If you\u2019re like many CIOs, the chances are your company compensates third-party IT service providers for something they didn\u2019t do or pays them twice for something. Technology leader Nipa Chakravarti realized that\u2019s what was happening at TransAlta (Canada\u2019s largest publicly traded power generator and provider of renewable energy). I recently talked with Nipa, and she made an interesting comment: \u201cI want to move away from SLA-driven contracts.\u201d\nAs Nipa explained in a prior blog post, she successfully restructured TransAlta\u2019s IT group to be more responsive to business needs, doing the things that the business users care about and doing them in a reasonable time frame and cost point. As detailed in that blog, she dramatically changed the value equation for IT at the company, making it much more cost-effective, achieving results much faster and at the same time delivering higher quality and more reliable work. That\u2019s quite a formidable set of accomplishments. So it\u2019s worth paying attention to her strategies for taking the organization to the next level.\nTwo significant problems with SLA contracts\nA key component in her strategy is rethinking the role of service level agreements (SLAs) within her organization and with third-party service providers. Why? As Nipa told me, \u201cWhen we have an SLA contract, the service providers just meet the service levels. That\u2019s what they do. But that\u2019s a problem. They don\u2019t meet our rapidly changing needs; they just meet the service levels, stipulated in the contracts.\u201d\nOver time, SLAs drive behaviors that are focused on delivering a minimum level of service at minimum cost to the provider. This forces IT organizations to become a commodity and not a strategic, value-added partner to the business. SLAs by their very nature are established as achievable contractual targets and can be static over time. Misused, they can be counter-intuitive to driving business agility and pace.\u00a0\nThere is little reason to innovate in an SLA arrangement. If it isn\u2019t broken, why fix it? She shared an example of the situation with their infrastructure managed-services provider. The SLA contract has metrics around uptime, performance and other metrics. Although the vendor is admirably meeting the SLA standards today, there is little incentive to dramatically shift the IT organization to keep pace with rapidly changing business requirements.\nThe company also invested in technology. The issue is she no longer believes the provider should get credit\/payment for meeting those SLAs because her company invested in process redesign, automation, behaviors that allow them to get in front of issues and eliminating the bugs and variables in the infrastructure environment to make it reliable. They addressed the issues and stabilized the environment. So now it\u2019s easy and routine to meet those SLAs.\nTherefore, paying the provider based exclusively on meeting SLAs means paying for results that are sub-optimal and over time erode the benefit of a managed-services arrangement. And in areas where the provider\u2019s services included also investing in stabilizing the environment, paying the provider for meeting SLAs means the provider, by design, is paid twice.\n\u201cMeeting the SLAs is no longer our concern,\u201d Nipa explained. \u201cBasically an SLA contract says the provider\u2019s performance is good enough when meeting the SLAs. But good enough isn\u2019t what we want to buy. We want to stop the issues from happening in the first place. We want to pay the provider for success in improving our environment.\u201d\nBut the criteria around \u201csuccess\u201d changes over time, especially with the pace of change in technologies and business models. Nipa stated, \u201cOur first struggle for success was stabilizing the environment. But once it\u2019s stabilized, that\u2019s no longer a measure of success. We have to continuously drive towards right-sizing technology services to business need. The IT world is changing; and now I need, and our business partners need, agreements with providers that help us evolve more than meeting basic performance requirements.\u201d SLAs around uptime and reliance don\u2019t matter when measuring for success where the focus is on speed and value.\nSLAs are the wrong contract governance vehicle\nService level metrics are worthy targets. They set the bar for a provider\u2019s performance. But once the provider can consistently achieve those targets, the SLAs just represent yesterday\u2019s problems and their importance diminishes. This is especially the case in infrastructure services. SLA contracts just live on past successes and don\u2019t incentivize stretching forward to improve the environment or processes.\nAs she rethinks the role of service levels within her organization and with third-party service providers, Nipa recognizes that service level metrics are usually time based (such as how quickly an agent can close an issue). But time-based metrics drive a different type of service behavior than a metric based on quality and business outcomes.\nThe bottom line of SLA contracts\nSLA contracts are the wrong governance vehicle and shouldn\u2019t drive a services relationship. Unless you keep moving the SLA\u2019s bar to align with your current goals for \u201csuccess,\u201d an SLA contract wrongly articulates what your business wants the provider to work on and achieve.\nAs CIO, you need to move your organization towards a defined \u201cbusiness expectation\u201d model. These expectations allow the business to express targets that match IT delivery models to business outcomes. It may not be unreasonable for a business-critical service to expect 24\/7 or 100 percent availability 100 percent of the time; but there may be other services that need much less than the 99.9 percent availability level. Expectations and requirements can change often, so your IT group must be in a position to adapt.\nA model based on business expectation allows IT to focus on providing solutions that are the best fit for the business vs. a best-in-class technology team. In today\u2019s economic realities, best in class is often the most expensive option. A \u201cbest-for-business\u201d expectation allows a balanced approach to performance and cost or value creation. These decisions are always made in partnership between business and IT.