ARTICLES : MANAGING THE COMPLEXITIES OF BUSINESS OUTSOURCING THROUGH
DEVELOPING A ROBUST SERVICE LEVEL AGREEMENT

As the use of outsourcing as a key business process matures, relationship management between service provider and client and the ability to measure and track performance continues to be a critical success factor. From our vantage point, several large-scale IT and business support outsourcing engagements, particularly within support services and shared utilities, are under duress as these engagements reach their three, four and five-year milestones. Unfortunately, in some cases, clients are unhappy with current services charging a lack of promised skills, structure, processing rigor, timely delivery of services and anticipated upgrades to core technology. Service providers are crying foul as they struggle to “give the client what they want.” Yet, many providers failed to fully scope client service requirements and the anticipated expansion of service delivery over time. In the end, providers invest for more in terms of people, process and technology than their business model suggested when they first pitched the business.The result? Clients are unhappy and looking for ways to unwind the deal. Service providers are losing anticipated profit margins while their perceived lack of service permeates their respective industry thus eroding market confidence.

How could this have happened?

From Crescendo’s perspective, client focus on speed and the tactical “get it done” aspects of shedding administration may have something to do with this trend. Conversely, the provider’s urgency to “win the business” from a sales perspective without understanding the underlying implementation and operational implications also could be contributors. Regardless of when these factors surface – whether during the RFI, RFP or due diligence processes – in the end these issues should be detailed and resolved when the parties create their Service Level Agreement (SLA) and supporting measurement methodology. In all business process outsourcing engagements, developing a robust Service Level Agreement is the “safety net” for initiating and ultimately nurturing a successful client – service provider relationship.

The Service Level Agreement (SLA) is a legal, binding covenant jointly developed by a client and service provider that defines standards, objectives and responsibilities for service delivery, relationship management and problem resolution. The SLA also defines mutually acceptable benchmarks that measure performance against those standards and objectives. Characteristics of a robust SLA include:

• Identifies and matches client needs with service provider commitments
• Ensures expectations of services are realistic and within the provider’s capabilities
• Provides a framework for defining the relationship
• Defines all cost structures (e.g., monthly fees, one-time costs, additional services, expenses, etc.)
• Simplifies complex operational issues and identifies critical touchpoints between the Parties
• Provides a mechanism for escalation and resolution in the event of disputes and / or operational issues
• Enables continuous monitoring of services (e.g., volumes, quality, response time, etc.)
• Provides a framework for continuous improvement
• Eliminates unrealistic expectations by actively managing scope and services.

So if both Parties have the best of intentions, why is it so difficult to develop and live by the SLA? There are several risk factors:

• Evolving client requirements (e.g., “I’ll know it when I see it” syndrome). Clients all too often want to jump on the outsourcing bandwagon striving to shed infrastructure and resources all in the name of saving money without thinking through what they really need.

• Increasing complexity of outsourcing transactions / services required. Service providers tend to overlook complexity in the name of gaining new business. Both Parties have a vested interested in ensuring all services are properly scoped.

• Squeezing further cost reductions from the provider. Too often, clients want to ensure they gain the best service at the “lowest” price rather than the best service at a “fair” price. Squeezing the provider to where they can’t make some money will only lead to service delivery and relationship issues later.

• Allowing service providers to unilaterally develop and manage the SLA. Successful client-vendor relationships emanate from a jointly developed SLA. Even if you start with a provider template, both parties need to collectively review, negotiate and agree on service delivery dimensions and metrics.

• Lacking a joint oversight mechanism to set and monitor service benchmarks and overall performance. The parties need to ensure mechanisms are in place to set initial service benchmark metrics and facilitate a process to review, refine and enforce them over time. Developing a strong relationship management model is paramount to ensuring “what gets measured gets managed.”