Vendor contracts have different sections, including pricing, confidentiality and insurance. These areas are often standardized by your company's legal and purchasing departments. One section that operations managers can greatly influence is the service level agreement (SLA).

In simplest terms, the SLA states what the vendor will perform for the customer, and how their performance will be measured. Normally, the SLA will include a penalty clause if the vendor fails to meet acceptable standards. Other than pricing, the SLA can cause the most arguments during negotiations. But it shouldn't. A well-written SLA establishes a level playing field for the customer and the vendor. The customer knows what the vendor is supposed to do, and the vendor knows what the customer expects. Both parties will start with a mutual understanding of the shared goals for the contract.

Of course, the key phrase is "a well-written SLA." This means that legalese is set aside, and everyday language is used. Four points to be covered in an SLA are:

  • What are you going to measure?
  • How are you going to measure?
  • What's the acceptable level of service?
  • What's the remedy when service levels aren't met?

Managers can use this format for every kind of contract. For this article, we'll consider three types of contracts equipment contracts, special service contracts and outsourcing contracts. Equipment contracts involve equipment performance, maintenance and repairs. Special services can include cleaning services, internal mail services and courier services. Outsourcing contracts could be print, mail or some combination of the two.

What Do You Measure?

There are multiple factors in any contract that can be measured to the smallest part of a machine, to the tiniest detail in a mailing. Limit the measurements to the key areas. Focus on the elements that lead to success.

With equipment, measure throughput (the number of pieces actually processed) and not speed. If the machine is running fast, but jams often, the throughput will decline. For repairs, measure the response time from when a call is placed to when the technician arrives. Also measure downtime from when the call is placed to when the machine is running again. Another good measurement is the number of pieces processed between service calls.

Special services SLAs should emphasize the factors most visible to the client. It's a good idea to track not just when the work is completed, but when the crew begins. For cleaners, a contract might specify when trash barrels are emptied, how often rugs are vacuumed, floors washed, etc. Internal mail services must measure the accuracy of deliveries (the right piece to the right department), deadlines for delivering overnight packages and processing daily mail. Similarly, a courier services SLA should include promptness, accuracy and meeting schedules.

When outsourcing print and mail, the document quality, mailpiece accuracy and deadlines all come into play. Is the quality of the print legible? Are the precise colors used? Is every piece accounted for? Does each envelope have the correct contents? When did the mail enter the U.S. Postal Service? When did the pieces get delivered to customers' addresses?

How Are You Going to Measure?

The methods used to track performance must be accurate and easy to use. Creating a system that requires manual entries or takes too much time to enter information can lead to errors and worse. Making operators spend hours filling out forms can generate resentment and ill will. Whenever possible, use existing or automated systems.

Most production equipment has internal meters that track time and clicks. Often this information can be accessed electronically. There's also third-party tracking equipment and software that can be added to almost any device. Repair departments use automated systems that track when calls are placed, technicians dispatched, etc. You may want to supplement the vendor's system with a simple spreadsheet that's completed whenever a call is placed.

ID cards are a great way to track when people arrive at work and when they access different areas of a building. Barcodes attached to wastebaskets, in-boxes and delivery points can be scanned by handheld devices with minimal impact to workflow. And simple spreadsheets for any ancillary service can be used to track additional information.

Require print and mail vendors to have a system that tracks work as it moves through the process. Whenever possible, have cameras or scanners verify the accuracy of information. Daily, weekly and monthly balancing reports should be reviewed by the vendor and the customer. Intelligent Mail Barcodes will monitor mailpieces as they move through the postal system.

What's the Acceptable Level of Service?

The goal for any contract should be 100% accuracy, timeliness and customer satisfaction. Humans, and machines built by humans, will occasionally make errors. So the acceptable level of service may have to be lower than 100%. But not too much lower.

Throughput levels should never be lower than 90% of the standard. Equipment should have a minimum 95% up-time (calculated by the hours the machine is functioning divided by the number of business or operating hours). Service calls should meet the established response time more than 95% of the time.

Services need to have even higher standards. Accuracy levels must be in the high 90s (98% or 99%). Completion times should be met within 4% of the agreed standard.

Technological improvements have pushed print and mail standards very close to perfection. While there may be some leeway with meeting deadlines, there's none for printing or mail processing errors. Success rates for meeting deadlines should be set at 98%, and processing accuracy set at 99%, or higher.

What's the Remedy When Service Levels Aren't Met?

The purpose of an SLA is not to punish vendors for errors or missing service levels. The purpose is to establish methods of working together to meet the goals and achieve mutual success. The SLA should include steps to be taken when goals aren't met, as well as financial penalties for the vendor.

The first step must be immediate notification to all parties. If the vendor discovers that they have made an error or missed a deadline, they need to let the customer know right away. Similarly, if the customer uncovers a mistake, or receives a complaint, they should notify the vendor.

After the notification, research takes place to find out why the mistake occurred. Only by uncovering the reason for an error can steps be taken to prevent it from recurring. Both parties should maintain a log of when mistakes happen, what was the cause and what corrective action was taken.

The customer and vendor should review the log together on a regular basis. These meetings may uncover additional issues that need to be addressed. Are the same problems still happening? Have the corrective actions worked? What other steps may be needed?

At the beginning of a contract, or if there have been significant problems, the performance reviews should take place monthly. After a relationship has been established, or problems have become infrequent, a quarterly review is sufficient.

Penalties are a necessary part of an SLA. There must be consequences to not meeting standards, and financial penalties can be applied with any contract. Any penalty should be substantive, yet fair.

Some contracts attach a fixed dollar amount for an error or missed service level. For example, a company may agree to pay $100 for every mistake, or $10,000 if standards fall below a certain level over a quarter. Usually, the amount owed is subtracted from the next invoice. In some cases, the vendor is required to write a check.

Another method is to base the fines on a percentage of the contract. With this type of agreement, 1% to 5% may be deducted from the monthly bill if the vendor fails to meet the standards of the SLA. This is very common if volumes and dollars spent fluctuate.

If the penalty is the "stick" with an SLA, what's the "carrot"? Vendors may ask for a bonus if they exceed the standards set for an SLA. This isn't a best practice and should be avoided. The goal must always be 100% accuracy and timeliness. So where's the incentive to exceed the established standards? The extension of the contract, or the next sale.

Internal SLAs

Operations managers should establish SLAs with their internal customers as well. The SLA should include standards, measurements, reviews and remedies. The only difference will be in the penalty aspect. Most companies won't allow internal payments.

Of course, there's the prospect of a much greater penalty than paying a percentage of a contract. If an internal operation fails to meet the established level of performance, the work may be outsourced to a third-party. Or in some cases, the operations manager may lose his or her job.

However, an SLA actually reduces these risks. With clear benchmarks, metrics and reporting, a well-run operation will shine. Their customers, and management, will be assured they're receiving the best possible service.

Good for the Customer, Good for the Vendor

A service level agreement is one of the best tools in managing the relationship between service providers and their customers. Everyone involved knows what's expected and what will occur when those expectations aren't met. Whether writing a contract with a vendor, or discussing performance levels with your internal customers, include an SLA.

Mark M. Fallon is President and CEO of The Berkshire Company. He has been described as "The best kept secret in the mailing industry." For more information, contact him by calling 508-485-9090, emailing or visit the company online at