Why SLA Based Contracts Are Better than Time & Material Model?

Service Level Agreements (SLA) have been on the rise ever since the advent of Information and technology services thanks to the increasing risk of global collaboration between various parties in a borderless, inter-connected, regulated, and legally complex world economy.

If a company in Germany wants a vendor in the United States to provide them with servers, for instance, it’s not exactly straight forward. The emergence of SLA helps blaze a new trial by penalizing underperforming vendors and business partners.

When it comes to outsourcing, SLAs are even more powerful and they keep security practices at the fore, put rigid expectations in place, and drive this already competitive sector into a much more organized and accountable.

But with both SLA-based contracts and the more common Time and Material model, which one is better? How do you choose?

Let’s dig in:

Time and Material Contracts

Time and Material focuses on inputs(resources) and the expectations are loosely defined (or maybe not defined at all) and as demands for vendor resources grow, the cost is likely to go up over time. Even more importantly, it’s hard to arrive at benchmarks, expectations, and to get to any incentive-penalty clause. In short, the pay is basically contractual without any standards for expectations without focusing on pay for effort.

SLA-based Contracts

SLA-based contracts on the other hand focus on pure output or performance. The KPIs, expectations, exact deliveries, and responsibilities of the vendors and businesses are all charted out at the very beginning. The performance is measured against mutually-agreed expectations.

Since the contracts themselves are performance-based, costs are more predictable with vendors “earning” their way through the relationship instead of just getting paid by default. Typically, multi-year contracts also give room for both vendors and clients to grow together with a fair pricing model.


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