What is a Service Level Agreement (SLA) and the key performance indicators for measuring it?

Whether you are a shipping company, a retailer, or any other institution operating in the service sector, ensuring the delivery of exceptional customer-satisfying services is indispensable. This is where the importance of Service Level Agreements (SLAs) comes in.

But what is a Service Level Agreement? What are the elements of this agreement? Who is responsible for concluding it? And how can Service Level Agreements revolutionize your business and pave the way for its success?

We will learn about all these questions and more in today's topic.

Let's follow along...

What is a Service-Level Agreement (SLA)?

A Service-Level Agreement (SLA) in logistics operations is an agreement between two parties, the service provider (a shipping company, for example) and the beneficiary (the merchant or brand owner), to guarantee the rights and obligations of each. The agreement acts as a contract that includes the elements of the terms of the agreement, as well as policies to protect the rights of each party.

For example, you have an online store through which you sell some products, and you certainly need a shipping company to deliver these products. To ensure your rights with the shipping company, you will need to sign an agreement with the shipping company that includes the logistics services you will benefit from, regular reports and reviews, as well as quality standards or performance metrics for these services in exchange for the price you will pay, all of which is agreed upon by both parties.

What are the reasons for implementing a Service Level Agreement?

There are many reasons that drive institutions to implement a Service Level Agreement, including:

• Setting Expectations between the Service Provider and the Customer

A Service Level Agreement helps set a clear framework for expectations between the two parties, preventing misunderstanding and defining what the customer can expect from the service. By clearly defining standards and specifications, the agreement ensures that both parties are fully aware of the required performance level and the associated conditions.

For example, if the customer expects delivery within 24 hours while the service provider plans to deliver within 72 hours, this may lead to customer dissatisfaction. By implementing an SLA, standards are clearly set from the beginning, which reduces the likelihood of disputes and helps build a more transparent and stable relationship between the two parties.

• Improving Service Quality and Ensuring Adherence to Standards

One of the most important reasons for implementing a Service Level Agreement is to ensure the provision of high-quality services according to fixed and agreed-upon standards. The agreement defines performance metrics such as response time, delivery time, and availability level, which obliges the service provider to adhere to these requirements to ensure customer satisfaction.

• Reducing Disputes and Conflicts between Parties

A Service Level Agreement helps reduce disputes and conflicts between customers and service providers by clearly defining obligations and rights. When a problem occurs, the agreement can be referenced to determine whether there has been a violation of the terms, which facilitates the resolution of disputes fairly and based on clear provisions.

For example, if there is a delay in delivering a shipment, the customer can refer to the Service Level Agreement to find out whether they are entitled to compensation. Instead of relying on personal interpretations, the agreement provides a formal framework that can be used to objectively and professionally settle issues.

• Gaining Customer Satisfaction and Building Trust

When customers receive service according to the agreed-upon standards, this increases their level of satisfaction and trust in the service provider. An SLA helps build a positive reputation for the institution and enhances customer loyalty, which leads to increased opportunities for retaining them in the long term.

For example, if a shipping company commits to delivering orders within the specified period and provides accurate tracking updates, this gives customers a sense of reliability. When customers trust that the service will always meet expectations, they tend to deal with the company repeatedly, which enhances its success and growth.

• Enhancing the Ability for Forecasting and Strategic Planning

A Service Level Agreement (SLA) provides a clear framework that allows both customers and service providers to predict future performance levels and plan accordingly. When there are fixed standards, it becomes easier for institutions to set accurate action plans and make decisions based on clear data.

• Legal Compliance and Conformity with Regulatory Regulations

In some sectors, such as the financial sector or the healthcare sector, Service Level Agreements are necessary to ensure compliance with legal regulations and regulatory requirements. These agreements help ensure that the services provided adhere to applicable laws, which reduces legal risks and exposure to penalties or fines.

