Service-level agreements (SLAs) today should be established to ensure that service provider performance aligns not only with mutually agreed-upon terms but with clear benchmarks and service levels that match a company’s business goals. These days, agility and flexibility are central themes for all industries. These themes also influence the methodology for the ongoing management of outsourcing services and the continuous improvement of outsourced activities, functions, and processes.
In this blog, we’ll shed light on how the changing business environment has affected the performance management process, as well as four common pitfalls that companies and service providers should avoid. Although the bones of the process remain intact — such as the definition of service requirements and metrics, identifying business needs and drivers, defining objectives, and establishing accountability for the achievement of the objectives — there are opportunities to flex and adjust to add value.
Why is now the time to reassess?
Let’s first explore why now is the time to re-evaluate SLAs. In the current business climate, companies must get the most out of their supply base. Contracting for specific service levels allows companies to set the standard of service and expectations for service providers. Throughout the supplier relationship, performance measurements become a large driver for how the service is carried out, how the service provided plays into a company’s overarching goals, and if they directly correlate to the cost of the services delivered. IT is now under greater pressure to deliver business outcomes instead of technical outcomes, and SLAs are increasingly evolving to measure quantifiable business outcomes.
How have SLAs evolved?
Over the past few years, we have seen a move from input-based measurement to output-based measurement within SLAs. For example, an input-based measurement could be paying for a certain number of IT headcount to carry out a specific activity, where output-based measurements are focused on measuring results such as how many company users are supported by the IT help desk over a period of time. Output-based measurements help to better align the outcomes with functional objectives. And in some cases, it works to have a blended approach with both input and output-based measurements — allowing for flexibility offers more opportunities to collect metrics that work best for each SLA.
Another interesting shift has been the move toward customer-centric metrics in what we refer to as XLAs, or “experience level agreements.” These measurements focus on if the business outcomes of the service tie directly to end-user satisfaction. The service provider may have delivered on time, but how, in the end, did the customer feel about the experience, and how were they treated? It’s a move from just keeping the lights green to a focus on satisfaction and even delight! In the last several years, we have seen a significant shift in business leaders placing more value on customer experience, whether external or internal customers and these more sophisticated targets reflect that focus.
Finally, we’re seeing that some organizations are creating composite metrics to measure service performance. Composite metrics combine a roll-up of multiple underlying values to arrive at an index – where the key goal is to demonstrate progress on the composite index. For example, you may measure two or three different variables for on-time delivery to make a broader measurement of timeliness as a whole.
Four mistakes to steer clear of when planning an SLA
There are four prominent mistakes that we see IT leaders make when developing SLAs, which may occur before or during contract negotiations and their management.
Poor measurement techniques
One very common mistake is poor measurement techniques, or not measuring performance at all, and therefore not having the data to hold providers accountable or drive improvements. Performance measurement can be a challenge, with data coming from many disjointed sources. While tools are evolving to support better measurement and score carding, many buyers still have a long way to go. SLAs in a contract don’t matter unless both parties share one version of the truth. Everest Group offers strategic engagement reviews to ensure performance is measured and managed throughout the life of the relationship. Our approach to reviewing supplier relationships is to uncover all the details to understand the whys, so you can take practical action.
Setting SLAs that are too stringent
The level of service requested directly impacts the price of the service. It’s important to understand what a reasonable level of performance is in the market to not over-spec expectations. Response times and availability are two examples – there is cost to always-on and fast response. In some cases, that cost may be worthwhile, but the business case should be evaluated to be sure. SLA and KPI benchmarking can be especially helpful here. In fact, price benchmarks are useless unless you understand the associated service levels.
Everest Group helps to guide companies through the drivers of pricing variations. Our price benchmarks are normalized to your company’s context, even when there are multiple, complex factors. Everest Group helps with pricing benchmarks to ensure pricing is appropriate to market rates and unusual SLA’s are not costing you too much.
For those looking for a simple reality check combined with deep market intelligence, Everest Group’s Outsourcing Excellence membership program includes PriceBook. PriceBook is an off-the-shelf reference with insights on price, performance, and delivery metrics as well as drivers that impact the pricing of ITO and BPO services in onshore, offshore, and nearshore delivery geographies. Our pricing analytics as a service retainer adds additional data customization and custom guidance from our pricing experts.
Too many or too complex SLAs
Focus on what matters. Setting SLA measurements takes resources, and you want your service providers optimizing for the right things. We have seen teams with so many objectives that they couldn’t meet any of them, and SLAs are similar. We sometimes see combination metrics that bring together multiple factors. These can be effective if they are similar and well-aligned, but avoid the trap of designing something so complex the average worker can’t understand their own impact.
Ignoring business needs and culture
Internal to the business, it’s important that measurements resonate with the team. We know of one company that moved from NPS (net promoter score) to a letter grade for satisfaction. That language made more sense to their stakeholders, so it worked for them. Simple but impactful. A company that has not focused on external customer satisfaction may not be ready for XLAs. Stick to fundamentals that match business goals.
Check out this webinar to discover how organizations measure, communicate, and improve strategic supplier performance.