It’s a familiar scene for many contract and supplier relationship managers.

You’re in a quarterly review meeting. The supplier has missed a critical service level for the second time this year. Your dashboard is red. Internally, people are frustrated. But when it comes to the conversation about applying service credits, there’s hesitation. You know the supplier is stretched. They are delivering for other big clients. They have other opportunities. And you don’t want to sour the relationship.

In today’s market, suppliers often hold more of the power. Whether it’s due to tight capacity, specialist expertise, or simply the limited number of viable alternatives, many organisations are competing for supplier attention. Being seen as a customer of choice has never mattered more.

But let’s be clear. That doesn’t mean lowering the bar. Strategic suppliers want strong relationships, but they also respect clear expectations. If performance matters, consequences must mean something.

That’s where service credits come in.

What Are Service Credits?

At their simplest, service credits are pre-agreed financial deductions applied when a supplier fails to meet specific service levels. They are not a penalty, but a remedy. A mechanism to acknowledge impact and encourage future improvement.

They are typically structured as a percentage of fees tied to the missed performance area. For example, a delay in response time or system availability might trigger a small rebate or invoice reduction.

The key point is: they are agreed upfront, written into the contract, and understood by both parties from the start.

The Challenge: Using Them Without Damaging the Relationship

It can feel awkward to request a service credit. Especially when the supplier relationship is otherwise strong, or when you rely on their goodwill to go above and beyond.

But the truth is, most mature suppliers expect service credits to be enforced when service levels are missed. What damages the relationship is inconsistency, or surprise.

The best approach? Be clear, calm, and consistent.

You might say:

“As you know, we’ve had two consecutive months below the agreed SLA on uptime. The contract provides for a service credit in this situation, which we will now apply. Let’s use this as a prompt to discuss what changes could help prevent recurrence.”

Handled professionally, this doesn’t erode trust. In fact, it builds it. You’re showing that you take performance seriously, but you’re also inviting the supplier to engage in the solution.

Don’t Just Claim - Reflect and Reinforce

Before triggering a service credit, pause and reflect on the context:

• Has the issue been flagged and discussed?

• Is it an isolated event or a recurring trend?

• Have we as the customer contributed to the missed target?

A transparent conversation can turn a difficult moment into a collaborative one. And if the service credit is triggered, don’t let it be the end of the discussion. Let it prompt action planning, joint root cause analysis, and (where appropriate) shared investment in improvements.

Service Credits as a Positive Business Lever

Too often, service credits are seen as a financial clawback. But used wisely, they can drive broader benefits.

Here are three alternative ways to think about them:

1. Reinvest for Impact: Rather than deducting from the supplier’s invoice, you might agree to reinvest the credit into something that improves service delivery: extra support hours, training for the supplier’s team, or joint process improvement.

2. Use Them as a Signal, Not a Stick: In some cases, even if you don’t formally apply the credit, referencing it can reinforce expectations.

   For example:

   “We’re aware this month’s result would trigger a credit, but we’ll hold that for now, on the understanding we see rapid recovery next quarter.”

3. Tie Them to Business Outcomes: Some organisations are shifting from operational SLAs to outcome-based credits.

   For example, tying credits to customer experience scores, delivery accuracy to end customers, or compliance with ESG targets. This approach aligns performance with what really matters.

4. Consider other Business Needs: In large corporate organisations, this supplier may be tendering for other lines of work or competing in other tenders. Are we as SRM's, ensuring the business is aware of performance? If not, can we move that data back to the pre-award team to assist in negotitaion?

Setting the Tone in Your Contracts

The groundwork for effective service credit use is laid early at the contracting stage.

This means:

• Defining service levels that reflect real business impact

• Calibrating credits so they are meaningful but not punitive

• Ensuring clear processes for measurement, validation and application

• Agreeing escalation routes before performance dips

Most importantly, the language should be constructive. Not adversarial. You are building a framework for partnership, not policing.

Final Thoughts: Be a Customer of Choice With Standards

In the current supplier market, it’s tempting to go soft. To forgive misses, delay action, or avoid hard conversations.

But being a customer of choice doesn’t mean being passive. It means being clear, consistent, and fair. Strategic suppliers value customers who hold high standards and back them up but also engage with empathy and intent.

Service credits, when used thoughtfully, are part of that balanced approach.

They are not just about clawing money back. They are a tool for reinforcing accountability, driving improvement, and sometimes even funding better outcomes.

So next time you open the performance dashboard and something’s not quite right, don’t flinch. Start the conversation. Apply the credit if it’s due. Then use the moment to ask: How can we use this to move forward together?

If your organisation is grappling with the challenges of inconsistent Supplier Governance, you're not alone. It’s a common struggle in complex environments, but also a powerful opportunity. By putting the right structures in place and investing in the people who manage supplier relationships every day, you can turn governance into a strength, not a stumbling block.

At SRM Tribe, we specialise in helping teams build the skills, systems, and confidence needed to manage supplier relationships strategically. Whether you're just starting to formalise your governance model or looking to elevate what you already have, we're here to support you.

Join the SRM Tribe and let's turn supplier complexity into supplier clarity, together.