Effective Management of Service Agreements for Successful Business Outcomes
What is a Service Agreement
The first thing to know about a service agreement is what it is. Surprisingly, the term can be applied to quite a few different types of contracts. The most general way to think about a service agreement is as any contract between a client and a provider of services. Most companies have at least one service agreement, but they are not always obvious.
A business that will install a new roof on a personal residence probably has a service agreement with the homeowner for that specific job. An agency that provides caretaking services for disabled people probably has service agreements with any clients it serves. A law firm that charges legal fees based on a contingency fee agreement may not think of that agreement as a service agreement even though the client is getting a service in the form of legal representation.
Since the term service agreement means any kind of contract for services, it is important to understand the purpose of such contracts . In essence, a service agreement governs the relationship between the person who provides the services and the person who receives them. Simply put, the client needs the provider to do something, and the provider needs the client to pay for doing it. In addition to governing the basic exchange of services for money, service agreements often include additional terms. These terms provide both the provider and the client with additional terms of the relationship that help the relationship proceed smoothly.
Service agreements are a central part of business transactions, but the term can mean quite a few things. Nearly every business will have some service agreements, but just as many business owners will not even think of those agreements as service agreements. In reality, service agreements that govern the relationship of a provider of services and a client are everywhere.
Elements of a Service Agreement
The opportunity to draft and negotiate new agreements is in itself a business opportunity. It is rare to be presented with a service agreement that you have not seen before but when you do, it can be the chance for a strategic rethinking of how you use services and how suppliers are used as leverage. What is the essence of a service agreement? At its core, parties make commitments and arrangements about how they will work together. The essential components are:
Dates and Term. Most agreements go on forever with no end date or rationale for the end except termination rights. In a world of short term contracts, I am an advocate of having agreements run for a fixed term and with no automatic renewal upon its expiration. A rolling ten year commitment may be good for the supplier but may not be good for the customer. In the scheme of things, ten years is a long time.
Parties. Entity names and references are often put through third, fourth and fifth translations and by the time you get to the final page, you might be surprised at what you have agreed to do. In this age of LLCs and L3Cs and partnerships and all of the forms of doing business, it is important to make sure that the correct entity name is in the agreement and that you understand the structure behind the entity.
Scope of Work. A scope of work section is common but often not thought through in terms of what work is to be performed by whom and in what time frames. The scope of work should be flexible enough to meet changing business realities but not so vague as to create potentially open ended liability. The agreement should also include a pricing or payment schedule or at least a process for setting price and price adjustments when necessary.
Highlights of Terms. Many times the agreement gets its life in the contract due to a few key terms. There is nothing wrong with highlighting certain key terms, but remember to address the key terms in the body of the agreement and not just the negotiated provisions.
Best Practices to Handle Service Agreements
Transparency is key. Customers must have full, unfettered visibility of service agreement compliance. Keep accurate data on compliance and share that data with your customers, preferably in a format that can yield insights based on the trends identified. This helps to make all parties feel as though you are delivering what you promised. Clear documentation is also essential. Clearly document your obligations in the service agreement and the processes for tracking compliance and reporting. A clear audit trail will leave little room for interpretation. Be sure that you have an accurate roster of internal resources that must commit time to the audit process, including specific personnel and their roles. Any internal processes important to measuring your ability to comply with the service agreement must be followed consistently, so that your performance can be accurately measured. Don’t push the envelope by stalling the audit process or failing to meet agreed turnaround times. All of these things could fall under the radar — until something goes wrong.
Key Risks and Challenges with Service Agreements
The world of service agreements is fraught with risks and challenges. Vague contract clauses, undefined roles and responsibilities, and failure to track changes over time can all lead to misunderstandings and disputes. One of the most common risks is a litigation disclosure in the event of a dispute. If an organization cannot produce a contract that it cannot find, and claims to have lost, the other party can issue a negative inference. This can lead to negative interpretation by a judge or jury, and add layers of cost.
