[Keypoint: KPI vs SLA, Definition, Components, Differences, Metrics, Importance, SaaS]

There are many crucial concepts to know for doing business in this fast changing world. Key Performance Indicator (KPI) and Service Level Agreement (SLA) are just two of them. This article explores the terms, SLA and KPIs; their importance, differences, examples and limitations.

Let’s think about the necessity of these terms – why do you need both of them?

To do business efficiently, you need to know both KPI and SLA thoroughly. They are extremely important. You need to have a clear understanding about the distinctions between these two terms.

You can measure the performance of your project by KPI. At the same time, you can evaluate the quality of the service of the provider by SLA.

What is the difference between KPI and SLA anyway?

The main difference between KPI and SLA is that KPI shows the progress of a project in terms of strategic goals, whereas SLA defines what service the provider offers to the client within a specific timeline.

At this point, we will know what SLA (Service Level Agreement) is –

A service-level agreement (SLA) is a commitment between a service provider and a client or customer.  It is a contract that establishes a set of deliverables that one party has agreed to provide another within the specified timeline. This agreement can exist between a business and its customers, or one department that delivers a recurring service to another department within that business.

It can be used as a tool which can easily evaluate the efficacy or value of the service delivery.

It not only evaluates the current value of the service delivery, but it also gives directions for further continuous improvement.

Components of SLA:

A well organized service level agreement has some key components. These components are discussed below:

  • Service Description: It defines the service that the provider gives to the client.
  • Reliability: It means when the service is available and when the client can reach out to the providers.
  • Responsiveness: It indicates how quick the service is provided after the order customer place.
  • Procedure for reporting problems: It should be mentioned in the agreement that if any problem arises, whom to report and when to report and how to proceed to them and what other steps need to be taken to resolve the problem efficiently.
  • Monitoring and Reporting: It should be stated in the agreement that who will monitor performance, what data will be collected, how often and how much the customer will be involved.
  • Consequence for not meeting the service obligation: It gives the customer the right to terminate the relationship if any clause of the agreement is violated.
  • Escape Clause: It discusses the situations when the level of services doesn’t apply.

SLA metrics:

SLA metrics examines whether every agreement is being met. Most of the metrics vary from service to service, business to business. But a very common one is average speed of response time to the service receivers.

For example, X is a small company, and they have no IT department. But all of their competitors are doing great, because they have their own IT team. X can’t afford an IT department because they lack money. Finally, they reached an agreement with an efficient IT company who provides 24 hours IT support for them. They reached a deal. This is one kind of service level agreement.

Let’s think about another scenario: X is a big fashion brand. They had only retail stores. Now they are going to open an e-commerce platform. They can either build their own servers or they could reach an agreement with a company for IT support with the customer services section. In this way, they can have better output with minimum investment. Now, they can be more focused on their own business.

Limitations of SLA:

SLA has its own limitations as well. Even though you reach an agreement with SLA, you can’t control future pricing of the business.

For Example: you are going to launch a website; you may get a discounted price of the hosting in the beginning. But when the specified period is over, you will have to pay more money to renew the service. The IT service provider company can increase the service charge any time. At this point, it is not convenient to start working with a new IT company because it will take a lot of time and effort.

What should you do in this case?

The cost of service can be increased. There might be many reasons for that. But IT should state their pricing publicly on their website. Then this will be more credible and trustworthy.

Now, we’ll discuss about KPI:

A business organization or company uses some metrics to analyse whether it has achieved its expected goals. These metrics are called Key Performance Indicators (KPIs). KPI is probably one of the most overused and little understood concepts in business. However, there are no one-size-fits-all type KPIs. It varies from business to business, organization to organization, industry to industry.

Common Indicators:

  • Quantitative indicators: When an indicator is measured and expressed solely on a number, it is called quantitative indicators. For example: Number of sales is a quantitative indicator.
  • Qualitative indicators: Qualitative indicators are not measured by numbers, even if they do, they are not merely numbers. The numbers have their own interpretation. They generally describe the characteristics of a process or business decision. Examples of qualitative KPIs include opinions, properties, and traits.
  • Leading Indicators: Leading indicators offer guidance on future results. They indicate what may happen in future. For example: Consumers’ buying confidence is a leading indicator for the car company. When the confidence goes down the sales of cars will go down. When it goes up, the sales of cars will go up.
  • Lagging Indicators: Lagging indicators are used to measure results at the end of a time period. It reflects upon the success or failure of an initiative. For Example: X is a car company. At the end of the year they assessed that their sales had dropped 50% despite aggressive promotion compared to the previous year. 
  • Input Indicators: Input indicators are used to measure resources used during a business process. For example: a business needs hand cash to operate its business. This is an input indicator. The business also needs employees to work. So it needs to set how much time it requires the employees to work. This is the stuff time indicator. 
  • Process Indicators: Process indicator indicates whether the process is on the track or not. For example: A company has opened a retail store. A well trained up employee group is important to maintain the smooth service. Quality Training is a process indicator. It expresses how well trained-up a group of employees is.
  • Output Indicators: They indicate the success or failure of a process or business activity. For example: Profit, Loss, Cost of Good Sold, Hand Cash etc.
  • Actionable Indicators: It measures and reflects a company’s commitment and effectiveness in implementing business changes. Company culture is one of the Actionable Indicators. These metrics express how fast a company can change to a new process.
  • Financial Indicators: These indicators show the economic performance of a company. These are economic stability, growth, etc.
  • Examples: ABC is a Digital Marketing Agency. They want to know whether they are reaching their goals or not. They need to find out how cost effective they are for their clients, how much profit they are gaining, how much time they are taking to respond to their clients, how many clients they serve a day.

Limitations:

KPI is the best solution for a business to track whether it is on the right track or not. But there is a limitation for KPI. It can’t predict the uncertainty of the future. For example: no company foresaw the upcoming danger of Covid-19 virus previous year, which devastated the business around the world. Many companies estimated growth and set standard KPI considering the normal economic situation. But most of the business couldn’t meet the expectation set by their KPIs due to the corona pandemic. That doesn’t mean that the companies didn’t do well, some companies are doing very well considering the situation. But the KPI will show that the business is not doing well.

In a nutshell, both the Service Level Metrics and KPIs give us valuable information in business. Service Level metrics provide information on the baseline performance expectations. An agreement toward meeting those expectations is regarded as an SLA term. On the other hand, KPIs offer data on the success in meeting organizational goals or expectations. They are useful tools for executing business strategically.