
Learning Track 3: Service Level Agreements
Service level agreements (SLAs) are contracts between firms that formally define the level of
service between a purchaser of services and a vendor of services. Contracts are a promise between
individuals and firms to perform a service. Some contracts are oral agreements, while others
Originating in the telecommunications industry to formally define the level of telephone voice
service that telephone companies would provide to purchasing firms, SLAs have spread to all areas
of business which involve services from human resources to marketing, management, logistics and
information technology.
Service level agreements provide an opportunity for the purchaser of services to precisely specify
the level and quality of service to be provided, to implement business best practices and world–
Chapter 5: IT Infrastructure and Emerging Technologies
Chapter 5 Learning Track 3 2
continued
SLAs have become very important in the information technology and systems areas of busi-
ness firms. As firms increased their outsourcing of IT services beginning in the late 1980s,
SLAs became the primary management tool for governing the relationship among the parties.
Information Systems Service Level Agreements
In the information systems world, service level agreements cover a very large variety of IT services
provided by outside vendors. Firms use SLAs in the systems area for several reasons:
◆ Identify and define the customer’s needs
◆ Provide a framework for mutual understanding
◆ Provide a framework for charging and pricing services
◆ Simplify complex issues
Chapter 5 Learning Track 3 3
TABLE 1 Common Services Governed by Service Level Agreements
SERVICE SERVICE LEVEL EXAMPLES
Service Desk Average response time
Hardware support Processing speed; transaction cost
Software support Version control
Software maintenance Hourly charges for routine changes
Service Level Agreement Issues
While service level agreements are one of the major tools for governing the relationship between
the purchaser and providers of service, they have many limitations and pitfalls as well. Two of
the most common pitfalls involve incomplete contracts and information asymmetry, but there are
other issues as well.
Incomplete contracts. Some important aspects of a relationship cannot be described in a
contract. Contracts are never complete in the sense of defining every possible contingency and
Information asymmetry. In most contracting situations, the participants have unequal amounts
of information. Typically, the vendor of a service knows much more about the costs of providing
the service than does the purchaser because they are specialized on this service and have many
years of experience. Moreover, the purchaser quite often knows very little about their own inter–
nal costs for providing the service. e vendor is incentivised to use this information disparity to
Chapter 5 Learning Track 3 4
Managing complexity. Contracting costs. ere is a cost to all contracts. Large scale service
level agreements, say above $10 million, can become quite complex. Some of the largest SLA
contracts go above $100 million. e SLA itself becomes a very complex, long document which
Enforcement costs. Termination costs. When parties fail to perform, it can become very expen–
sive to terminate the contract and even more expensive to allocate damages. When the vendor
REFERENCES:
ere is a very large literature on contracts and service level agreements. Here are just a few references to get
started:
Jacques Bouman, Jos Trienekens, Mark Van der Zwan, “Specification of Service Level Agreements, Clarifying