A related risk comes from lack of proactive contract management. While not an easy task, organizations must actively manage contracts throughout their lifecycle. Failures in any of these areas can lead to breaches of contract, which can result in costly legal proceedings, lost business, and even criminal liability in some cases.
Specific to IT contracts, many organizations fail to plan or implement the infrastructure needed to support service agreements. As mentioned above, automation and systems are often lacking when it comes to service agreement management. Organizations may also fail to define deal timelines, end dates, and notice periods. In cases where organizations outsource key functions, contract management failures can lead to loss of data, business continuity failures, and brand damage.
Depending on the jurisdiction, there may be additional challenges with specific jurisdictional risks that can have negative financial impacts. For example, federal and state laws mandating stricter regulations for data privacy and security.
Using Technology for Service Agreement Management
With the trends in service agreements toward recurring revenue, subscription products, and software as a service (SaaS), strategic service agreement management is becoming even more critical. This makes manual methods of managing service agreements increasingly ineffective. According to the Aberdeen Group, "Best-in-Class companies are 246% more likely than all others to employ a configuration and quote management solution." This section will look at some of the major players in dedicated service agreement management software, as well as how other, more general legal management software are also capable of addressing many service agreement management concerns.
The service agreement management software landscape is broad. There are several software solutions available that are specifically designed to help with service agreement management. WCS Service Contract Management is one example of dedicated service agreement management software and supply chain management products, and it costs $3,850 per user. Xanalysis LLC’s ROI Service Contract Management covers claims, service warranties, service parts and services sales packages. The software is hosted on the service provider’s secure servers and can be accessed via the Internet. Xanalysis’ service contract management software is priced on a per-transaction basis. IPRealEstate.com by Elden Legal Group specializes in service agreement management for intellectual property and assignments, and is provided under a subscription model. Finally, Remedy My IT’s Service Level Agreement Manager gives IT managers a tool for comprehensive service agreement management and reporting. It is also available for free .
There are also many "horizontal" legal and business applications that have wider application but that also can work well in the service agreement management arena. One of these is Aras PLM which has integrated product life-cycle management with service agreement management. The Aras system is priced based on the number of users, with no per-user license fees. Oracle’s Contracts 11i is another example of comprehensive contract lifecycle management that is making an increasing impact on service agreement management and service contract strategies. Baker Robbins & Company points out that "Note that the 11i Contracts functionality is built on top of the 11i Applications technology platform. It is in the same product family and uses the same user interface as the 11i Applications. In many organizations, this will mean that the contracts solution might sit on the same server and database as your other eBusiness Suite applications and share data with your other applications." This sharing of resources is supported by pricing options for Oracle 11i that include subscription-based pricing for Oracle Contracts, in addition to traditional upfront licensing pricing and hosting.
These options are just examples of the many choices in dedicated service agreement management software and related horizontal software such as enterprise resource management (ERP) and web-based tools from dedicated service contract providers. Some of these companies provide online demos of their software and its functionality while others offer a free trial for a limited time period so that users can see what the software has to offer and compare it to existing service agreement management methods.
Legal Aspects of Service Agreements
Service agreements are a core aspect of any business. Beyond being one of the most common kinds of contract, they are among the most important. It is essential that businesses understand which elements of a service agreement can be subject to negotiation and which cannot. This article will outline the legal considerations involved with drawing up a service agreement.
The actual elements of a service agreement will typically be implemented in service-level agreements (SLAs). These add detail to the broader and more ambiguous clauses within the service agreement. While there is considerable overlap between the two kinds of contract, SLAs are generally more detailed and focused. They specify what the service provider must deliver and what the service user can demand. This level of detail allows for a more precise way of ensuring that the service provider meets their obligations.
Section 43 of the Sale of Goods and Services Act 1982 stipulates that services must be carried out in a way that can be reasonably expected of a person with adequate knowledge and experience. Section 13 requires that service providers adhere to the information provided to the customer before the service was offered. Sections 49 and 50 establish that services must meet the expected standard as described in the service agreement. If any of these conditions are not met, the service provider must provide remedies to their customer.
