SERVICE LEVEL AGREEMENT (SLA) in OUTSOURCING

By: Lukman Susanto - 2003

Abstract / Introduction

A Service Level Agreement (SLA) is an official document included in master contract for an outsourcing agreement which includes detail description of services required, level of performance needed and where applicable: credits received by us and bonus given to the provider depending on their performance level (Kathleen, 2001). This is the only method to legally bind the agreement between us as a customer and them as service providers. To prepare an effective SLA, firstly we need to determine adequate service level specification needed by our business processes. We can then observe to find the appropriate providers who are capable to achieve that level.

What is a SLA?

While overly high specifications drawn usually means better, more reliable, more responsive and less flaws services, as common business rules, this would attract more costs as well (Kathleen, 2001; Patterson, 2001). We do not want ended up by paying too much for something that we may not need in near future. As our business may grow, we can always make an agreement to review the SLA after a certain period of time to make some adjustments based on our current business needs (Patterson, 2001).

Here are some general guides to prepare our SLA (Darwin Mag, 2002):

Only ask what we really need

For example, many executives are now attracted to have their online system available for 24/7. It would be nice if we all can have 100% availability, however again this is nice to have and not necessarily means we need it. The fact that guaranteeing 100% availability is cost significantly more than 99% or 98% (Darwin Mag, 2002), we need to scrutinize our business to find what we really need, at least for the moment in time.

Protect the important stuff

We need to bring our IT department or any expert from our company who understand the system to be involved in analysing the SLA including possibility of misleading term or agreement which may affect our key business performance in overall. This is to avoid generalising possible critical aspects in our business. For example, if we outsource more than one function, we may need to measure the performance individually instead of overall or even determine different level for each function to represent the importance of it (Darwin Mag, 2002).

Clearly define our terms and monitoring processes

If for example, we are promised 98% of system availability, we need to know what is that 98% measured against, is it including scheduled maintenance, acts of God, natural disaster or terrorism, how do we measure that figure and the most important thing is how do we monitor and in what period of time the report will be produced (Darwin Mag, 2002).

Include the best and worst case situation

In general 98% sounds a good figure to rely on, however if the reporting period is in monthly basis it is acceptable to have 14 consecutive hours down time and the provider has no obligation rectify the problem sooner as long as that 98% measurement is still fulfilled. It would be worse if that down time happens during peak time. How would that event affect us as business? This example illustrates the need of careful analysis for such possible extreme cases.

Draw the consequences for substandard performance

Even though almost all SLA includes “fines” as consequences to substandard performance, this often doesn’t compensate our actual lost as a result of that event. If the outsourced function is crucial in our business we need to find a better solution than just letting the provider to use that “fines” to solely get away with its responsibility.

Draw the appropriate rewards for satisfactory performance level

We do not normally prepare to give rewards to our provider for outstanding performance written in SLA as we only prepared to pay a certain cost for a certain performance level required by our business. However, if we do find a significant benefit / profit out of that increased performance and willing to give some rewards, we need to clearly state it and describe the mechanism to measure the rewards against our profits.

Ask for continuous adjustment to meet current industry standard and requirements

As industry standards always grow to meet market demands, so is market demands on our business. Our outsourcing contract must be open for future improvements. For example, the figure of 98% which is acceptable in current condition may no longer be appropriate to the future industry standard, i.e. 99.50%. SLA has to be adjusted “periodically to match industry standards” (Darwin Mag, 2002).

Why is it essential for outsourcing?

As the nature of outsourcing, we will virtually transfer the ownership and responsibility of a function within our business to the service provider (Kathleen, 2001). In most of cases, once outsourced we have no control on how that function will be performed. “If we try to remain in control and dictate how the service provider should run the outsourced business process, we will rob the provider of its leverage” (Kathleen, 2001) and neither us nor them will get any benefit out of it. However, the outsourced functions are still part of our business which is in our interest should be able to perform adequately to support our business as a whole.

This is where SLAs playing an important roles to guide our service provider to understand our business needs so that they can carry out their tasks as needed to be and to monitor their performance as well as to legally establish each party’s obligation out of the outsourcing contract. “The only way to ensure a comfort level for us is to set required service level specifications and then regularly measure the provider’s performance to determine whether it has achieved those levels” (Kathleen, 2001). Outsourcing as any other business agreement requires a well prepared, carefully analysed and documented details for each individual points to eliminate risk to the buyer and in the end, to achieve win-win relationship between both parties (Kathleen, 2001).

What it should contain?

When preparing a SLA, we need to include but not limited to the following:

Terms and services will be expected

First thing that we need to address is all the general terms that we will use throughout the SLA. This may include the key persons who involve in the agreement and also those who directly or indirectly related with the project. The next thing that we need to prepare is the list of services that we expect from the service provider which details all the doable tasks and where applicable general responsibilities of the provider (Deckelman, 1997; Kathleen, 2001).Also in this introduction part, we need to include our business blueprint which will be used as a guide by the provider. Some of the key issues may be raised to pinpoint the important parts of the outsourcing plans.

Service levels will be measured

This is a part where explaining how the provider’s performance will be measured. Provider will me measured its quality, speed, availability, capacity, reliability, user-friendliness, timeliness, efficiency or effectiveness of services. These figures should be discussed with our provider to bring out an achievable level as well as value for money. Negotiation in this part is extremely important to get a reliable SLA which beneficial for both sides (Peterson, 2001).

