What is Service credits?

Service credits are the financial teeth behind a service level agreement. An SLA without consequences is a best-efforts commitment; an SLA with service credits is a results obligation backed by a financial mechanism.

The principle is straightforward: the supplier commits to a defined performance level (availability, response time, resolution time). If that level is not met, the buyer automatically receives a credit, typically calculated as a percentage of the monthly contract value. For an availability guarantee of 99.9 percent with actual availability of 99 percent, that might mean a credit of two to five percent.

The credit scale varies by contract. Common practice is two tiers: a lower credit for minor breaches and a higher credit for more serious or prolonged failures. Some contracts also include a cap: total credits in any month will never exceed a set percentage of the monthly invoice value.

A crucial point that is often overlooked: in most contracts, service credits are the sole remedy for SLA breaches. They therefore exclude further liability. If a system outage costs you a week of production, service credits of a few percentage points are symbolic. The supplier effectively buys off their liability with a small discount.

In addition to credits, the contract may include a right to terminate if the supplier consistently performs below the SLA, or a right to an external audit into the root causes of underperformance.

Without service credits, an SLA is a paper tiger. The supplier has no financial stake in compliance, while you depend on their service for your operations. Service credits change that balance and give you an automatic remedy.

But be realistic about what service credits cover. For business-critical systems they are a first line of defence, not comprehensive protection against serious loss from prolonged outages. Combine them with a right to terminate for persistent underperformance.