IT Outsourcing: Why You Need to Reengineer Your SLAs

Chances are, a majority of the service level agreements in your IT outsourcing contracts are, at best, outdated, and at worst, utterly worthless. Here are eight tips for creating more modern and meaningful SLAs.

How's this for an IT outsourcing metric: 90 percent of the service level agreements (SLAs) in your contract are completely meaningless to your business.

Admittedly, the percentage isn't exact and—in some cases—may be exaggerated. But the fundamental message is on target. Most of the SLAs that IT outsourcing providers agree to—from 99 percent network availability to help desk resolution time—bear little resemblance to anything that actually matters to the end users of those IT services.

"Too many times SLAs are structured around things that can be measured, simply because they can be measured, and have no relationship to the success or failure of the business line," explains Kenneth Adler, chair of the technology and outsourcing group at New York-based law firm Loeb & Loeb.

While the IT outsourcing industry has matured—with customers looking for innovation from providers and attempting to weave together deals with multiple vendors—SLAs have not. As a result, most IT leaders have found that traditional SLAs are inadequate governance tools and performance incentives today.

Traditionally, SLAs have been focused on individual components of vendor performance—server availability, network throughput—rather than the end-to-end user experience. "This is based on the theory that if all individual parts are working, then the overall system must also work," says Steve Martin, partner with outsourcing consultancy Pace Harmon.

But that assumption frequently proves false.

"Business owners often complain that the performance of IT services is inadequate even though the service level reports have green lights—acceptable performance—across service level metrics," says Mike Slavin, partner and managing director of CIO services for outsourcing consultancy TPI.

[ For more information on SLAs, see CIO.com's handy reference guide to SLAs and SLAs: A CIO's Guide to Success. ]

The reason IT outsourcing customers can be unhappy with their provider's service despite satisfactory service level reports is because in outsourcing, complete satisfaction is more than the sum of adequate performance on a component level. A provider can turn in 99 percent server availability metrics month after month, for example, but if that one percent of downtime means a critical application is unavailable at an important time, the business user certainly wouldn't be pleased.

Despite conventional component-based SLAs' weaknesses, they shouldn't be scrapped wholesale; they are useful in maintaining an incentive for providers to manage critical dimensions of IT systems and potential vulnerabilities, says Pace Harmon's Martin. "Rather, outsourcing customers should focus on those that really matter and augment them with total end-to-end system or business-oriented SLAs."

That's no small task, but customers can take the following eight steps to incorporate more meaningful, business-oriented SLAs into their IT outsourcing contracts.

1. Engage the Business

"While the commercial terms—pricing, termination rights, transition provision—of a contract are developed collaboratively by IT, finance, supply chain and legal departments, the SLAs are predominantly handled by the IT group," explains Martin. "This typically results in a framework based on measuring as much as possible in as many areas as possible—with heavy focus on areas such as throughput, availability and response time."

For example, there are many technical components involved in successful call center operations—servers, applications, desktop, network, and so on. Traditional SLAs would measure the availability of each of these components but ignore other critical aspects of call center operations, such as processes and capacity, that are equally, if not more important than the technical aspects.

"Collaborate with internal customers to determine what elements are the most important to the company's business function," advises Martin. "Many IT organizations don't go far enough in uncovering this vital data."

Then write the SLA in your business partners' language. "It is critical to keep the definition [of SLAs] in business terms, avoiding technical jargon wherever possible," says Slavin.

2. Get It In Writing

As you work with business partners to find out what aspects of the outsourcing deal are important to them, there will inevitably be trade-offs. "It's a given that you won't have unlimited resources to deliver services," says Slavin. "Work with your customer to set expectations for what can be delivered in relation to the need."

Those SLAs will become part of the pact between you and the IT service provider. But get your business partners to sign on a dotted line, too. "It's important that your customer sign off on the IT service level commitment you're making and accept any service limitations you've agreed upon," Slavin advises.

3. Attack the Application Layer

Application-based SLAs, which measure the percent of time a specific application is available, are growing in popularity. "The business relates more to that kind of metric, because applications are what the business touches directly and are what the business needs need to operate," says Scott Feuless, a senior consultant with Compass Management Consulting. "If the app is down the business doesn't care if it's the server or the network or the desktop, they just want it back up and running."

4. Get Creative With SLAs

It may be true that you can't manage what you can't measure. But don't let a management mantra keep you tied to traditional and technically-focused SLAs. Never underestimate your ability to measure the seemingly immeasurable.

Pace Harmon's Martin recalls a supplier who managed the call center technology for a large wireless carrier. Such a vendor would typically be measured on all of the component parts of the technology they were managing: desktops, servers, applications, network and telephony platforms. But the customer decided to add a business-focused SLA on top of the component-based SLAs that centered on the most critical aspect of their business—customer churn.

"The technology outsourcer certainly didn't have control over the full range of reasons that customers switched carriers, [but] the IT infrastructure being managed was considered a critical dimension of a customer's ability to reach an agent and quickly get his or her problems resolved, and thus was considered to be at least one of the reasons customers churned."

Even though the penalty for missing the customer churn SLA was nominal (given the limited control the provider had over it), it did tie the supplier to an overall business outcome of great importance. And, ultimately, the vendor worked with the customer to recommend both technology and non-technology initiatives to help stem customer churn, Martin says.

5. Put Someone in Charge

The challenge with any end-to-end SLA, such as application-based SLAs, is that the IT service provider may not have complete responsibility for the full process. The customer or another outsourcer might develop and maintain applications, for example, while another vendor provides infrastructure support.

"To remedy this situation, someone inside the company must have management responsibility for both suppliers and cobble together an end-to-end SLA that appropriately assigns accountability," says Pace Harmon's Martin, adding that ensuring accountability among suppliers is no small task "considering the amount of finger-pointing that frequently ensues."

Such a service level manager would be responsible for understanding your internal customer's business support needs, aligning them with your service organization's ability to deliver, and managing that alignment over time.

6. Broadcast Business-Based SLA Performance

Don't leave the service level talk at the negotiating table. Make results headline news. "Put together a communication plan to get the word out about service levels to your internal customer's community and your service delivery team," says Slavin. "Make it easy for them to hear about and remember. Build reinforcement of the message into your everyday service interactions."

7. Revisit SLAs Over Time

Too often SLAs stagnate, even when an outsourcing agreement requires them to be reset and improved periodically. "You'd be surprised by how many agreements require this, but the parties just keep the SLAs that were in place when the contract was signed," says Loeb & Loeb's Adler.

Outsourcing customers must be vigilant about revisiting these performance metrics. Changes in technology offerings, industry innovation or government regulation may necessitate new SLAs that better align with the new business environment. Don't wait for the provider to pony up ideas.

8. Look Beyond the SLA Section of the Contract

SLAs cannot—and should not—be the sole means of governance and incentives for an outsourcing relationship. "Consider risk-reward frameworks that tie the supplier's financial performance to the customer's performance," says Martin of Pace Harmon. "Create incentives for the supplier to learn how to use IT to innovate or create cost reduction or revenue enhancement opportunities by allowing the supplier to share in the upside of business outcomes."

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