• Enabling Continuous Improvement and Development Processes

Service Level Agreements allow service providers to periodically monitor performance and analyze the extent of their commitment to the agreed-upon standards. Data extracted from the SLA can be used to identify weaknesses and continuously improve service quality.

For example, if performance reports show a recurring delay in certain geographical areas, the company can improve shipping strategies or add new warehouses to reduce delivery times, contributing to continued performance improvement and enhancing competitiveness.

We point out that the Service Level Agreement has multiple types, which we will review in the following paragraph.

Key types of Service Level Agreements

There are several types of Service Level Agreements, each with different uses based on the nature of the relationship between the contracting parties, and here are the most prominent:

• Customer-Based SLA

This is a comprehensive agreement that defines all services a specific customer will receive from the service provider within one contract, regardless of the type of services provided. This agreement is customized according to the customer's specific needs, which makes it more flexible compared to other types of Service Level Agreements.

Its clauses usually include performance standards, response times, availability levels, and technical support mechanisms, ensuring the provider's commitment to delivering integrated services according to the customer's requirements.

This type of agreement is used in cases where a customer deals with a single service provider for several related services, such as companies that provide internet services, website hosting, and technical support to one customer under one contract. This facilitates the negotiation and management process, as the customer deals with a unified agreement covering all their needs instead of dealing with several separate contracts for each service.

• Service-Based SLA

This type focuses on a specific service provided to all customers who benefit from it, where performance and quality standards for this service are determined regardless of the customer's identity. This agreement is suitable for standardized services provided by institutions, where the same standards and terms apply to all users, which facilitates the management and monitoring process for the service provider, and also reduces the need to customize separate agreements for each customer.

This type of agreement is used in cases where companies provide a single service to multiple customers, such as cloud computing service providers who set a specific service availability level (such as 99.9%) for all users. This allows the provider to set unified service standards, which helps improve operational efficiency and ensures that customers adhere to the same terms without the need for individual negotiation for each of them.

• Multi-Level SLA

This is a flexible model that allows customizing different levels of obligations according to different categories within the institution or based on user types. This agreement is usually divided into three main levels:

• Company level, where general standards are set for all users;

• Department level, which focuses on the requirements of a specific group within the institution;

• Service level, which sets performance standards for each specific service.

This type of agreement is usually used in large institutions that need to set different obligations for multiple levels of users. For example, a technology company might have a general agreement that sets the response time for all employees, but includes a dedicated level for the IT team that ensures a faster response for them, and another level that sets performance standards for specific services such as troubleshooting or system updates.

• External SLA

This type is usually used when an institution relies on an external service provider to deliver part of its operations, where the agreement defines the performance and quality standards that the provider must adhere to. This agreement focuses on ensuring compliance with customer requirements regarding service delivery speed, response time, availability, and failure compensation, which helps institutions avoid delays and improve operational efficiency.

An example of this is companies that rely on shipping service providers to deliver products, where the agreement can stipulate that orders must be delivered within a maximum of 48 hours, with penalties imposed in case of delay. These agreements help companies ensure that suppliers and shipping companies adhere to the required service level, which improves the customer experience and reduces operational risks.

• Internal SLA

This type of Service Level Agreement is used within the institution itself to define obligations and performance levels between different departments, where it helps improve internal coordination and ensure the efficient delivery of services. Unlike Service Agreements directed at external customers, this agreement aims to improve internal operations, which contributes to raising the efficiency of the institution as a whole.

For example, the IT department might sign an internal Service Level Agreement with the Human Resources department, guaranteeing the resolution of technical issues for the department's employees within 24 hours. This ensures clarity of expectations between different departments and enhances cooperation within the organization, leading to improved productivity and a smoother work environment.

• Consumer-Based SLA

This type focuses on providing standardized services to consumers according to pre-defined standards, where the service provider's obligations towards all customers are determined without the need to customize the agreement for each individual. This agreement includes standards such as delivery time, complaint response, and quality guarantees, which enhances service transparency and clarifies consumers' rights and expectations regarding the provided service.

