Service level agreements (SLAs) remain a critical component of outsourcing contracts, forming the core of service delivery reporting over the life of the IT services agreement. Any flaws when SLAs are drafted can have a significant impact down the line, resulting in a reported measurement of service delivery that doesn’t line up with the reality on the ground.
“This is especially true where the SLA measures only part of the process or service directly influenced by the service provider, but there is no commentary on the end-to-end process or service delivery,” says Abhishek Sharma, vice president of pricing assurance with outsourcing consultancy and research firm Everest Group.
The resulting situation — all the lights on the service delivery dashboard are green but the customer is seeing red — can have destructive consequences for the engagement.
Therefore it’s important, to the extent possible, to get SLAs right. Following are some do’s and don’ts to consider when crafting SLAs for your next outsourcing engagement.
Do use common sense when crafting SLAs
Irrelevant or unrealistic service levels only make governance of the arrangement more difficult. Too many metrics will result in onerous overhead for everyone involved. Instead, “choose the few metrics that actually matter to deliver on desired business outcomes,” says Saurabh Gupta, chief strategy officer with outsourcing consultancy and analyst firm HfS Research “Be pragmatic and use SLAs to drive a hygiene level of performance.”
Aim for fewer, but more comprehensive service levels, advises Randy Wiele, managing director with KPMG’s shared services and outsourcing advisory. In addition, “all sides need to be honest about the tolerance for failure — it’s almost always higher than IT professionals think,” says Clay Calhoun, partner and leader of ISG’s sourcing advisory service. “This saves money in the provision of the services, and ensures the stakeholders understand why the service levels are as they are.”
Don’t view financial penalties as cost savers
SLAs often include clauses for remuneration when an outsourcing arrangement goes wrong. But there is downside to doing so — especially when it comes to accepting credits to compensate for poor performance.
“Enterprises need to realize that SLA-related financial penalties are meant to drive the right service provider behavior, and not to trigger credits at the slightest pretext,” says Sharma. Pushing to create too many “critical performance indicators” — metrics linked to financial penalties — will dilute the individual impact of the most important measures.
“Buyers have come to realize that credits typically do not fully compensate them for the impact of poor service received,” says Marc Tanowitz, managing director at outsourcing consultancy Pace Harmon. “There is greater emphasis on performing root cause analysis and establishing and implementing an action plan of remedies associated with a failure.”
Do consider pushing back on ‘earn back clauses’
Earn back clauses give outsourcing providers the right to not pay a service level credit if a specified level of performance is achieved later on. Organizations should be aware that such clauses are falling out of favor — for good reason. “We have seen a significant decline [in earn back clauses] in contemporary contracts as clients believe that service loss at a particular time cannot be undone by overachieving later,” Sharma says.
Don’t overlap metrics
“All SLAs should be mutually exclusive with no overlap of what they measure,” says Pace Harmon’s Tanowitz. “SLAs should measure different aspects of a symptom and offer visibility into the client’s operating environment and how it is working.”
Do be precise
SLAs should be as definitive and quantitative as possible. “They should be clear about what they are measuring, how they are measuring it, how performance is calculated and evaluated, and whether there are any exclusions or exemptions,” says Tanowitz of Pace Harmon.
ISG’s Calhoun suggests that client and provider should meet before the effective date of the contract to evaluate every service level for measurability, identify the tools to measure them, and examine the potential business impact. “It is surprising how often, despite best efforts at the time of the contract development, this evaluation turns up challenges that must be addressed,” Calhoun says.
Don’t raise the ‘fee at risk’ too high
There is a tendency to assume that if the service provider has more to lose, there will be greater incentive to perform. As a result, clients will often subject a percentage of an outsourcer’s fee to performance metrics. However, that can cause other repercussions. “If [fee risk is] increased beyond a certain point, this could reflect in higher pricing from the service provider as the additional impact is baked in as a buffer,” says Sharma.
Do offer a grace period
Unless there is robust baseline data at the start of the contract, SLAs and associated financial penalties should not be applied at the beginning of the engagement. Treat the first 60 to 120 days as a learning period where penalties are off the table, Sharma advises.
Don’t pay more for better service levels
If your organization is seeking a premium when it comes to service levels, paying more may not be the best approach. “Generally service providers have a singular approach to service delivery,” says KPMG’s Wiele. “The cost associated with higher service levels is more an allocation of risk than a planned improvement in the service.”
Do adjust SLAs over time
If a service level is either not meeting business needs or is creating other challenges, you don’t have to live with it, says Calhoun. Increased use of automation and other service-optimization technologies, for example, have resulted in some metrics becoming redundant and others becoming newly necessary. Revisit SLAs with the provider and make adjustments. “Metrics and associated stringency targets are being reviewed periodically as part of the governance process and changed or edited as per the requirements and with mutual agreement,” says Sharma.
Don’t view SLA adherence as guaranteed success
“The biggest mistake is to presume that just SLA adherence alone will drive performance,” says Gupta. However, IT leaders who take a diligent approach to crafting thoughtful SLAs will be able to use them to benchmark the health of their relationships and take action. “Don’t expect service levels to solve issues with performance,” says KPMG’s Wiele. “They are used to identify the issues; effective service management and governance are ultimately required to improve service.”