Sections 11-14 of the Misrepresentation Act 1967 state that if a service provider provides untrue or inaccurate information to the customer and they use this to make a decision, the service provider can be liable if the customer suffers loss. Service agreements must be drawn up with due care and skill, even heading off interpretations that could later prove disadvantageous to one party. Effectively, a service agreement must consider all possible connotations of the elements outlined in the SLA. Should a dispute arise, the courts will interpret the contract as it is presented before them.
The drafting of service agreements and SLAs has been greatly aided by the introduction of the Electronic Communications Act 2000, as amended in 2011. Essentially, the act allows the inclusion of electronic signatures within a service agreement or SLA and retains their enforceability. Contracts tend to be grouped into bundles of templates that tend to follow a strict format to avoid unintended mistakes. Some organisations may take any given contract template and adapt it to a specific situation instead of drafting a new template. In these circumstances, the existence of a number of such standardised templates can actually provide a lot of evidence if the matter goes to court. The courts are able to examine how certain contracts have been previously set out.
The Arbitration Act 1996, which came into force in 1997, offers an alternative to the traditional court solution should a dispute arise from the terms of a service agreement. This is regarded as a positive alternative to conventional litigation due to the fact that it avoids a matter dragging out in court. Essentially, the act spells out how the arbitration process must be conducted, why arbitration should be chosen over other methods and what the limitations are on the powers of the arbitrator. Arbitration can be a simpler and more cost-effective solution for clients and this article will outline what elements should be included in an arbitration clause.
The Evolution of Service Agreement Management
In examining how business will evolve, it is clear that the most successful companies will be the ones who have mastered Service Agreement Management. As technology continues to impact business faster than most can imagine, technology will play an even bigger role in Service Agreement Management.
In the coming years, several trends will emerge that will focus on the entire business operation rather than a single function such as finance, procurement or revenue generation. For example, we believe that companies will increasingly take a much more holistic approach to the management of Service Agreements. Historically, each department has focused primarily on their own needs resulting in Service Agreements being scattered across the enterprise. This scattershot approach has resulted in companies paying more money and missing opportunities to negotiate better or more favorable terms. Since the revenue cycle is heavily dependent on the management of Service Agreements, a more holistic approach should be a top priority for those looking to optimize the entire value chain. The importance of looking at the big picture can not be overtstated.
With the advent of new compensation models, the management of Service Agreements will increasingly encompass revenue assurance functions. For example, in order to maximize cash flow while also minimizing risk, it will be important to develop Service Agreements that contain favorable terms and conditions. Additionally, as the trend continues toward more risk based compensation; revenue assurance programs will increasingly require that Service Agreements are managed properly .
Also emerging is the trend of new compensation models. Historically, compensation models have primarily been based on billable capacity in the services industries or throughput and capacity in manufacturing. However, new compensation models are emerging that focus on the value and effectiveness of the service as opposed to volume. This is particularly important for complex services. For example, in the case of a drug discovery company, revenue is generated when a compound moves from pre-clinical to the human trial stage. There is actually a negative cash flow during the discovery phase. Therefore, when the drug passes from one phase to another, revenue is recognized, positive cash flow is realized and significant risk is also considered to be significantly reduced. Therefore, in this example, the goal of the business is to get the drug compound from one phase to another so new revenue can be recognized and risk can be reduced. In this example, the risk involved in getting the compound to the next stage is critical and the Service Agreements play a pivotal role in mitigating risk to the greatest extent possible.
The next major trend will be Outsourcing Service Agreements. We expect companies to increasingly look at outsourcing the development, implementation and management of Service Agreements to third parties. Historically, Service Agreements were managed in-house by company personnel, either by individuals in business operations or by legal departments. However, outsourcing Service Agreements will allow a company to focus on core business by leveraging the expertise of outside providers who specialize in providing cost effective service.