The problem with penalities is that it becomes a disinsentive to the general service approach. We find that this method of service performance management yeilds a better and healthier relationship between the customer and the service provider. Note also you can always fall back on 3 consequtive strikes and your out clauses where is the service level fails to meet the minimum target over three consequtive periods of measurement then the client can without reservation terminate the contract. Nevertheless it is important to treat the outsourcer as a partner and not simply as a supplier. Partners have ups and downs but work on it.
Suppliers deliver goods end of story.
The punishment should fit the crime. The more severe the impact, the more severe the penalty. In extreme cases, you should consider termination for cause or material breach. In the case of long-term contracts which are not easy to exit, the penalties should be higher. The supplier may already be paying a significant penalty due to its own business interruption or other issues.