According to Grand View Research, the global business process outsourcing industry is booming, with revenues projected to surge from $280.64 billion in 2023 to $525.23 billion by 2030. While many business processes depend on outsourcing, maintaining trust remains a top priority for companies.
Ensuring secure and efficient outsourcing requires clear service expectations and accountability, which is why service level agreement (SLA) becomes indispensable. In this article, we will discover what is an SLA, what essential components should it contain and what type of the agreement matches your business specifics best.
What Is a Service Level Agreement in Software Development?
What does SLA stand for in tech? It stands for service level agreement. In software development, it is a written contract that outlines the expected level of service between a client and their IT service provider. It is typically required when outsourcing development projects, hiring a dedicated development team and/or distributed development team, or setting up an offshore development center.
This agreement outlines the service commitments and the measures used to evaluate whether the service is delivered according to expectations. It usually includes a description of cost reimbursement and corrective actions in case the provider violates the contract.
The service agreement’s critical components are:
- Service definitions: List of measures that should be taken towards the successful delivery of the requirements.
- Performance metrics: Definition of the main criteria for the project completion considered successful (e.g., uptime, response time).
- Service availability: Definition of the expected availability of the service, including metrics such as 24/7 availability, 99.9% service uptime, etc.
- Service levels: Specification of the expected level of service.
- Exclusions/limitations: Clarification on the parts of the project where the service levels do not apply or are limited.
- Responsibilities: Overview of the main tasks of the service providers as well as the duties of a client.
- Communication protocols: Clarification on how to handle issues and changes during the project.
- Response/resolution times: Outline of the timeframe within which clarifications are provided for incidents and service requests.
- Penalties and incentives: Specification of consequences for service failures and rewards for exceeding service levels.
- Dispute resolution and escalation procedures: List of measures for resolving misunderstandings, with escalation steps like management involvement, mediation, or arbitration, including specific timelines for each stage.
Oleksandr Boiko
Delivery Director at SPD Technology
“Executing a project without a service contract for software development can make the process disoriented. Without defined expectations and performance metrics, project timelines can easily extend, and quality may deteriorate, leading to dissatisfaction for both the client and the development team.”
Why Do You Need an SLA?
McKinsey states that regardless of project size, 59% of IT projects are finished under budget, 47% are finished on schedule, and 44% get the desired results. This shows that around half of the projects are not delivered up to customer satisfaction. However, if the parties involved in the project sign a software service level agreement, they maximize the chances of a successful completion. Below are more specific reasons for signing an agreement.
Define Clear Expectations
The client is generally expected to pay special attention to the service contract to protect their project. However, an SLA in software development benefits both the client and the service provider. It allows both parties to clearly define what the end results should be, when they should be delivered, and in what condition they must be presented. For the provider, it also helps manage customer expectations.
Defining the demands and responsibilities minimizes potential disputes by providing a solid reference point. Furthermore, when there are well-defined expectations, project management runs more smoothly. Wellingtone reported that around 60% of projects mostly or always have a scoping document before the initiation. This leads to more productive and cooperative teamwork.
Set Performance Metrics
If the client wants to accurately evaluate the provider’s productivity and effectiveness, a software development SLA must include several key metrics. Typically, these include throughput, error rate, accuracy, and completion rate. Additional metrics can also be added based on the specific needs of the project.
The importance of setting performance metrics is supported by the study of the Project Management Institute. The research revealed that 56% of IT projects meet their original goals, primarily due to thorough performance monitoring and management. Indeed, checking routine metrics allows the client to evaluate if the software development company they are working with is fulfilling the established requirements. This methodical assessment guarantees the preservation of high-quality service and serves as a foundation for ongoing development.
Establish Vendor’s Accountability
Defining the responsibilities and obligations of a software development vendor in a service contract guarantees a transparent and enforceable standard for performance. Thus, the development process is secured against the vendor’s non-compliance, ensuring the vendor is held accountable for delivering the agreed-upon services.
As a result of this accountability, the service provider is more likely to commit as they understand the possible consequences of not fulfilling their duties. It also gives the client a way to deal with problems and find effective solutions.
Manage Risks
The SLA for software development aids in anticipating possible service-related problems and outlining precise procedures for their resolution. A service contract minimizes the effect of these risks on the client’s operations by defining protocols for managing failures, interruptions in service, and other events.
