While companies are striving to acquire greater economic benefits from its IT, business operation end users rarely are concerned about technology delivery costs. Internal customers’ concern is: will IT work when it is needed without disrupting business operations.
If IT services are disrupted, it is difficult to assess penalties on an internal IT delivery organization for failure, rather than a situation where you have an outside provider in an outsourcing relationship. In most circumstances, business operations are not aware that the provider has even assessed the penalty.
Providers are expected to deliver at a higher standard than internal operations by the outsourced IT organization; this avoids any perception of a bad outsourcing decision. In an outsourcing arrangement, when a service level is missed and operations have a glitch, the perception by the internal customer will almost always be “outsourcing was a bad decision.”
In contract negotiations, service levels agreements (SLA) are scrutinized intensely, because any SLA slips by the provider may severely impact the customer’s business. Internal organizations will not turn to the provider if there is a problem; they turn to the IT organization to resolve the issues.
Defining Provider Service Levels from the Beginning
Many times, internal IT service levels are used as a basis when issuing an RFP, though they are really deficient due to the following reasons:
- The service levels identified actually may be operating level objectives;
- The defined service levels targeted toward IT operating statistics, but are not key to the business organization performance and/or;
- Accumulated service level information may be inaccurate compared to how industry really measures them.
When it comes to outsourcing, providers end up being measured by IT standards as opposed to business objectives. For example, server availability typically is one of the measurements identified for service levels. Yet, cumulative server downtime calculations may not impact business operations delivery and the provider is assessed penalties. A server determined to require high availability may have redundant back up servers that automatically switches over processing, and in this case, no service disruption occurs.
On the other end, service availability is impacted for a short period of time, and it may be stated within the service level agreement that has been established; therefore the provider does not incur penalties. This outage may have caused a service outage leading to customer dissatisfaction, a loss in confidence by the business organizations and a financial loss to the company. At the same time, the person handling the service desk is deluged with contacts which increase the baseline resources. This in turn rewards the provider with an additional revenue stream, if the calls are not ticketed as a single incident.
The Future of Service Levels
Providers are reluctant to place entire billings at risk when it comes to meeting service levels, and for good reason. There are times where service level penalties may be assessed on areas that are out of the providers control, yet do not fall under force majeure clauses or are caused by another provider in a multi-sourcing situation.
During contract negotiations, a set amount (or percentage) is determined to be in the “at risk pool.” The “pool” is spread over several service levels, some receiving greater weighting than others. Service levels are predominantly measured by IT standards, given the fact that is what IT is use to measuring.
Companies are always looking at better ways to tie service level measures to business satisfaction indices. This approach is evolving slowly due to:
- The difficulty of relating IT service delivery to specific business operations or event;
- Unlikeliness of providers to allow “at risk pools” with areas of suspect measures;
- Assessment may be subject to greater root cause analysis of miss that would result in increased mediation occurrences to determine actual failure responsibility and liability;
- Types of services are changing so quickly on agreements, that each time a new service is introduced, it would result in an entirely new service level negotiation, which may impact other service levels in the contract;
- A required measuring period to observe occurrences and determine what service levels should exist;
- And there are clauses in agreements that assess additional business liability factors that the provider is already subject to outside of service levels.
In addition to measuring the initial defined Critical Performance Indicators (CPIs), greater emphasis is being placed on Key Performance Indicators (KPIs) during the first 6 months of contracts. During this period, additional KPIs are identified and aligned with the overall business performance measures. As these are refined, and both parties are comfortable with the ability to quantify, the KPIs will replace the CPIs.
The concept of service level definitions will require constant modification; this is in part to the rapid change of pace for technology delivery. Though the basic concept of what does not meet a service level cause equate to its effect on business, may lead to aligning to more penalties to business loss. On the other side of the spectrum though, this may encourage providers to promote innovation opportunities leveraging a gain sharing relationship.
About the Author: Charles Rosenfield, Senior Consultant – Financial Analysis: Charles provides over 20 years of experience in the automotive, financial services, hi-tech and retail industries with a global outsourcing leader. He led ITO initiatives with clients from the financial perspective resulting in reduced cost and improved service levels. Charles also served as engagement lead on an outsourcing pursuit resulting in a 75% reduction per transaction cost over a 3 year period while creating a relationship, facilitating expansion of the client’s global market expansion.