For example, a shipping company might set a Service Level Agreement that specifies that all local orders will be delivered within 48 hours during peak times, with compensation provided in case of unwarranted delay. This type of Service Level Agreement helps improve customer satisfaction by setting clear standards that ensure the quality of the service provided.

The Importance of Service Level Agreements in the Logistics Sector

In fact, the importance of concluding a service performance agreement is not limited to the logistics field only, but there are many types of these agreements according to each industry, such as healthcare, e-commerce, banks, payment applications, and others.

But let's discuss the importance of agreements regarding the logistics industry between service providers and the customer.

• Ensuring Service Quality

One of the most important benefits of concluding a Service Level Agreement (SLA) between the service provider and the customer is ensuring the quality of the service the customer receives as clearly stated in the agreement, and not according to customer expectations.

• Defining Mutual Responsibilities between the Two Parties

Defining the mutual rights and obligations between the two parties is one of the most important elements of the Service Level Agreement, where the responsibilities of each party are clearly and specifically defined and these rights are observed during the preparation of reports and the evaluation or tracking of performance, thereby guaranteeing rights both when agreeing or disagreeing.

• Easy Service Performance Tracking

In the presence of rules and conditions in the agreement between the service provider (shipping company) and the customer (merchant), tracking the service performance level becomes easy and simple for the customer, as the agreement and all agreed-upon key performance indicators are reviewed regularly, and reports are prepared easily.

The customer (merchant or brand owner) is lucky in case of an agreement with a company or shipping gateway that provides them with a comprehensive control panel that includes the analytics and reports they need, such as Service Level Agreement (SLA) reports, so that they can track performance and prepare and import reports easily in a few simple steps from one place, whether they contract with one shipping company or more.

This is the case at Oto. Before you is an illustrative picture from the Oto shipping gateway control panel for Service Level Agreements analyses between the customer and the shipping company 👇

As shown before you, you can view reports up to 30 days, or specify another time range for more than 30 days.

Several points are displayed on this dashboard, such as the average order reception, the average time period for order delivery, and also the average order preparation period.

Thus, as a merchant and brand owner, you succeed in easily tracking the performance of the shipping company you contract with.

Here is another example of Service Level Agreement (SLA) performance analytics and how to view and track them via the Oto platform through your private account, such as the performance of the Pickup Service Level Agreement.

• Improving Service Quality and Performance

The existence of a Service Level Agreement between the customer and the service provider helps each of them define, track, and evaluate performance standards periodically. This helps them continuously identify weaknesses and strengths, enabling each of them to improve what they offer or their performance, which reflects positively on their work and improvement.

Elements of the Service Level Agreement

The content of the Service Level Agreement includes several key elements:

1. Description of the Provided Service

The elements and rules of the services provided by the service provider to the customer must be defined in clear and specific points that describe the features, advantages, and services provided to the customer, avoiding any expectations or guesses from either party.

For example:

• Shipping and delivery services.

• Storage services.

• Packaging services.

• Service distribution scope.

• Goods receipt services.

2. Defining Performance Standards

It is best to define the performance standards or metrics that will be tracked during the agreement period to ensure they are achieved by the service provider. These metrics are determined according to the customer's requirements.

For example, in the logistics field and the agreement between a shipping company and a merchant, these metrics will include:

• Average time period for shipment delivery.

• Commitment and accuracy in shipment delivery.

• Shipment security procedures.

• Technical support in normal cases and in emergency situations.

• How to deal with loss, damage, and the like.

3. Defining the Responsibilities of the Two Parties

As we explained earlier, defining the obligations and responsibilities of each party is important to ensure the rights of each, such as the cost of the service and the due time for payment, who is responsible for making decisions in urgent matters, and problem management, and so on.