Such a risk management entails defining incident response timelines, escalation routes for problems that remain unfixed, and backup plans for important malfunctions. As a result, service agreements help to handle risks, ensuring that each party is ready to face and resolve unforeseen difficulties and boosting the service’s general resilience.
Allocate Resources Wisely
If you clearly outline the necessary services expected in service level agreements, it will help to allocate resources in a more rational manner. You will be able to specify the personnel, technology, and time commitments needed to complete the project.
Both parties can prevent overcommitting or underutilizing their resources by having a clear resource plan. This guarantees that the client may efficiently arrange their internal resources while a software product development company can offer high-quality services without overstretching their capabilities.
Manage Costs
According to the 2022 Global Outsourcing Survey conducted by Deloitte, 57% of executives state that the primary driver of traditional outsourcing is cutting costs. At the same time, an SLA for a software development project helps control costs by providing a definition of the scope of services and associated pricing.
Clients are able to precisely budget and prevent unforeseen costs because of the transparency brought to them by clear contract requirements. Service agreements also guarantee value for money by establishing performance KPIs and accountability measures for the service provider. This is especially true for large projects, like developing enterprise-level applications, since these projects often involve complex requirements and high stakes.
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What Type of SLA Should You Use?
When considering outsourcing web or mobile app development, choosing the right type of software development service level agreement becomes a critical decision. Below we describe each of the most common types along with the most appropriate service level agreement use case examples for each of them.
Customer-Based SLA
This type of an SLA in software engineering represents a contract between an outsourcing company and a specific customer. The key elements of this contract are the specific software development services provided, performance standards, as well as the terms and conditions applicable to that customer. This contract encompasses all relevant service expectations and metrics that help meet the particular needs of the customer.
Use Case Example: A large enterprise decides to hire a software development team to oversee every aspect of its IT setup. The client has clearly defined demands, such as specific response times for different departments and customized support levels.
Oleksandr Boiko
Delivery Director at SPD Technology
“The customer-based contract’s ability to cater specifically to individual customer needs, foster direct communication, and offer flexibility makes it the most common type of SLA for software development.”
Service-Based SLA
In case of signing a service-based contract, the service offered can be used by all the customers who enter into an agreement. This kind of contract defines the universally applicable performance metrics and service requirements, and it is standardized across all clients.
Use Case Example: A cloud storage service provider offers storage options to a broad spectrum of customers, including big businesses and individuals. The cloud storage service’s availability, data recovery, and support response times are all specified in the contract, which guarantees uniform service levels for all customers.
Multi-Level SLA
Multi-level service level agreements provide consumers with varying service levels according to their individual needs and payment capacity. This approach benefits both: customers can ask for a personalized service delivery, while vendors receive the flexibility to serve a greater number of customers.
There are several subtypes of multi-level service contracts:
- Corporate-Level SLA: Addresses general concerns that are relevant to every client across the company.
- Customer-Level SLA: Covers topics unique to a certain customer base, outlining their demands.
- Service-Based SLA: Deal with certain issues pertinent to a given service and offered to a particular consumer or group.
Use Case Example: A global organization with several divisions and service requirements set up offshore software development. Multi-level contracts signed by the parties contain customer-level agreements to cater to each division’s particular needs and service-based contracts to cover particular services like network management and technical support.
Operational-Level Agreement (OLA)
When an organization needs to define the relationship between different internal teams and outline the responsibilities of each department, it opts for an OLA. This agreement makes sure all internal units are on the same page in terms of their contributions for maintaining the quality of the service
Use Case Example: An organization has an internal IT department that is divided into teams for network administration, software development services, and helpdesk support. In order to maintain agreed-upon service levels within the company and elevate overall IT service management, the helpdesk and network teams sign OLA to guarantee that network issues identified by the helpdesk are addressed within a specified timeframe.
Underpinning Contract (UC)
A UC is a service level agreement that facilitates the provision of services to clients between a vendor and an outside supplier. This contract type is typically used in such cooperation models as IT staff augmentation or or dedicated team outsourcing. The UC makes sure the supplier fulfills the required service levels that it has promised its clients.
