A service credit is a payment for a non performance by a supplier. It’s normally measured using a KPI.
Context and Usage
The hierarchy is an SLA, then the KPI’s and then service credits. Here’s a breakdown of what this entails:
Service Level Agreements (SLAs):
A service credit will typically be part of the SLA and sits alongside the KPI’s. In many service contracts, it’s particularly popular for contracts like cleaning, IT, FM or professional services. SLAs define the over arching agreement of the expected level of service. KPIs are established to measure performance criteria such as uptime, response time, resolution time, and customer satisfaction amongst other things. Credits are payable for non performance.
To recap a A KPI (Key Performance Indicator) is a specific performance metric that is included in tender and contractual documents. Service credits, though it may not be the legal term, it’s like a penalty paid by the supplier based on the non-achievement of specific performance targets defined by KPIs.
Measurement and Monitoring:
- KPIs are quantifiable metrics that are regularly monitored to ensure that the service provider meets the agreed-upon standards. Examples include the percentage of system uptime, average response time to customer inquiries, and the number of resolved tickets within a specific time frame.
Function of KPI Service Credits
Performance-Based Compensation:
- If the service provider fails to meet the established KPIs, they may be required to issue service credits to the client. These credits can serve as a financial penalty and are typically applied to future billing periods, effectively reducing the cost of services for the client as compensation for the provider’s underperformance.
Incentive for Compliance:
- KPI service credits incentivize service providers to maintain high standards of service delivery. By aligning financial penalties with performance metrics, providers are motivated to adhere to the agreed-upon service levels to avoid issuing credits.
Examples
IT Services:
- A cloud service provider might have an SLA guaranteeing 99.9% uptime. If the uptime falls below this threshold, the client may receive service credits proportional to the downtime experienced.
Telecommunications:
- A telecom provider may offer a KPI for resolving customer issues within 24 hours. If they fail to meet this KPI, they might provide service credits to affected customers, reducing their next bill as compensation.
Utilities:
- An electricity provider could have a KPI for the maximum allowable downtime per month. Exceeding this downtime might result in service credits applied to the customers’ accounts.
Benefits
Accountability:
- KPI service credits hold service providers accountable for their performance, ensuring they strive to meet contractual obligations.
Customer Assurance:
- Clients gain assurance that they will be compensated if service levels are not met, which can enhance trust and satisfaction.
Performance Improvement:
- The potential for financial penalties encourages continuous improvement in service delivery and performance management.
In summary, KPI service credits are a mechanism to ensure that service providers meet the agreed performance standards, providing a tangible form of compensation to clients when these standards are not met.
But- do not ask for service credits for the sake of it, they should be carefully thought out to drive value. Though most suppliers enter into agreements with the intention to perform satisfactorily and above, most will take into account that they could lose money if they don’t perform and they may factor in a risk premium into their final price.
SERVICE LEVELS AND CREDITS TEMPLATE
Describe here the service levels that you expect the Supplier to comply with. Indicate clearly for each service level:]
– the service level description
– the minimum acceptable performance target (this could be a percentage or time limited or a milestone deadline)
– how will [insert organisation] measure performance?
– how frequently will you measure performance?
– what are the implications of the Supplier failing the service level (service credits, contract termination, etc) – be specific: if you say for example that failure will lead to termination of the contract, would this be after one failure, several failures over a period of time?
– If the service level is dependent on [insert organisation], what will [insert organisation] commit to in order to enable the Supplier to comply with the service levels?
If the service level is dependent on a third party that is not controlled by the Supplier (example, an agent or subcontractor of [insert organisation]), what will [insert organisation] do to ensure that the Supplier is not penalised for failures not under their control?
Consider response times, errors / accuracy, availability of systems, staffing levels – or whatever is relevant to you as service manager or user.
Be realistic. We will be assessing Suppliers against their willingness to commit to these. If the targets are unrealistic, it is unlikely that any of the Suppliers will bid.
Remember service credits should be just one lever in your armoury. The best choice is to get things right by undertaking active contract management and supplier relationship management. Every business is different some love the idea and some would say, I like the idea of getting KPI reports but I don’t want a service credit because the relationship is more important.
Definition of a service credit
Just be mindful that service credits are not damages- seek legal advice for damnages
Damages
Nature:
Legal Remedy: Damages are a legal remedy that a client can pursue through litigation or arbitration if a service provider breaches the contract.
or
Monetary Compensation: They are financial compensation awarded to cover the actual losses incurred by the client due to the breach.
Trigger:
Breach of Contract: Damages are typically pursued in cases of significant breaches of contract, where the failure has caused substantial harm or loss to the client.
Purpose:
Compensation for Losses: Damages aim to put the injured party in the position they would have been in had the contract been properly fulfilled.
Legal Accountability: They hold the service provider legally accountable for their failure and provide a remedy that can be enforced by law.
Calculation:
Assessment of Losses: The amount of damages is determined based on the actual losses suffered by the client. This can include direct losses, consequential damages, and sometimes punitive damages.
Key Differences
Scope and Use:
- Service Credits: Used for relatively minor or routine breaches of service levels, typically outlined in SLAs.
- Damages: Applied for more severe breaches or when the losses are significant, often requiring legal action to resolve.
- Method of Compensation:
- Process:
- Service Credits: Usually involve a straightforward process defined in the contract, with little to no need for legal intervention.
- Damages: Often require formal legal proceedings, evidence of loss, and a judicial or arbitration process to determine the amount awarded.
- Service Credits: Provide future service discounts or credits.
- Damages: Offer direct monetary compensation for losses incurred.
In summary, service credits are a contractual mechanism designed to address minor service failures quickly and efficiently, while damages are a legal remedy for more serious breaches of contract that result in significant losses.