Don’t Let the Credit Crunch Put the Squeeze on Service Levels

The current credit crunch is creating ever increasing pressure on companies to reduce costs in order to remain competitive. As a result many analysts and market observers are predicting that the number of outsourcing deals will increase with a much greater emphasis on reducing and controlling operating costs and gaining a predicted improvement in service performance – the luxury of ‘innovation’ and flexibility is likely to take a back seat until the global economy recovers and provides a suitable environment for more strategic approaches.

Outsourcing at its simplest level is about delivering an agreed package of services to meet the current and anticipated requirements of the business with the ultimate measurement of success being stakeholder satisfaction and corporate performance. Both customers and suppliers measure this success through Service Level Agreements.

The contract that delivers those services must be robust enough to allow the parties to predict the cost and quality of services delivered but at the same time must be flexible enough to respond to changes in business requirements. That’s a tough balance to achieve and many organisations simply won’t get close.

Despite the fact that an outsourcing relationship can directly, or indirectly, affect the performance of a business for a significant number of years, many organisations still fail to recognise the absolute importance of aligning service delivery to business needs, and tend to treat the Service Level Agreement (SLA) as a post contract afterthought or a necessary evil that is all too easily confined to the top drawer after signature.

This weakness is likely to be exposed as never before during this credit crunch period as the pressure increases to conclude deals more quickly and more aggressively to minimise the cost of procurement and meet financial objectives. Developing and maintaining  effective SLAs will be critical for both customer and supplier organisations if they are to avoid the potential for future relationship difficulties.

A well written and well executed SLA lies at the heart of all successful outsourcing relationships and can often be a strategic differentiator for both parties. When executed properly the SLA ensures that the customer receives value for money from its supplier by balancing cost and quality of services.

So what makes a good SLA? Here are eight tips that should help you get the most out of your service contracts:

1. Baseline, baseline, baseline - the SLA is only as good as the baseline data against which it operates. Therefore before entering into any new outsourced relationship, the level of existing service should be captured and baselined. This is equally true whether it is a new outsource or the transfer of an existing supplier contract.This will help to establish minimum acceptable service levels, to identify the performance goals that will be part of any future outsourcing contract, for defining the metrics against which service delivery will be measured and for quantifying service improvement.
   
   
2. Establish and monitor critical KPIs pre-contract – the SLA must deal with monitoring and measuring critical service level performance. Essentially, every service must be capable of being measured and the results analysed and reported. The benchmarks, targets and metrics to be utilised must be specified clearly and unambiguously. However, an over reliance on measuring for measuring sake, or the setting of unrealistic expectations with respect to what the SLA will achieve, can result in a break-down of the relationship that the SLA was originally designed to foster. The focus should be on identifying and measuring a small number of business critical KPIs during pre-contract discussions that will become effective from the very start of the new contract. Additional KPIs can always be added at a later date.
   
   
3. Embed the SLA into a structured Service Management Framework - on its own, an SLA is not sufficient. It is only part of the service relationship picture. It needs to be accompanied by a clear and concise definition of those business objectives that are directly impacted by the services being outsourced. It must be surrounded by a flexible and proactive service management framework that incentivises the supplier to continually improve its delivery performance. Both parties must understand the cost implications of initiating desired service improvements and must acknowledge the commitment necessary to achieve success. But …
   
   
4. Don’t over-engineer the model - in some instances where outsourcing relationships have become strained customers have sought to use the SLA as a weapon for continually squeezing the supplier whilst the supplier has seen management of the SLA as a burden and a drain on resources that should be focused on delivering contractual services. The incremental cost of this over-management is inevitably placed back onto the shoulders of the customer in terms of increased charges or reduced services. On both sides of the outsourcing relationship, the SLA can sometimes be seen as the end goal to which virtually all resources are directed, rather than as a means to achieving the original business objectives.
   
   
5. Be reasonable and realistic - many customers believe that the supplier will automatically deliver levels of service that are significantly higher than their current experience. Whilst this can be a future and worthwhile target, the reality is that simply transferring responsibility for the provision of service will not necessarily result in an immediate improvement to that service. Each party’s requirements must be reasonable and realistic in terms of technology, organisational capability and cost.
   
   
6. Establish a mechanism for dynamic benchmarking - there should be a link between existing service delivery and continual performance improvement using tools such as dynamic benchmarking and applying industry trends to set new goals and targets. This is in the interest of both the customer and the supplier. For the customer’s part they have confidence that they are well positioned to take advantage of performance improvement opportunities. For the supplier, they have the opportunity of building new best practice into their standard service model to reduce the cost to them of service delivery and therefore improve their own profitability. Everybody wins.
   
   
7. Balance penalty and reward – having established metrics and measurement methods you will need to set out what happens in the event of single or recurrent service level failures. You should treat each of these differently but consider multiple individual service failures in a given period as critical as a single recurring failure. Rebates or service credits are a typical approach with the customer retaining the option to terminate with financial penalties for consistent breach. Whatever the regime, the size and nature of financial penalties that a supplier is likely to agree to is unlikely to adequately compensate the customer for the real business impact of service level failure. The agreement therefore needs to take a more positive approach that seeks to incentivise over performance where there is a business benefit delivered as well as punish non-performance.
   
   
8. Define operating levels as well as service levels - as Newton once remarked “for every action there is an equal and opposite reaction”. In the context of the SLA the customer will have a responsibility in some way for enabling the supplier to meet its performance obligations, whether that is due to customer responsible systems or retained business processes.  Therefore for every service level or KPI, the SLA needs to define the customer related process or system activity upon which it may be dependent.
   

Getting the right SLA in place relies more on common sense and structured approach than rocket science. SLAs are simple two way agreements that ensure performance against contract. They are about:

• knowing where you are today;
• deciding where you want to be tomorrow;
• helping you plan how to get there; and importantly
• telling you when you have arrived. 
                                                                                          

They are also about continuous improvement in both relationship and service delivery.

There is a thin dividing line between success and failure and that’s what makes the process of developing them challenging. Get them right and they will protect your investment and support your business objectives. Get them wrong and you will end up paying heavily.

 Source: Outsourcing Leadership Forum