Use Case Example: A small IT company relies on a third-party software vendor to provide critical fixes for web application development challenges that came up during the development process. A UC is created with the software vendor, detailing the software’s performance metrics.
What Should an SLA Include?
Each service contract must contain specific criteria to provide contract participants with a clear understanding of their rights and responsibilities.
Introduction and Purpose
This section provides an agreement overview, stating the reasons why an SLA in software engineering was created and what objectives parties try to achieve by signing it. It also defines the relationship between a software development vendor and its client. Moreover, this section outlines the purpose of a contract, which helps decide on service expectations, attainable performance levels, and mutual responsibilities of both parties.
Service Description
This part of a contract contains a detailed description of each necessary service in the custom software development process, as well as its scope, and some reasonable exclusions. In this section, parties also indicate the expected service levels. For that, they can define uptime guarantees, response times, and resolution times.
Service Performance
When it comes to the overview of service performance, an agreement specifies the metrics used to measure the performance of the services provided. Those may include but are not limited to uptime/downtime, response times, and resolution times. This agreement section also establishes the performance standards against which the service performance will be measured.
Roles and Responsibilities
In order to ensure that every party of an agreement knows what is expected of them, key roles and responsibilities are indicated in a separate section. Here are outlined the provider’s responsibilities, which often include service delivery, maintenance, and support as well as customer responsibilities, such as providing necessary information, ensuring access to resources, and adhering to agreed-upon procedures.
Oleksandr Boiko
Delivery Director at SPD Technology
“Defining roles and responsibilities in a service contract for software development is crucial for ensuring clarity and accountability in our projects. It helps us know exactly who is responsible for what, ensures a quicker dispute resolution process, and guarantees we meet our performance targets.”
Monitoring and Reporting
It is always important to guarantee transparency during the development process, and, therefore, a service agreement must include techniques and measurement tools used to monitor service performance. On top of that, both parties should take care of the reporting schedule since it will clear up the communication frequency. Thus, the vendor will know when to present reports, in what format, and what metrics to include. At the same time, the client will be sure that the transparency of the process is ensured on the highest level.
Issue Management
In outsourcing, service contract violations may happen. To protect from unfortunate incidents, it is crucial to outline the incident management process and describe the process for reporting and managing service troubles, including how incidents are logged, prioritized, and resolved. An SLA for software development should also include escalation procedures in this section. Thus, parties define the resolution path for pending issues, ensuring that serious problems receive appropriate attention and resources.
Penalties and Remedies
If issues are not resolved, the service provider and the client can refer to the contract section that defines penalties. Here, the parties determine the consequences for failing to meet the agreed service levels. This could include financial penalties or service credits. Furthermore, contract participants can decide whether to apply any remedies to best possible project completion results. For example, this can include additional support or service extensions.
Maintenance and Upgrades
To ensure that the software receives the required attention after the development and performs as needed, a contract can provide the details of the schedule for regular maintenance activities, including when and how they will be performed. The same is with upgrades. The parties can outline the process for implementing service upgrades and any impact these might have on the levels of service.
Security and Confidentiality
A service agreement outlines robust security measures, including encryption and access controls, to safeguard data and services. This contract also highlights that both parties commit to strict confidentiality of sensitive information, adhering to industry standards and regulations.
Disaster Recovery and Business Continuity
The next section in a service agreement outlines actionable scenarios for an organization in case of disruptions. Backup procedures and recovery time objectives can be taken into account here as they usually are the main part of disaster recovery plans. This part of a contract also focuses on ensuring business continuity and aims at elaborating ways for maintaining critical functions in the event of a disruption. It covers procedures for protecting assets, personnel, and resources, enabling a quick recovery and minimal downtime.
Termination and Exit Strategy
The SLA for software development also specifies what to do in case of closing the project. Notice periods and any associated costs are indicated in case of the termination by either party. There is also a place in the contract for an exit strategy. It contains a plan outlining how an investor or business owner will divest their stake in a company.
Reviewing and Refining Service Agreements
Regularly revisiting service agreements keeps the software product development process aligned with business goals and allows for evolving technologies and adapting to regulatory changes. The following sections explain why clarity matters and how to set an effective review cadence.
What Are the Risks of Vague or Poorly Defined SLAs?
