Slack waters down cloud SLA after $8.2 million payout

Slack reworked its service-level agreement to be less generous to customers after outages cost the team messaging vendor $8.2 million last quarter.

Slack still promises to keep its service online 99.99% of the time, higher than the 99.9% uptime most cloud vendors guarantee. But it will no longer pay every customer regardless of whether they were affected by an outage. Plus, Slack will average uptimes over each fiscal quarter, rather than issuing credits each month.

Slack also reduced its payout ratio. It used to provide credits worth 100 times what each customer paid for the service during the time Slack was inaccessible. Moving forward, the credits will be worth 10 times that cost. As before, the promise applies to customers on Plus and Enterprise Grid subscription plans.

TechTarget identified recent changes to the service-level agreement (SLA) by comparing Slack's current policy to a version of the document from May available through an internet archive. In a statement, Slack said it had alerted customers to the new policy, effective Aug. 15, early last month.

In a conference call with investors Wednesday, CEO Stewart Butterfield said the old policy dated to when Slack was a young company, supporting customers with tens of users -- not tens of thousands.

The $8.2 million worth of credits issued for recent outages reduced Slack's revenue by 5.3% in the quarter ended July 31. The company expects the credits issued during the quarter to shrink revenues by another $5 million over the remainder of the fiscal year.

A significant outage on June 28 left some customers unable to use basic features in Slack for 12 hours. The vendor also reported outages during the quarter on May 2, July 26, and July 29. Uptime fell below the industry standard of 99.9% in both June (99.83%) and July (99.87%) but hit 99.993% in May.

"Slack has become so integrated in the way many people, departments and companies work, any outage for any percentage of users makes news," said Wayne Kurtzman, analyst at IDC. "Slack had to -- and did -- recently update their downtime policy to prevent getting a big hit from an event where perhaps not every customer was affected."

Cloud SLAs are often difficult to compare across companies. Microsoft commits to keep the rival app Microsoft Teams online 99.9% of the time, less than Slack's 99.99% guarantee. But Microsoft makes that promise every month, rather than every fiscal quarter.

On the other hand, Microsoft requires customers to submit claims to receive refunds for downtime, whereas Slack issues credits automatically.

Slack updated its SLA "to be more in line with industry standards, while still remaining very customer-friendly," Allen Shim, Slack's chief financial officer, told investors. "We do not expect a revenue impact of this magnitude again."

Slack reported nearly $145 million in revenue in the second quarter, up 58% from the same period last year. It expects to generate between $603 million and $610 million for the year, after bringing in $400 million last fiscal year.

Slack attributed its recent service disruptions to ongoing growing pains. The company had 10 million daily active users as of January, up from 6 million in September 2017.

"This is a big area of investment," Butterfield said on the call. "We've made some great hires on the infrastructure side. We've put a lot more tooling in place, a lot more automated testing."

Studies show that reliability is among the top considerations for businesses looking to buy collaboration software, said Irwin Lazar, analyst at Nemertes Research. By reducing payouts, Slack may find it harder to draw contrasts with competitors based on reliability. But meeting uptime targets will ultimately be more important than the details of its policy, he said.

"If Slack can demonstrate that they are routinely meeting or exceeding 99.99%, I don't think the reimbursements will matter much to current and prospective customers," Lazar said.