Drafting Service Level Agreements: Best Practices for Corporate and Technology Counsel Structuring Key Provisions, Anticipating Common Areas of Dispute, and Streamlining Negotiations Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1. TUESDAY, MARCH 20, 2018 Presenting a live 90-minute webinar with interactive Q&A Matthew A. Karlyn, Partner, Foley & Lardner, Boston
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Drafting Service Level Agreements: Best
Practices for Corporate and Technology
Counsel Structuring Key Provisions, Anticipating Common Areas of Dispute, and Streamlining Negotiations
Commitment from provider to provide the services to an agreed standard
Incentivize provider performance
Ensure customer pays for what it gets
Cooperation between customer and provider
Builds trust
Service levels are a critical part of information technology agreements – invest the time and resources to negotiate appropriate service levels and corresponding remedies.
Specific information related to Service Levels commonly located in exhibits to a master services agreement
Reference in the master services agreement to the service level requirements in the exhibits – The MSA typically states that a provider will provide services
– The SOW typically states what will be provided
– The SLA typically states how the services will be provided
Some service level-type requirements that are commonly found in the master services agreement and not in an exhibit: – Root cause analysis and resolution
– Cost and efficiency reviews
Warranties and other contractual terms are important but – Difficult to enforce
– Damages are hard to prove / might be capped by limitation of liability
except as set forth below in this Section 1.1, for a period not to exceed the first thirty (30) calendar days (the “Initial Disaster Period”) following the declaration of a disaster, as described in the Disaster Recovery Plan, and while any affected Services are being provided by the disaster recovery services provider, Provider shall be excused from complying with the Service Levels that, as a result of the disaster, cannot be met through the exercise of best efforts; provided, however, that, (a) during the Initial Disaster Period Provider shall use its best efforts to comply with the Service Levels, and ensure that the disaster recovery services provider complies with the Service Levels, with respect to the affected services, (b) in no case shall Provider be excused from complying with the Service Levels that are not materially affected by the disaster, (c) in no case shall Provider be excused from complying with the Service Levels with respect to Services that continue to be provided by Provider in the same manner notwithstanding the disaster, (d) in no case shall Provider be excused from complying with the Service Levels that can otherwise be met through the exercise of best efforts, and (e) notwithstanding the foregoing or anything to the contrary contained in this Exhibit C (Service Level Agreement) or elsewhere in the Agreement, for any Availability Service Levels including D1.2, D1.4, D1.5, D2.2, D2.5 and D3.6, the minimum Service Level shall be reduced to ninety-eight percent (98%) and Provider shall, and shall ensure that Provider’s disaster recovery services provider shall, meet or exceed such ninety-eight percent (98%) Service Level during the Initial Disaster Period.
− Monthly Maximum At Risk Percentage: With respect to each calendar month, 18% of Provider’s fees for Services in such month
− Critical Service Level: Those Service Levels that have a performance credits associated with service level failure
− Key Performance Indicator: Those Service Levels that don’t have performance credits associated with service level failure
− Earnback: The right of provider to earn back performance credits for Critical Service Level failures
− Performance Credit Allocation Percentage: The total of the percentages (e.g., weights) of all Critical Service levels, which shall not exceed an agreed upon amount (e.g., 250%).
CSLs − Additions generally permitted after 12 or 18 months of service
− Service level set by a pre-determined process, for example:
Where measurement data exists, the average of the most recent 3 consecutive months of service
Where no measurement data exists, set up a measurement period and set service level
− Additions, modifications and deletions to CLSs don’t change the “performance credit allocation percentage” or the “monthly maximum at risk percentage”
All additions, deletions and modifications to service levels in accordance with change control process
Upon Provider’s discovery of, or, if earlier, Provider’s receipt of a notice from Customer in respect of, Provider’s failure to provide any of the Services in accordance with the Service Levels or this Agreement, Provider shall within a reasonable period of time (and in any event within five (5) business days), conduct a Root Cause Analysis to identify the cause of such failure. Provider shall, within the timeframes prescribed in the applicable Statements of Work, or if no such timeframes are prescribed in the applicable Statement of Work, within five (5) business days (or a longer period of time if Approved by Customer) after such discovery or notice: (i) correct such failure without charging Customer additional fees (except as provided below); and (ii) if such failure is not capable of being corrected within such timeframe, provide Customer’s with a written report detailing the cause of and procedure for correcting such failure as promptly as possible and provide Customer with reasonable assurances that (a) applicable corrective steps reasonably calculated to be a permanent fix have been taken, (b) a short term workaround has been implemented and Provider will use its best efforts to implement a permanent correction as soon as possible, and (c) such failure will not recur and that any correction shall not result in additional fees to Customer. If the Root Cause Analysis demonstrates that such failure was not caused by Provider, Provider shall timely cooperate with Customer in correcting such failure and Provider shall be entitled to reasonable fees, consistent with and not in excess of Fees charged for similar Services to Customer and similar services provided to Provider’s other customers, for such efforts to the extent involving incremental resources. If the Root Cause Analysis demonstrates that such failure was wholly or partially caused by Provider, Provider shall also timely cooperate with Customer in correcting such failure; however, Provider shall not be entitled to any fees.
