Insights from Gallagher’s HR & Benefits Technology Consulting Practice

With the vast majority of today’s HR software being SaaS (software as a service, or cloud-based), the relationship between an employer and their technology service provider is more important than ever. Too often, however, we see employers invest significant time (and money) in selecting, purchasing and implementing a best-fit solution for payroll, benefits, talent management or other HR functionality and then give little thought to the ongoing service they can expect from the provider. Enter the Service Level Agreement (SLA). 

An SLA is an agreement between two parties—in this case, an employer and their technology service provider—that spells out the services to be provided and related service goals (or guarantees), how they will be measured and the penalty for failure to meet these goals (typically a financial credit). 

The metrics included in an SLA are typically objective, e.g., system response time, meeting implementation target dates, file processing time, accuracy, customer call resolution, test scores and more. As a marketing tactic, some service providers also include subjective metrics, such as if the client is satisfied or happy with the product/service. We’d like to see all metrics shift to the subjective side as the reality is that, in most cases, any penalty applied will be minimal due to the application of formulas that reduce the penalty due to a client, e.g., measurement across a quarter. 

Standard SLAs

Most technology service providers have a standard service level agreement. We advise employer clients to accept the standard agreement, as is, for one year but advise the provider that you may want to revisit the SLA a year into a multi-year contract with the option to negotiate service metrics. In many cases, there will be no need for this, but it’s good to let the provider know you’re paying attention. 

SLAs typically come up for discussion after the contract has been signed. Ideally, if there’s to be any negotiation, it should occur before signing a contract when the employer has greater leverage. At the very least, ask if the provider has an SLA before signing a contract. If the answer is “no,” ask why. Keep in mind that some technology may require little or no service, so the absence of an SLA may not be a red flag. If service is a big concern, ask to review the SLA as part of the selection process and discuss any concerns at that time. 

Recently, we’ve seen a trend of providers limiting SLAs to large clients or offering only a token “uptime” guarantee to smaller clients. We think this is unfortunate but not necessarily a deal-breaker, as addressed later in this blog. For organizations that secure an SLA, keep the following tips in mind.

  • Leave old baggage behind. Just because your last technology provider had a problem doing “X”  doesn’t mean the new one will have the same problem. Bringing baggage from a previous service provider relationship to a new one is probably the most significant error we see clients make. Like in dating, it doesn’t bode well for the relationship to start on a negative assumption about your partner. While there may be a problem along the way, in all likelihood, it will be something new because you were vigilant during the selection process relative to past issues. 
  • Allow time to “break in” the relationship. It takes time for relationships to settle into the norm, so give your new provider at least three months before strictly holding them accountable to the terms of the SLA. Also, keep in mind that the provider is not in control of all the pieces, e.g., whether the payroll provider loads the file on time, and that any change in your operation may negate a service standard. After the initial settling in period, discuss any concerns during scheduled meetings (we suggest meeting two to three times a year). If a year into the contract, you continue to experience problems, ask to renegotiate the terms of the SLA. Not only is this your opportunity to make clear your expectations for going forward, but also to put the provider on notice that you’re not happy and will likely shop around for a new provider if things don’t improve. 
  • Understand the limitations of provider risk. When negotiating the terms of an SLA, we sometimes see employers ask for a penalty amount that significantly exceeds the profit margin on the deal. For example, asking the provider to put at risk 20% of the fee in the event they fail to meet the service metrics is not a reasonable ask because, after expenses, the provider may only net 15% of the fee. Don’t expect much room for negotiation here unless the deal is huge (think a million dollars). The industry average is 10%; substantial contracts may warrant up to 15% to 20%. 
  • Internal standards. In addition to standard service levels for clients, many technology providers also have goals associated with their internal operations. These goals may differ from what is in their standard SLA. Ask if they have internal goals or metrics—and if they will share them. A willingness to share the information with clients is the sign of a mature service provider, but don’t assume an unwillingness to do so means there is a problem.

Use SLAs to set expectations and govern the relationships

Regardless of the metrics, guarantees and terms, the reality is that an SLA probably won’t impact the service much. There is no “silver bullet” to eliminate the possibility of service problems. An employer’s strongest position is the ability to change providers. That said, SLAs can be useful, and we encourage our clients to always request one from a new service provider. At the very least, an SLA helps to facilitate the all-important conversation about expectations, which is an essential aspect of governing the service provider relationship and helping to ensure a productive and smooth client-service provider relationship. For more information, read our article, 10 Tips for Governing the Relationship with your Technology Provider . 

Contact us today if you’d like to speak with a Gallagher consultant about your specific challenges with technology service provider SLAs and how we can help.

About the Author

Rhonda Marcucci, together with Ed Barry, co-leads Gallagher’s HR and Benefits Technology Consulting Practice. Their team provides unbiased, well-researched HR technology and benefits administration consulting, including sourcing advice and service provider capability audits. Rhonda’s extensive and broad-based experience in finance, accounting, administration, strategic planning, information systems, sales and marketing, and operations is instrumental in helping clients identify a comprehensive strategy and execute against it.