Service level measuring process

A system that enables the measuring process should also be determined. Measuring process can be conducted by us as a client, by our provider using their own measuring system or we can use third party vendor to objectively monitor our provider’s performance. In this part we need to discuss the following issues:

Accuracy: We need to make sure whatever measuring system we use and whoever responsible with the process should be able to provide an accurate figure. Inaccuracy will result major damages to our business (Peterson, 2001).

Cost: The measuring system itself will cost our business with the amount vary depending on how far do we need to assign resources into it. Careful analysis may be required to determine the compromised level between a perfect measurement and high cost (Peterson, 2001).

Visibility: The measuring system should allow us to monitor in real-time as well as analysing historical data (Peterson, 2001).

Measurement periods

Measuring system must also have a predefined period so that we can see our provider’s performance level. Depending on the importance of the task that we outsourced, we need to define a reasonable time range which is good for us and viable to our provider. Long time range normally give our provider “more opportunity to make up for bad performance” (Peterson, 2001) and the shorter one will motivate them to keep up more often. These issues should be negotiated between both parties as this may involve some additional costing. Another important issue in this part is confirmation whether “acts of God”, power black-out, accident, terrorism or any other unmanageable events will be included in the calculation. If so, we also need to clearly define any possible events and categorise them in either group.

Reporting procedure

The service provider should provide a proper report which is “clear, useful and timely” (Peterson, 2001). This reporting process should be done in periodical basis same as measurement periods. Raw data may also need to be presented as original report produced by computer or monitoring system.

Performance level agreement

After we agree on all points above, we can then appoint the level of performance our provider should perform. Included in this part are different levels of our acceptance such as “target service level and minimum service level” which also carry credits or where applicable bonuses associated with the achievements. We may also need to draw the extreme figure with which we will then be able to terminate the contract based on failure to deliver the service at satisfactory level (Deckelman, 1997; Peterson, 2001).

Future improvement and SLA review

A SLA should be open to accept some refinement and improvement after being used for a certain period of time. As the world is constantly changing and so is the industry standard (market demand) if the contract is for a long time (i.e. 5 or 10 years) we and our provider will have to make an agreement to be able to revisit our SLA and make some adjustments required. There are different variants which we can use to accommodate this change, for example: using improvement schedule where we are both agree to increase performance level figure (i.e. by 0.5% every year), automatic annual adjustments based on current industry standard or we can use our provider’s excellent performances throughout the year to adjust the target performance level figure (Peterson, 2001).

Service level credits

This is a credit which should be given to us by our provider in the case of service failure. To prepare this, we need to describe level of importance for each individual task rather than relying on a general performance level figure to clearly shows which parts of services are crucial to our business. As there are many possible ways for our supplier to get away with their responsibilities, we need to carefully elaborate this credit system with service level measuring system. “We are smart if we could design the service level credit structure on obtaining good performance throughout the contract term” (Peterson, 2001). At this part of SLA, we need to also discuss certain conditions which may breach our agreement along with their nitty gritty.

Service level bonuses

This is a bonus which we may give to our provider for their outstanding performance. Even though this part is extremely rare, if that performance may directly boost our business and bring a significant profit, we may prepare to give a bonus to our provider. In this case we need to carefully analyse our gain compared with our provider’s excellent service in order to determine an appropriate bonus.

Termination of services

This part is important to redraw the possibility of agreement breach as a result of substandard performance. “We can set minimum service levels at the level that allows termination”, (Deckelman, 1997; Peterson, 2001). This may include a minimum single task failure or multiple failures; the variation can be developed depending on our condition. This condition will give us a clear termination method when our provider could not achieve the minimum required level of service.

What are the issues of implementing and monitoring such an agreement?

There are many issues which may arise during the implementation process. People are often putting their maximum effort in preparing a SLA without worrying too much its implementation. As more people from both parties trying to understand the SLA overtime, they may interpret it variously which may result a big confusion and crossed understanding. No matter how careful we prepare it, there is always something unpredicted which may affect our outsourcing reliability or misunderstanding throughout implementation. The only way we can keep track of our agreement is by monitoring it; however monitoring a SLA implementation with all its details may cost an enormous amount of money. That is why if it is feasible we need find a reliable provider regardless the initial cost rather than paying more and more along the contract period just to make sure that our “less-reliable” provider will do their job properly.

Concluding thoughts

Preparing a SLA is a painful process; however a good, comprehensive and effective SLA is a foundation to a successful outsourcing relationship (Deckelman, 1997).

References / Appendices

A Guide for Establishing Service Level Specifications for Outsourcing Relationship – White Paper

Kathleen Goolsby, Everest Group, December 2001

Ten Key Questions for Developing Effective Service Level Agreements

Brad L. Peterson, Partner, Mayer, Brown, Rowe & Maw, October 2001

Service Level Agreement – General information

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Service Level Agreement & Service Level Management

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A Guide for Establishing Service Level Specifications for Outsourcing Relationships

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Change Without Pain: An Alternative Model For Year One Of Outsourcing Agreements

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Setting Standards For SLAs

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Service Level Agreement management

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Service Level Management Can be Key To IT Success

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Negotiating Effective Service Level Agreements (SLAs)

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10 Myths About SLAs

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Penalties and Incentives in Outsourcing Agreements

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Service Level Agreements

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