Provider may stop delivering services to client, due to: − a server being down, − failure of a telecommunications link, − a natural disaster causing damage to the provider’s data
center, − provider withholding services because of a fee dispute, or − provider closing its business because of financial
difficulties
Result: − Client has no access to
the services (which may be supporting a critical business function), and
– Include a provision requiring the provider to continue to make the services available, even in the event of a disaster, power outage, or similarly significant event.
– Continuity of services should be provided through a secondary server, data center, or provider, as appropriate.
■ Review any related provider policies and procedures ■ Example:
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Scenario: Natural disaster is causing damage to the provider’s data center
Example: Provider shall maintain and implement disaster recovery and avoidance procedures to ensure that the Services are not interrupted during any disaster. Provider shall provide Client with a copy of its current disaster recovery plan and all updates thereto during the Term. All requirements of this Agreement, including those relating to security, personnel due diligence, and training, shall apply to the Provider disaster recovery site.
Scenario: Provider is withholding service because of a fee dispute
Provided Client continues to timely make all undisputed payments, Provider warrants that during the Term of this Agreement it will not withhold Services provided hereunder, for any reason, including but not limited to a dispute between the parties arising under this Agreement, except as may be specifically authorized herein.
financial stability, then consider adding a provision
that enables the client to identify provider’s
financial issues in advance
− Require the provider to deliver periodic reports on its
financial condition
Example:
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Scenario: Provider is closing its business because of financial difficulties
Quarterly, during the Term, Provider shall provide Client with all information reasonably requested by Client to assess the overall financial strength and viability of Provider and Provider’s ability to fully perform its obligations under this Agreement. In the event Client concludes that Provider does not have the financial wherewithal to fully perform as required hereunder, Client may terminate this Agreement without further obligation or liability by providing written notice to Provider.
Most common service level issues: − uptime − service response time − simultaneous visitors − problem response time and resolution time − data return − remedies
2 main purposes: − assure the client that it can rely on the services in its
business and provide appropriate remedies if the provider fails to meet the agreed service levels
− provide agreed upon benchmarks that facilitate the provider’s continuous quality improvement process and provide incentives that encourage the provider to be diligent in addressing issues
Services that fail to provide timely responses to its users are effectively “unavailable”
Therefore, include a service level that sets forth maximum response times for a customer’s use of the Services − a specific service level target depends on the facts and
circumstances in each case (e.g., transaction complexity, processing required, whether services are being accessed over an Internet connection or a leased line)
Example:
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The average download time for each page of the Services, including all content contained therein, shall be within the lesser of (a) 0.5 seconds of the weekly Keynote Business 40 Internet Performance Index (“KB40”) or (b) two (2) seconds. In the event the KB40 is discontinued, a successor index (such as average download times for all other customers of Provider) may be mutually agreed upon by the parties.
The client should also consider adding a data return service level, if services involve − a critical business function, or − sensitive client information
Measures the time period between the client’s request for data and the provider’s return of such data in accordance with the timeframe requirements of the agreement
Provides additional assurance that customer will be able to receive its data and continue to operate, in the event that provider stops providing services or concerns of a loss of service arise
Credits − Typically, remedies for failure to hit a service level start
out as credits towards the next period’s service
Right to Terminate − If repeated failure occurs, the client should have the
right to terminate the agreement without penalty or
having to wait for the current term to expire
Example:
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In the event the Services are not Available 99.99% of the time but are Available at least 95% of the time, then in addition to any other remedies available under this Agreement or applicable law, Client shall be entitled to a credit in the amount of $_____ each month this service level is not satisfied. In the event the Services are not Available at least 95% of the time, then in addition to any other remedies available under this Agreement or applicable law, Client shall be entitled to a credit in the amount of $_____ each month this service level is not satisfied. Additionally, in the event the Services are not Available 99.99% for (a) three (3) months consecutively or (b) any three (3) months during a consecutive six (6) month period, then, in addition to all other remedies available to Client, Client shall be entitled to terminate this Agreement upon written notice to Provider with no further liability, expense, or obligation to Provider.
10 year, $1.3B agreement to modernize welfare eligibility system
Indiana sued IBM for $1.3 billion, claiming breach of contract
IBM countersued for the value of equipment it was obligated to leave with the State
As a result of known modernization problems in other state systems, the agreement attempted to lighten performance obligations by disclaiming warranties of “uninterrupted or error-free operation” and referring to the modernization transition time-table as “preliminary”
“All in all, the State was not deprived of benefits it reasonably expected from the contract, although some benefits were not received as smoothly as the parties would have expected.”
While IBM’s performance was “premature and problematic” and key performance metrics for timeliness were “consistently missing the mark,” IBM’s performance was “steadily improving during 2009, especially in the months leading up to the October 2009 termination.” − Court reasoned that IBM’s failures had the “likelihood of
being cured” and were “apparently in the process of being cured.”
− Because IBM could, and did, pay liquidated damages whenever it missed a performance metric during transition, the Court found that IBM’s failure to meet those metrics did not constitute a breach of the agreement
The $12M award
− Included both the fair market value of the IBM equipment the State retained after termination
− Early termination close out payments
− Prejudgment interest (but not deferred fees or mandatory change fees)