What is an SLA: Definition, Examples, and Tips for Small Businesses (2023)

Every industry has its jargon. But the term “SLA” is particularly hard to define because of its wide scope.

Internet providers use SLAs to set standards for up-time. Merchant suppliers use SLAs to determine production costs. And, of course, customer service teams use them to set expectations for service performance, response time, and satisfaction.

I’ve worked at lean startups most of my career. I knew SLA as a term used by outsourced IT departments. And for the most part, that’s still it’s typical use case.

But, as more small businesses and e-commerce stores pop up—and more of them center their mission on providing great customer service—I’m seeing people make an effort to learn the jargon and understand terms like SLA to legitimize their services.

We’ll take a more practical approach to defining the term and help growing businesses understand how they can use SLA best practices to improve their support—regardless of the size of your team.

What is an SLA?

An SLA (service-level agreement) documents the agreed-upon level of service between a vendor and a client. Numerical metrics are often assigned to determine success or failure of the agreement, along with clear repercussions for failing to meet the service level standards. It’s most commonly used by technology and customer service providers.

For the customer service industry in particular, SLAs include metrics like response time, customer satisfaction, and replies to resolve. SLAs can be either internal or public-facing. They help set a standard for measuring customer happiness and team productivity.

Types of service-level agreements

The most common types of SLAs include customer-based, service-based, and multi-level agreements. Each sets up a contract between a specific type of industry or business relationship.

Using some realistic examples, let’s explore the basics of each type.

1. Customer-based SLA

With customer-based SLAs, the agreement revolves around a single customer.

For example, an e-commerce store signs an SLA with a manufacturer to create their t-shirts. The SLA stipulates the services provided by the manufacturer to the individual e-commerce store. The agreement includes things like the quality of materials, the number of shirts to be produced within a given time, and the delivery dates.

2. Service-based SLA

A service-based SLA covers the level of service for all customers—not just one.

A SaaS business, for instance, may use a service-based SLA to ensure 99.9% uptime for its product and offer service credits for failure to perform. This guarantee is not just for one individual customer, but a general performance-level promise for all users of their software.

3. Multi-level SLA

Multi-level service agreements allow you to adjust or combine different types of SLAs to meet your customers’ needs.

The simplest example of this type exists in many freemium software products. You’ll often see guaranteed service levels (like a dedicated customer service line or an assigned account manager) reserved for higher price points or exclusive to certain subscription plans.

Setting SLA metrics and KPIs

The real meat of service-level agreements lies in their metrics. This holds the service provider and their clients accountable to a precise measurement. The metrics are objective and often able to be calculated automatically, ensuring fairness for both parties.

For customer service providers, the most common metrics found in SLAs are:

• Average Resolution Time
• First Response Time
• Replies to Resolution
• CSAT (customer satisfaction score)

(We’ve broken down all of these customer service metrics at length in previous posts if you want to learn more!)

These metrics have been perfected over the years to cover the most important aspects of customer service. When a company excels at each of these metrics (and continues to improve them), they can expect higher profit, longer customer retention, and decreased churn.

While SLAs and KPIs (key performance indicators) are different terms, it’s not uncommon for the metrics associated with them to be the same.

Customer support teams set KPIs to decrease reply time, resolve tickets quicker, and get higher satisfaction ratings. The difference between SLAs and KPIs simply lies in the intention.

SLAs must be met in order to fulfil a contractual agreement, with clear repercussions if a service provider fails (often in the form of discounts or refunds). Whereas KPIs are used for goal-setting and motivation, not usually associated with demerits for failure to meet.

Why is an SLA important for customer service?

It’s easy to understand why SLAs are important for huge organizations. They objectively track the success of an external service like an outsourced IT department and hold them accountable to standards set forth by the company.

When customer service is out of sight and out of mind—SLAs are extremely important.

Managing customer support at a small company must be a different case, right?

You’re busy fulfilling orders, getting new clients, or overseeing production. You might not even have a dedicated support team yet. Or if you do, they’re very small. And it seems silly to track these big scary metrics with jargon like SLA and KPIs.

But understanding the principles behind service management (even if you don’t write up an actual contract) proves just as important for smaller companies for a few reasons.

• SLAs establish clear-cut goals for your customer service. Just as you track revenue and costs for your product, use SLAs to verify your support needs and keep up with demand.
• Clients respect the idea of SLAs—even without a contract. Use real metrics to set customer expectations and answer potential client questions around response time or satisfaction to close more deals.
• Tracking SLAs will tell you when it’s time to grow. If you’re a founder handling support (or a small team), constantly missing the mark on your desired metrics signals a need for hiring or outsourcing.

Moreover, customer service SLAs correlate with every other important part of your business. If reply time is low, revenue often goes up. If CSAT is high, you’ll likely see more repeat purchases.

SLA best practices and tips for growing businesses

Regardless of the size or type of your business, the best practices behind service-level agreements can help you achieve customer service success.

Here are some tips to help small businesses, in particular, use SLAs in the most impactful way.

1. Make your SLAs flexible

Small businesses experience more volatility than established brands. You might see a huge leap in orders one month or an unforeseen issue with a manufacturer could throw off all your estimates.

Your service delivery can change in an instant, making it impossible to hit your original goals. Take a moment to step back and re-define the services expected in these moments—but don’t get rid of your KPIs completely!

Realign your metrics and set more realistic goals during a chaotic time so you can effectively plan for future incidents.

2. Set aspirational (but attainable) metrics

You always want to be improving your SLAs to keep customers happy. Focus on incremental and traceable improvements.

I wouldn’t recommend setting standards too high for small teams. I’ve worked on teams where we just stopped looking at metrics because the goals seemed so out of touch with reality.

Define your baseline metrics. Then set KPIs a bit higher. If you consistently hit your goals for a few months, bump it up a bit more. Slow and steady.

3. Use internal SLAs for better team communication

Internal SLAs enable your company to communicate better interdepartmentally. This is a great option for both large and small teams to establish clear expectations among team members.

Give your customer success team realistic expectations for getting materials from your marketing team or for the amount of time needed to fix bugs from your developers.

Depending on the culture of your company, you can use a formal service-level agreement (SLA) template or simply draft a list of expectations and ask the parties involved to sign off.

We put together a template to outline everyone’s role and expectations during an outage at our company. Worth a look if you’re considering something similar.

Note that you can have “SLAs” without actually having a service-level agreement contract. The term covers general metrics and customer service KPIs.

When clients ask about SLAs, they’re asking about your metrics and customer service priorities. You don’t (and shouldn’t) need a contractual SLA to provide an answer.