Incentivizing Performance In Cloud And Outsourcing Contracts: Key Points

August 15, 2015 Off By David

Grazed from Mondaq. Author: Steve Gold.

Defining and incentivizing high-quality performance is often key to the structure of complex service or technology-oriented agreements. In this class of agreements, merely having a performance warranty that answers a yes or no question – in breach or not in breach − just doesn’t do the job. To augment those performance warranties, a common approach is to use a "service level agreement" (SLA).

The SLA is a familiar and essential feature in information technology-oriented agreements, such as outsourcing, cloud computing, software-as-a-service and the like. When properly structured and negotiated, SLAs can be an effective tool for more nuanced vendor management than a performance warranty alone could afford. This article will catalog some of the best practices for structuring a service level agreement, and discuss elements enterprise corporate counsel can put to use in the IT and service contracts that come across their desk…

1. Specify Metrics. An initial task in developing an SLA is to specify the metrics that will be utilized. Metrics should meet three criteria. First, they must be objectively measurable without undue overhead or difficulty. While it may be desirable, for example, to measure how long a particular process takes in order to incentivize minimizing that time, if there isn’t a way to record when the process starts or stops, that just can’t be a useful measurement. Second, they should be truly reflective of performance quality. Third, they should be within the control of the party whose performance is being measured. The last point may seem obvious, but identifying circumstances in which a metric is affected by the actions of others is not always easy…

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