Observe The Limitations Of SLA Penalty Clauses

May 18th, 2009

With contributors:

Andrew Parker , Elizabeth Rose

Summary

Sourcing and vendor management professionals continue to struggle with devising contracts that balance risk between themselves and their suppliers. One of the most difficult challenges is devising service-level regimes in which a certain percentage of the supplier's revenues are at risk if it misses contractual service levels. Service-level penalties have their place. However, service-level agreement (SLA) penalties provide poor compensation for unsatisfying outsourcing relationships. Sourcing and vendor management professionals should balance their desire for maximum economic redress with greater flexibility in transitioning out of an engagement when faced with poor supplier performance.

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