4. Defining Communication Methods

You might think that communication between the service provider and the customer is easy, but it also needs specific rules and conditions. The available communication method for each party must be defined, whether normal communication or communication in case of emergency to manage a problem.

5. Defining How to Prepare Reports

It is necessary to include the mechanism for preparing reports and their format among the rules of the Service Level Agreement and the agreement between the two parties that this method is clear and understandable to them to ensure maximum benefit from it and the success of performance tracking perfectly.

6. Defining How to Manage Problems

To ensure the rights of both parties, it is best to define methods for solving and managing problems and emergencies, and what are the emergency communication methods for the support team for either the service provider or the merchant. The performance of the problem-solving method is tracked later according to the agreed-upon Service Level Agreement (SLA).

7. Conditions for Renewal or Termination of the Agreement

Service Level Agreements need renewal and restructuring of the contract and the agreement again according to the development and growth of the service beneficiary's needs.

Therefore, it is necessary to include these rules in the agreement and how they can proceed, whether for renewal and what are the conditions for renewal or termination, and whether there are penalty clauses or the like.

Key Performance Metrics for Service Level Agreement

There are many Service Level Agreement performance metrics that must be relied upon to measure performance, including:

• Response Time

Aims to measure the duration it takes the service provider to respond to the customer's request or begin dealing with the problem. For example, if a customer submits an inquiry or reports a problem, the SLA defines the maximum time the provider should take to respond, such as "respond within 2 hours."

• Resolution Time

Refers to the time required to solve the problem or complete the request after receiving it. This metric helps ensure the speed and efficiency of the service, such as setting that technical fault repair must be done within 24 hours of reporting it.

• Uptime Percentage

Expresses the percentage of time the service is available to customers without interruption.

• First Call Resolution (FCR)

Is responsible for measuring the percentage of problems or inquiries that are resolved on the first contact without the need for additional follow-up. The higher this rate, the greater customer satisfaction and the lower operational costs.

• Delivery Accuracy

In shipping and delivery services, this metric measures the percentage of orders delivered on time without errors.

• Error Rate

Is responsible for measuring the number of errors or problems that occur during service delivery, such as orders that were not processed correctly or technical issues faced by customers. This metric helps improve service quality and reduce future errors.

• Customer Satisfaction Score (CSAT)

Is usually measured through customer surveys that reflect their level of satisfaction with the provided service. This metric allows the service provider to evaluate its performance and work to improve the customer experience.

• SLA Compliance Rate

Measures the extent of the service provider's commitment to the terms of the agreement, such as the percentage of requests or problems handled within the specified time frame. A high rate means that the service is operating efficiently and conforming to the agreed-upon expectations.

• Service Downtime Frequency

Defines the number of times the service breaks down during a specific period. If the number of outages increases, it may be an indication of the need to improve infrastructure or update operating processes.

Considerations for Selecting Service Level Agreement Performance Metrics

When selecting Service Level Agreement performance metrics, it is important to ensure that they accurately reflect service quality and help improve performance and meet customer expectations. Choosing the wrong metrics may lead to an unrealistic measure of performance or focus on aspects that do not affect customer satisfaction.

The following are the most important considerations that must be taken into account when choosing performance metrics:

• Alignment of Metrics with Business Objectives

It should be noted that the selected metrics are consistent with the general goals of the institution. They must reflect fundamental priorities and support the achievement of operational and strategic success. Metrics that do not serve organizational goals may lead to unhelpful results or unfocused efforts.

• Measurability and Traceability

Performance metrics must be accurately measurable using clear tools, as this helps ensure the possibility of tracking progress and continuous improvement. Metrics that are not measurable or rely on inaccurate estimates may lead to wrong decisions as a result of being based on untrue data.

• Direct Link to Customer Experience

Performance metrics must be directly relevant to the quality of service customers receive, as this helps improve customer satisfaction and increase their loyalty. Metrics that focus only on internal operations without considering the end-user experience may not reflect the company's true performance.

