With so many new application service providers (ASPs) flooding the market, it’s hard to tell them apart. But if you peel away the outer shell, no two ASPs look alike, even if they offer the same application. Navigating in this market—and setting up terms for a service level agreement (SLA)—will become increasingly difficult.

It’s not an easy process to negotiate an SLA, experts say, but you won’t want to be without a good one.

“You want some sort of binding agreement between you and your ASP,” said Meredith McCarty Whalen, a research analyst with the Framingham, MA-based International Data Corporation (IDC). “If anything, it gives customers some comfort level to know their ASP will step up to the plate and guarantee that service will be available when they need it.”

Here’s a look at some details on negotiating SLAs with application service providers.
An SLA is a contract between a service provider and a company that establishes predefined service parameters and outlines penalties against the provider when the service level is not reached. SLAs are tools for determining the price/performance requirements of a company’s applications.Courtesy of WebHarbor.com
The good, the not-so-good, and the bad
Levels of service will separate the high-quality providers from the substandard, and the differentiating factor will be performance beyond purely technical criteria. Not only must the application be delivered, but it should also consistently perform well and produce the desired results.

Jim Dybalski, senior vice president and CTO of LoanCity.com —a San Jose, CA-based online mortgage marketplace—was responsible for outsourcing some of the firm’s applications to Corio, an ASP headquartered in San Carlos, CA. He said the negotiation process must be a collaborative effort between providers and customers.

“It’s a tug-of-war,” Dybalski said. “We want more, they want to give less. We’ve yet to see a performance against it. But so far, I think we negotiated a fair price and service agreement.”

The ability to negotiate with ASPs is a plus that customers don’t usually get from traditional service firms. Because the ASP market hasn’t standardized yet, buyers have the chance to ask for add-ons or trade in one service for another.

The basics of the agreement
The performance metrics that clients and providers establish fall into some basic categories—availability, downtime, time-to-response, delay, and delivery. Above all, the service level agreement will serve as a means of legal recourse, should anything go wrong with the ASP.

Even if they talk until they’re blue in the face, experts advise that subscribers ask a lot of questions before committing to an agreement.

“It’s important for the customer to ask about all the SLAs that are offered by a particular ASP,” Whalen said. “What does this SLA offer—is it the uptime of the servers? Is it around the database or the network? Most of the SLAs, up to this point, have to do with uptime of the whole application environment. In the future, I think you’ll start to see SLAs around the performance of the application.”

Although some aspects of service may be beyond the provider’s direct control, alternative plans and recommendations that minimize disruptions in access should be offered to the subscriber. Clients should also expect their providers to accept a level of responsibility for the whole network, even when the Web is being used for client access.

Be certain that these operations and management issues are outlined in your service level agreement:

  • Backup schedules
  • Software updates
  • Systems monitoring and maintenance
  • Security

In addition, confirm that these support concerns are addressed:

  • Help desk response time
  • Time to answer
  • Time to resolution
  • Time to escalation
  • Management of escalation

Of course, you want as much service from the ASP as your money can buy—but don’t forget to allow time in-house to monitor the performance of the service to make sure the provider is keeping up its end of the deal. For instance, if your accounting application fails for 30 minutes in peak time, can lost business or productivity be offset by a rebate from the provider? You’ll want to select an ASP that can most closely align with your company’s needs and priorities.

Performance penalties
IDC estimates that the average minimum and maximum service guarantees for ASP service are 98.1 percent and 99.5 percent, respectively. That looks fine on paper, but it actually equals two days to one week of downtime per year. Disruptions in application and network service can have dire consequences on your business. You’ll have to determine how much your company can afford to lose. Some ASPs promise 99.9 percent service, and those may be the ones you’ll want to contact first.

“We have penalties in our contract, but who wants to go there?” said Edwin Csukas, director of data services and CIO of Cortel Business Services, Inc .—a New York City-based systems integrator, telecom, and data management provider. His firm will soon enter the ASP space, and he wants to ensure that Cortel can offer the highest level of service.

“It’s not good to have your system down, even if you do get a payment break,” Csukas continued.

You’ll want to be clear about the penalties invoked if the provider fails to meet the SLA. You should expect to get money back from any reputable provider. However, the extent of the applications and amount of usage can vary, so SLAs scale the amount of the rebate accordingly. In addition, most providers figure in downtime that allows them time to fix errors without being penalized by having to issue refunds.

Staying in, getting out
Because ASPs have small pools of customers at this point, most require lengthy contracts with subscribers, simply because that’s the only way they can turn a profit. “The ASPs spend money to bring you on board as a customer. They do the implementation, so it’s in their best interest to have some of these longer contracts,” Whalen said.

Most SLAs will be based on per-user, per-month fees, and a 36- or 60-month period will be the average length of the agreement.

“If it’s a new ASP and they’re unproven, you don’t know how well they’re going to perform. You may want to negotiate a shorter contract,” Whalen said. “And if there’s a lot of downtime that you just can’t work through, you want to have the option to leave early without a penalty.”

It’s clear that ASPs will need to provide assurances of performance and availability to their customers before the market gains a solid footing. One way for that to happen will be for providers to develop standardized SLAs and prove to customers that what they offer is a fully managed business service.

“In the case studies we’ve done, most customers have been really happy with the service,” Whalen said. “I think that’s a safe statement for the market as a whole. If we heard some real disaster stories, they would be front-page news because the market is in that infancy stage where everyone’s watching to see what will happen.”
Are you planning an ASP implementation? Are you in the middle of negotiations for a service level agreement? Give us your thoughts by posting a comment below. If you have a story idea you’d like to share, drop us a note.