Failing to grasp the SLA meaning in business often results in service contracts with imprecise definitions, inviting confusion, slowing response times, and eroding trust. Without explicit performance metrics, accountability fades, and minor misalignments can quickly snowball into costly outages, legal disputes, and escalating support costs.
- Service ambiguity: Teams interpret scope differently, causing missed deliverables.
- Hidden costs: Unspecified tasks get billed as pricey change orders.
- No enforcement: Absent penalties remove urgency to fix issues fast.
- Compliance gaps: Weak security clauses risk audits and fines.
- Prolonged downtime: Undefined uptime targets lead to tolerating outages.
- Relationship strain: Persistent disputes consume time and goodwill.
- Innovation slows: Unclear obligations divert focus from improvement initiatives.
How Often Should SLAs Be Reviewed or Updated?
By recognizing the SLA meaning in business, companies typically revisit their service agreements whenever service criticality, market volatility, or regulatory shifts demand it. If no such external triggers arise, an annual contract review remains best practice.
High-velocity niches, such as healthcare or fintech, often schedule quarterly check-ins to capture rapid technology or compliance shifts. Reviews should also be triggered by major events: new feature launches, significant user-base growth, mergers, infrastructure migrations, or incident post-mortems.
During each review, companies compare actual performance data against targets, assess emerging risks, adjust metrics, and recalibrate incentives. Regular updates keep the agreement realistic, prevent scope creep, and sustain mutual accountability.
SLA Agreement: Key Challenges
Having a well-defined service contract before initiating a project can secure your investment and guarantee successful results. However, some aspects of agreement development can be complex for detailed elaboration. Let’s see where we usually put particular efforts when crafting an agreement.
Defining Clear and Measurable Metrics
We often encounter the challenge of defining clear, measurable metrics that accurately reflect the progress. This happens due to misaligned vision of a “successful project” across the company. To make sure that both the client and the vendor are on the same page, we define relevant metrics and make them realistic, objective, and quantifiable.
Our team takes into account the following considerations for setting metrics:
- Uptime Percentage
- Response Time
- Issue Resolution Time
- Performance Metrics
- Deliverables.
Balancing Flexibility and Accountability
We often see that some unexpected technical complexities arise and require additional time and resources for resolving. Although a contract must have well-defined obligations and deliverables, it still needs to have room for adjustments. In this way, it becomes possible to maintain accountability and preserve the project’s progress or timeline.
To balance flexibility and accountability, we focus on:
- Change Management Process
- Grace Periods
- Progress Checkpoints
- Escalation Procedures
- Buffer Times.
Handling Scope Creep
If additional requirements arise during the project, it may cause a delay in the deadline and entail other technical challenges. Some projects are not ready to face these complexities. Moreover, certain procedures, such as additional approval steps, time adjustments, or budget re-considerations, may be often overlooked. This is why we pay particular attention to defining those: ignoring them can lead to delays, increased costs, and disappointment in the project progress.
In order to manage scope creep, we consider:
- Clear Scope Definition
- Change Request Process
- Impact Analysis
- Stakeholder Agreement
- Cost Tracking.
Setting Realistic Expectations
One of the critical steps during crafting a service agreement is to set achievable goals. This is why we emphasize the importance of being realistic about timelines, expected deliverables, and the overall end result. This implies not only avoiding over-burdening the vendor with excessive responsibilities but also ensuring that the vendor does not overpromise the team’s capacity, resources, and the project’s complexity.
Our experts set realistic expectations with:
- Consultation with Stakeholders
- Feasibility Assessments
- Clear Timelines
- Quality Standards
- Frequent Reviews.
Ensuring Collaboration Between Teams
With over 120 projects under our belt, we are convinced that successful software development relies on close collaboration between multiple teams. The opinions and expertise of developers, project managers, and client stakeholders matter and bring additional value to the project. This is where the need for a regular and effective collaboration arises.
For this reason, we include the following in a contract:
- Communication Protocols
- Meeting Frequency
- Collaboration Tools
- Reporting Structure
- Conflict Resolution.
Managing Third-Party Dependencies
When it comes to dealing with third-party integrations, projects can experience delays because of issues of the third-party vendor side. For this reason, we elaborate ways for managing these issues, that include communication strategies, responsibilities clarifications, and technical approaches.