• Achieving Balance between Efficiency and Quality

Metrics should be chosen that contribute to achieving a balance between improving operational efficiency and ensuring service quality. Some metrics may focus only on speed without paying attention to quality, which may lead to providing an unsatisfactory service despite the efficiency of operations.

For example, if the Service Level Agreement (SLA) only measures the "initial response time" in the technical support center without looking at the "first call resolution rate," the response may be fast but without an effective solution, which negatively affects customer satisfaction.

• Clarity and Ease of Understanding

Metrics must be clear and easy to understand for both the service provider and customers, as this ensures transparency in performance evaluation and reduces disputes over the interpretation of results. Complex metrics or those that contain unclear terms may lead to misunderstanding and affect trust between the contracting parties.

• Verifiability and Auditing Capability

Performance metrics should be verifiable and auditable by all concerned parties, which helps build trust and ensures that there is no manipulation of data, which necessitates the availability of technical means or periodic reports through which the accuracy of measurement can be confirmed.

• Flexibility and Adaptability

Performance metrics must be adjustable over time to keep pace with changes in customer needs and the operating environment. Relying on fixed metrics without updating them may render them ineffective or inappropriate with changes in the market and technologies.

• Compliance with Regulations and Policies

In some industries, SLA performance metrics must comply with applicable legal regulations and policies, as this ensures legal compliance and spares the institution potential penalties.

When should the Service Level Agreement be reviewed?

In the following cases:

• Change in customer requirements or business needs: As companies grow and customer needs change, the terms of the agreement may become inconsistent with current expectations, which necessitates modifying them to ensure continued customer satisfaction and improve the service experience.

• Developments in operational processes or technology: Technology updates or process improvements may lead to a change in performance level or the provision of faster services, which requires modifying the SLA to comply with new capabilities and improve efficiency.

• Increase in the rate of complaints or non-compliance with standards: If complaints increase or reports show a failure to meet the specified standards, it is necessary to review the agreement to ensure the service provider is committed to improving their performance and reducing operational problems.

• Market expansion or introduction of new services: When entering new markets or adding new services, requirements and regulations may differ, which necessitates modifying the agreement to cover the changes and ensure compliance with local laws.

• Expiry of the agreement period or upon renewal: The agreement must be reviewed before renewal to ensure that it is still appropriate and aligned with the new goals, which prevents the continuation of ineffective or non-compliant clauses with the current situation.

• Legal or regulatory changes: In some sectors, regulatory bodies may impose new laws that require modifications to service standards to ensure legal compliance and avoid risks and penalties.

• Changes in agreements of suppliers or external partners: If the suppliers or partners on whom the service provider relies are changed, this may affect the service level, which requires reviewing the SLA to ensure continued consistency and quality.

• Improving market competitiveness: If competing companies offer better or faster services, the institution may need to modify the SLA to improve the service level, maintain its competitiveness, and attract more customers.

• Periodic evaluation and performance analysis: Even in the absence of clear problems, it is preferable to conduct a periodic review of the SLA using performance data and measuring customer satisfaction to ensure that it is still appropriate and effective.

In Conclusion,

A Service Level Agreement can be a decisive factor in the success of your business, enhancing cooperation and trust between you and business partners, improving the efficiency of operations and organization, and helping achieve customer satisfaction and build a strong loyalty base.

By defining and implementing an effective Service Level Agreement, you can take advantage of the opportunities this provides to make significant improvements in your business performance. Therefore, you must document service commitments and standards, and regularly evaluate and monitor performance to ensure everyone adheres to the terms and achieves the set goals.

Also, utilize the data provided by these agreements for development and growth, cooperate with strong shipping partners, and provide shopping experiences based on transparency and trust.

Do not delay setting your own agreement or starting to implement this strategy, and benefit from the advantages it will provide for you and your business; to be the tool that helps you achieve success and superiority in your trade.