Amazon & the Service Level Agreement

There is a fundamental principle you should remember when negotiating. Ask yourself, “What problem am I trying to solve?” before you settle on terms and/or prices.

Recently, Amazon experienced outages in their Amazon Simple Storage Service (S3), which provides scalable storage and retrieval to Amazon marketplace vendors.  The Service Level Agreement (SLA) says that Amazon “will use commercially reasonable efforts to make Amazon S3 available with a Monthly Uptime Percentage (defined below) of at least 99.9% during any monthly billing cycle (the “Service Commitment”).  In the event Amazon S3 does not meet the Service Commitment, you will be eligible to receive a Service Credit as described below”…  Great.  The SLA was not met this month. Now what? Or in this case, What problem are we trying to solve?

First things first.  If you are negotiating a contract that is important to your business, make sure you have adequate legal advice.  Terms like “commercially reasonable efforts” have specific meaning.  Remedies, cure periods, limits of liability, definition of terms, side letters, the “four corners” and more will impact your legal position if trouble arises.  Make sure your negotiating team includes the right skills, including legal skills.

Now – why have an SLA?  From the seller’s perspective, it can enhance credibility (“Here is proof of how I stand behind my product/service/solution.”), which can raise the odds of signing a deal.  It can also provide a specific statement of liability for failure to meet the SLA.  Affordability is a key part of the statement of liability.  So above, failure to meet the SLA results in an obligation on the part of the provider to supply a credit (essentially, some free service). A buyer may see this obligation as a penalty.  The seller, while acknowledging the “penalty” component of the SLA, also sees it as a limitation of liability.  When things go wrong, this can be important.

From a buyer’s perspective, an SLA provides some assurance that a necessary business condition will be met (as above, “availability of 99.9 %”).  The SLA provides a remedy/penalty if it isn’t.  After all, the buyer has a business to run.

Sounds simple, right?  An agreement on performance and an agreement to a remedy.  A side comment: for those of you who have read some of our other articles, K&R teaches the concept of the Negotiation Success Range™ (NSR™).  However, even a simple SLA like the one at the top of the page involves more than one NSR.  The ranges 99.9% to 99% and size of the credit are two examples.  Each of these terms has a magnitude, interacts with the other terms, and is in fact a negotiated result.  The NSR can help you understand the tradeoffs.  See our NSR articles for some thoughts on the use of that tool.

Back to the “problem”.  The full question is this: What problem are we trying to solve?  It’s a critical question in negotiations.  In the SLA above, if 99.9% availability of the service is important to your business, and you don’t get it, what remedy does a credit provide for you?  The answer comes from answering the question “What problem are we trying to solve?”  If the lack of availability causes you to lose revenue, and your company is publically traded, and the revenue loss will affect the stock price (and your personal options grants), then this remedy is probably the wrong one.  If the lack of availability causes your work to shift from completion on Monday to completion on Tuesday, and you only use the data once a month, the remedy may be perfectly suitable.  The negotiation principle is to understand the problem resolution as an end first, and address the means of resolution second.

Ask yourself, “What problem am I trying to solve?” before you settle on terms and/or prices.  Then make sure the terms and prices reflect a true solution to the problem.  The SLA example above provides a simple lesson in matching your solutions to the problem.  If you do it consistently, you’ll be a better negotiator. (TD)