Our approach to third-party dependency management includes:
- Risk Assessment
- Contingency Planning
- Third-Party Service Contracts
- Responsibility Assignment
- Issue Escalation
Crafting SLA Agreement Tailored for Your Needs
When developing an SLA for software development, the details can often determine whether the project results in failure or success. To make sure that every element is taken care of completely, you can collaborate with seasoned professionals who have a track record of delivering results.
With 19 years of experience, we have established a meticulous process for creating service contracts that reflect our clients’ needs. This is how our professional approach ensures your project’s success:
- Tailored SLAs for Every Project: Our team works closely with you to create contracts that include the specific requirements, scope, and challenges unique for your project.
- Transparency and Accountability: Our service contracts define each party’s responsibilities, deliverables, and timelines, leaving no room for ambiguity.
- Proactive Risk Management: We incorporate proactive risk management strategies designed to identify and address potential issues early.
- Long-Term Partnership Focus: We design service agreements with a collaborative relationship in mind, focusing on continuous improvement and future growth.
Why Choose Us for Your Next Software Project?
When partnering with industry-leading companies to address their software development needs, we bring expertise, commitment to quality, and a focus on long-term collaboration to the table. Here’s how you can benefit from working with us:
- Proven Track Record and Extensive Portfolio: With over 120 projects delivered across various industries, we have gained experience that allows us to anticipate challenges and provide solutions tailored to specific requirements.
- Reliability and Stability for 19 Years: For almost two decades, we executed our technical expertise to consistently deliver results on time and within budget and established our tailored approach to help clients gain competitive advantage.
- Clear Communication: We prioritize open, clear communication, ensuring that you’re always in the loop. Our team meets with you and prepares detailed reports on a regular basis to make sure you are informed of every step of the way.
- IP Protection: SPD Technology makes protecting your intellectual property our priority. We incorporate clear IP protection clauses into every agreement, ensuring your data, ideas, and technology remain confidential.
- Skilled Talent: Our developers and project managers possess expertise across a wide range of technologies and industries. We thrive to ensure the best minds are working on your solution and accurately match talent to your project.
Conclusion
SLA stands for service-level agreement. The SLA in software engineering plays a critical role in the partnership of the technical vendor and the client when outsourcing a project. The contract highlights the service levels for every party to be informed about the expected end results. There are several types of this agreement: customer-based, service-based, multi-level, operational level, and an underpinning contract. Each of these are tailored to specifics of the cooperation between the parties.
A typical SLA for software development often has an introduction, purpose, service description and performance, roles and responsibilities of the vendor and its clients. The contract also defines the ways for monitoring the progress, reporting and managing issues, and possible penalties. Last but not least, service contracts also outline how to implement upgrades, security, disaster recovery, and explain exit strategies in case of the termination of the contract.
It is highly recommended to use service agreements when outsourcing the project not only to make sure that the project will be delivered as expected but also as part of the planning. So, if you need a trusted outsourcing partner for a development venture, do not hesitate to contact us. Together, we will craft a thoughtful service level agreement so that you can be sure that the development services delivered meet the highest standards of quality and are strategically aligned with your business objectives.
FAQ
- What Challenges and Risks Can Arise from the Absence of Service Level Agreements?
SLA stands for service level agreement, which means it defines the expected level of service. Without clear expectations, projects might have potential conflicts and dissatisfaction. Service quality may be inconsistent, with no accountability for failures. Also, financial losses and reputational damage can occur because of unmanaged service performance and lack of formal dispute resolution mechanisms.
- How Frequently Should SLA Performance Be Reviewed to Achieve Optimal Results?
A service level agreement (SLA) performance should be reviewed monthly to ensure consistent service quality and address issues promptly. Regular reviews facilitate continuous improvement, foster better communication between parties, and ensure alignment with evolving business needs and objectives.
- Is It Possible to Establish Joint SLAs that Are Shared Among Multiple Vendors or Service Providers?
Yes, joint SLA (service level agreements) can be established among multiple vendors to manage interdependencies and ensure cohesive service delivery. These contracts align performance standards across providers, fostering collaboration and clear accountability for each vendor’s contribution to the overall service.