5 reasons to avoid service credits | Legal Advice | Law 365

Service credits are a hotly debated issue in Service Level Agreements. A wide variety of companies incorporate them into their deals with various degrees of success.

Three questions often arise:

• What are they?

• Are they good or bad?

• Is there an alternative?

The answer isn’t as simple as these questions because the needs of businesses, and how they operate, can vary greatly...But we will endeavour to explain how they work in simple terms:

Service Credits explained – For football fans

It all starts with a Supplier (often a Managed Services Provider) and a Customer. When they enter a long-term business deal, they set out the standards (or Service Level) the Supplier is expected to achieve.

Since we’ve just enjoyed (or not enjoyed) the Euros, let us take the example of a football team.

The owner of the football team is the Customer in this metaphor. They want to hire a manager to oversee training and tactics. The manager is the Supplier. The owner offers the manager a healthy salary, but only if the team is ranked continuously in the top three positions on the league table.

In this scenario, the third position or higher is our service level.

However, if the team performance drops (and they fall below third in the league table) the manager will not receive full payment. Instead, for every month the team doesn’t achieve the agreed service level of 3rd or higher, the manager will have £10,000 deducted from their annual salary.

Service credits work like these deductions, ostensibly as an incentive to improve service, but often feeling a lot more like penalties (and none of us like those much!) 

How do Services Credits work in Managed Services?

Service Credits are most likely to be offered to customers in relation to response times. The Service Level Agreement will usually include a chart listing potential faults and estimated response times. Response times vary depending on the severity of the problem. If the Managed Services Provider fails to find a solution in the agreed response time, they may offer the customer a credit instead of resorting to more punitive remedies, such as suing or terminating the contract.

Are Service Credits a good idea?

On one hand, service credits seem logical and fair. If a company’s performance is not living up to what was agreed in the contract, they won’t be paid as much and the contract will not need to be terminated.

Suppliers are incentivised to maintain high standards and the customer will get what they pay for. It’s even possible to run regimes alongside service credits. For example, a “traffic light” system (red, amber, and green) where credits will be deducted at a reduced price depending on the level of standards. Or maybe, a “earn back” policy, so the supplier can exceed standards to gain back credits that have been deducted.

5 problems with Service Credits

1. Getting the service level correct isn’t always as simple as placing third in a football league. From a legal standpoint, service credits could be seen as a penalty (and therefore unenforceable under English Law) if they are too high.
2. If they are set too low, in theory, what is to stop a supplier from providing a sub-par service just to make more profit?
3. Assessing the supplier every month takes time and resources. Is it worth it?
4. There is a lot of negativity that comes in service credit territory. Many businesses decide not to use them to preserve good relations.
5. They can suck up valuable time -- Time to set out and agree terms. A lot of back and forth between both parties, and many passes under the noses of lawyers. Perhaps the supplier wants a “settling in” period to assess the service level’s practicality? That’s another couple of weeks…. Then there is the ongoing monthly review…

3 alternatives to Service Credits

How do you keep standards high without Service Credits? One would hope that no one enters a business relationship with someone who might let standards drop, and we know we should strive for excellence in all our ventures…But, best to be prepared, so here are a few alternatives to service credits you may want to consider:

1. A remediation list

Essentially, an additional clause that obliges the supplier to report any issues to the client. This report must include what happened, why, how it was fixed, and the preventative measures taken to stop it from happening again. As part of this, there should be a follow-up report on how the implemented prevention measures are working.

A remediation list can be used alongside service credits, but while service credits can sometimes feel like punishment, a remediation list feels much more friendly and constructive.

2. Three strikes

A “get out” clause that allows the customer to terminate the contract if the supplier cannot meet a certain critical service level in a set period of time, say, three months. Your supplier will want to define what ‘critical’ means and may want specify three consecutive months, as opposed to any three bad months at any point in the relationship, so they have time to remedy the problem.

3. Something extra “on the house”

A common practice in a restaurant is giving food or drinks gratis to make up for mistakes. If something is wrong with the dish, the kitchen fixes the problem, and the waiter might offer you a complimentary dessert. For the diner, the standard of the meal is back up to scratch and the they feel better because they have a free sticky toffee pudding. For the restaurant, offering some small extra for free is better than saying the whole meal is on the house.

An idea like this can be incorporated into your contract. If a service level is not met, rather than a service credit, the supplier may choose to offer the customer an extra service gratis. The range of service is broad, so this would need to be investigated by companies to assess what “extras” could be offered. This can turn a mistake into an opportunity because it allows you to show the client another area of expertise. Like a free sample at a food stall, they may be left wanting more!

At Law 365 we recommend that our clients try to avoid the negativity that often comes with service credits. Mistakes happen in any sector and nothing in life is 100% perfect, 24/7. How we deal with issues when they arise, move forward, and find ways to improve is critical in moving our business practices from reactive to proactive. Much better to set the intention to create productive, professional and positive business relationships.