Commercial and technology contracts legal A-Z: K is for key performance indicator

Commercial and technology contracts legal A-Z: K is for key performance indicator

Commercial Contracts 22 - Confidentiality provisions and trade secrets

A KPI is a measurement tool to ascertain actual business performance, often over a defined period of time. A KPI is not a legal concept per se, but in a contract drafting context can be used as a mechanism through which parties can establish the level of performance under a contract and, in some instances, what effect that level of performance has had on the relevant business. From a legal perspective, effective use of KPIs can be a useful tool for service recipients to quantify loss suffered in the event of a breach of contract, but can also assist service providers to achieve certainty and measure performance.

KPIs often appear in contracts in conjunction with service levels, although the two are distinct concepts and can (and often do) exist independently. There are a number of different ways of distinguishing between KPIs and service levels, but one of the more usual ways of doing so is to regard KPIs as a measure of contractual performance for a period of time up to a set date (i.e. reviewing past performance), as opposed to service levels which form a set of forward- looking service standards to which a supplier is contractually committed from service commencement.

It is important to consider the link between these two concepts when drafting a supply contract, particularly if the supply itself is business-critical. For example, one approach is to use KPI data as a way of measuring whether agreed service levels have been achieved over a set period. This approach requires careful drafting to avoid unnecessary overlap or confusion but, as an example, a service level and linked KPI for system availability in a software hosting arrangement might take the following form:

Category

Service Level

KPI

System availability

System availability (excluding Planned downtime) to exceed 99.9% uptime during each week of the term.

Total system availability figure (excluding planned downtime) per week, calculated as a percentage of actual uptime (in hours), relative to the total planned uptime (in hours).


In the example above, a weekly KPI measurement will be taken, against which the 99.9% service level commitment will be assessed (perhaps from which a service credit might be derived). The example above is, of course, over-simplified, and there are many different ways in which KPIs can be incorporated into contract drafting for the benefit of both service provider and service recipient.

For more information please contact Charles Maurice, or any member of the commercial contracts team at Stevens & Bolton LLP.

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