Three years ago, I wrote some blogs stating that Service Level Agreements (SLAs) are dead. Unfortunately for businesses, SLAs are still around – they’re like zombies. Companies realized for many years that SLAs don’t work. They are not just ineffective; they constrain companies from getting to their goals for services. But, like zombies, they did not die. Why? Because there was nothing better to use in governing service agreements. Until now. In this blog, I will explain what works better than SLAs, and why.
In digital service models, companies need to move to a new set of metrics. Metrics that focus on productivity. Metrics that focus on velocity. Fluid metrics that allow companies to adjust the target to a changing reality. Metrics that accurately affect pricing. Metrics that do not lock companies into old contractual vehicles that no longer work.
Governance balances the competing interests and needs of the buyer, end users, and the service provider. The intent of governance is to build a strong relationship, and align strategies, goals, and objectives through collaboration, mutual respect, and continuous communication.
Governance models should be foundationally designed with a joint relationship management structure and processes to build a cooperative, trusting working environment that encourages both the buyer and provider to make collaborative, proactive, mutually beneficial decisions. This requires active leadership by senior management in both organizations, including hands-on sponsorship, ownership, coaching, mentoring, influencing, and intervening, when necessary.
A true win-win partnership, as enabled by effective governance, is one that motivates the provider to do satisfy not just the contract but also all parties, and deliver value beyond the metrics and the original contractual expectations.
Following are the key principles behind setting up a partnership type of relationship with a service provider.
With a tiered management structure, effective communication, responsive and efficient decision-making, and resolution are supported across three distinct levels to ensure alignment between executives and delivery teams. This keeps the focus on day-to-day service delivery without either party losing sight of strategy goals. The three tiers and their associated responsibilities should be:
To ensure objectives are met and the spirit of the partnership relationship is maintained, the people engaged at each level must view their role as working with the provider, rather than policing its activities.
Defined and documented decision rights will help organize decision-making and execution by setting clear roles and accountabilities, and by giving all those involved a sense of decision ownership. In addition, the executive, managerial, and operational levels must aligned across both parties. While this may seem obvious, governance models often break down due to misalignment of these levels.
Sponsorship should be evidenced by the commitment of sufficient resources and management time to nurture the relationship at both the tactical and strategic levels. All communications, formal and informal, must make it clear that senior management views the outsourced relationship as a true partnership, and will work together to provide joint oversight to achieve the desired outcomes. Moreover, commitment and plans for strong change management, training, and communication need to be rolled out, reinforced, and managed.
Buyers must make significant investment in standing up and staffing the governance organization, and management must be aware of the potential impact of the joint governance on current policies, processes, budgets, skills, competencies, and relationships, etc.
To help ensure mutual success, a proactive feedback loop should be developed, and periodic reviews by buyer and service provider stakeholders with progress reported to senior management should be instilled. These regular reviews enable both parties to process feedback, make required changes to the governance model, and proactively manage expected deliverables throughout the contract. They can also present a strategic opportunity to improve buyer and provider organizational capabilities, operational resilience, and competitive analysis in the longer-term.
Has your company experienced misalignment among the executive, managerial, and operational levels? What did you do to rectify the situation?
For insights on two key guiding principles to consider when building your governance team, please read the Proficiency blog in this series.
Some organizations – particularly first time outsourcers – tend to think that outsourcing engagement success ends with carefully dotted I’s and crossed T’s on the contract. Unfortunately, they often overlook governance, which is critical to ultimately driving the value captured from the relationship.
What is outsourcing governance? While definitions abound, one Everest Group particularly appreciates was cited in The New Global Services Governance executive point of view written by several of my colleagues:
Governance ensures that stakeholder needs, conditions and options are evaluated to determine balanced, agreed-on enterprise objectives to be achieved; setting direction through prioritization and decision making; and monitoring performance and compliance against agreed-on direction and objectives.
With that stage setting, the blogs in this series looks at three key components of good governance…proficiency, partnership, and playbook. They’ll be refreshers for some readers, and provide new insights for others.
First up is proficiency.
Outsourcing represents a significant change in the way an organization provides its services. Governance of this new service delivery model requires a considerable effort to implement and optimize, even if guided by an experienced team.
A common pitfall is staffing the governance function with personnel that were previously responsible for managing the functions internally, without ensuring they receive the guidance and training required to operate in the new service delivery model.
There is a big difference between knowing what needs to be done and actually implementing and executing it effectively. Understanding governance models, frameworks, and documentation alone will not capture the full value of the relationship. Allocating resources with experience managing service providers and the nuances of outsourced services is critical to achieving the positive results desired.
Here are two key guiding principles to consider when building the team that will play key governance roles:
The retained functions (those that existed prior to outsourcing and will continue to be owned by the buyer) are not the same as the governance functions
The skills needed to manage an outsourcing partner are not the same as those needed to run an in-house organization
What best practices has your company implemented when building its governance team?
Next in this three-part series: Partnership. Be sure to read it for key principles on establishing a partnership-oriented relationship with your provider.
Understanding the importance of effective service level agreements (SLAs) that are practical and create business value, most buyers design contract SLAs that are generally within provider’s control, are measurable, promote convergence of interests, and usually have a proper baseline. However, many buyers feel a need to reassess and redesign their service levels at some point during their contracts’ lifecycle.
Our interactions with a large and diverse group of buyers and service providers have shown that service level redesign is typically driven by one or more of four key reasons:
The core of the SLA redesign process is to understand the mistakes made during contracting and execution. It also requires an effort in visualizing at least three to five years into the future understanding the IT environment that will be sufficient to cater to the business demand. Therefore, this also requires an understanding of evolving business needs.
The process itself consists of four steps, as outlined below:
This process is relatively easy for buyers that early on missed the basics of good SLA design such as practicality, manageability, collectability, measurability, etc. Understandably, it is harder for buyers that are satisfied with their provider’s performance but want to evolve the relationship to the next level to extract more business value.
Yet, whichever category they fall into, we have time and again seen buyers reducing the number of SLAs, believing it will lead to lesser complexity, simpler governance, and reduced cost. However, doing so may not solve the problem as they may end up removing even the “must have” SLAs.
Additionally, we frequently see buyers incorporating metrics that on the surface appear good but in reality cannot be concretely measured or clearly defined, such as innovation, collaboration, next generation delivery, etc.
SLA redesign is a challenging task that must take into account not only cost and efficiency, but also the evolving competence of service providers, peer benchmarks, an understanding of the past, knowledge of business priorities, and, above all else, analysis of its necessity.
What have you experienced with SLA redesigns? What were your drivers, challenges, results, and outcomes? Do you have good, bad, or ugly to share with your peers?
ITO deals in which service providers’ compensation is linked directly to the business outcomes they achieve for the clients have started gaining prominence. While the idea has been around for some time, and indeed should be part of a gradual evolution process from pure FTE or T&M models through to gainsharing arrangements, we’ve observed with interest both parties’ strategic interests (see image below) converging through shared business outcomes on several mega deals.
A number of clients have recently asked for our advice and insights on the upsides and downsides of outcome-based pricing models. Following are the factors we told them they must carefully consider before asking their providers to make the change:
At the end of the day, an outcome-based model is a bit like marriage – it represents the triumph of hope over experience. So be clear about why you are getting into it, choose your partner carefully, share space, and who knows – you could live happily ever after!