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When is an SLA Not Necessary in an Outsourcing Relationship?

A service level agreement (SLA) plays two important roles in an outsourcing arrangement. It sets the stage for the service provider’s accountability, and it is the major factor in determining the price of the service.

The buyer of outsourced services can achieve a comfort level that it’s getting what it pays for if it regularly monitors the provider’s performance against service level agreement specifications for such factors as accuracy, timeliness, regulatory compliance, customer satisfaction, etc.

Establishing SLAs in an outsourcing arrangement is critical, as it helps the buyer eliminate risks in outsourcing.

However, the fact is there are times in outsourcing relationships where the parties choose to proceed with a new initiative without tying it to SLAs. Is there an advantage to doing this that outweighs the risk?

We asked this question of the buyers participating in Outsourcing Center’s Outsourcing Excellence Awards program. Their responses provide insights into when it might be acceptable to move forward without SLAs as well as factors that lead to a comfort level in proceeding without SLAs.

Types of initiatives entered into without SLAs

The surveyed buyers stated there were types of situations that led to starting new initiatives or a new scope of services without SLA specifications for those services.

1. Side projects. The buyers cited this segment of situations without SLAs more frequently than any others. In these instances, the initiative was a small “side” project that was not part of the process already outsourced. Examples include testing a theory, helping to eliminate backlogged work in a function related to the outsourced process, or experimenting with a potential opportunity that arose from brainstorming.

In some of the side projects, the buyer and provider both discussed at the outset that they could potentially transition to pilot projects or to long-term services, but that was not necessarily a goal in lot of these projects.

One buyer addressed the risk factor stating that essentially there was not much risk in moving forward without an SLA in these initiatives because the buyer would “be in no worse situation” if the initiative didn’t produce the hoped-for outcomes.

2. Time to market. Coming in second place for most frequently mentioned, the buyers in this second group believed they had a unique opportunity and a great risk in not starting the initiative quickly; they felt it was too risky to delay it by taking the time necessary to negotiate SLAs. These initiatives were not for short-term services. They were usually something completely new and not associated with the outsourced process yet were similar to the work already outsourced. In each case, they intended to establish SLAs at a later point in time.

Several buyers commented that these kinds of initiatives were intended as “something we could partner on.”

3. Impact on the relationship. Similarly to the partnering aspect in the instances in #2 (time to market), the buyers in these situations chose to move forward without SLAs because they “didn’t want to be unfair” to their service providers.

In most of these cases, the initiative involved a new process with which neither the buyer nor provider had experience, nor were there industry benchmarks. As one buyer put it, “We didn’t think it was fair to ask our provider to commit to a service level blindly with no data points to back it up.”

A few were situations where the buyer had a mindset that SLAs imply a penalty approach to services and are associated with “managing a vendor” rather than taking a partnering approach and, therefore, should not be used in an initiative designed to enhance a partnering relationship.

Factors leading to comfort with not having SLAs

Without exception, trust was at the heart of the surveyed buyers’ comfort level in starting initiatives or a new scope of services without SLAs in place. Their responses included such statements as:

  • “We are confident they are a partner with us and are working for our mutual benefit.”
  • “We really understand each other and know we can trust each other.”
  • “Our experience with them to date shows we can trust them.”
  • “We know that they understand the quality we expect, so we know we can trust them.”
  • “We trust them because we know they recognize it is in their best interest and their reputation to meet our targets and ensure we are satisfied with their service.”
  • “They always take a long-term approach to our relationship, and they’re going to execute the way they always have, even if there’s not a piece of paper dictating what they have to do.”

However, trust is not blind faith, and in outsourcing it extends only to the level at which the providers have demonstrated their trustworthiness. Among the surveyed buyers, this characteristic was the same for long-term relationships as for relationships that had just completed their transition phase.

Despite their statements that they knew they could trust their providers, the surveyed buyers’ responses revealed their level of trust had limitations. Most also mentioned additional accountability factors that helped bolster their trust in moving forward without SLAs in place. For example, a buyer stated it put in place an audit process to validate all decisions the provider makes on the buyer’s behalf. Several established a base period for the initiative with a deadline beyond which they will cease operating without establishing SLAs.

Lack of SLAs should not mean lack of structure

When is a service level agreement not necessary in an outsourcing relationship? The answer from a buyer’s risk perspective is “never.” However, as pointed out in the examples described above, there are other perspectives and various contributing factors that lead some buyers to veer from that answer.

Negotiating SLAs can be an inhibiting factor. Several surveyed buyers related this happened in their relationships. In one case, they “stopped the SLA conversation in mid-stream” and decided they would work through the SLA later. This ended the constraints and enabled them to turn the conversation back to figuring out what they needed to do to meet their objectives.

Undertaking initiatives without SLAs can also yield some unwanted outcomes. In one situation, the buyer explained that there were several “exhausting” improvement projects that didn’t lead to any anticipated long-term results. “Since then, we don’t do anything that doesn’t have measures around it. What gets measured gets done,” said the executive.

Another buyer found that undertaking a project without SLAs resulted in unwanted outcomes and commented: “It was a stupid thing to do. It didn’t work out well. We certainly have had SLAs since then.”

One buyer executive spoke of the importance of having SLAs because there are a lot of initiatives and large scope in his company’s relationship, and the SLAs help ensure they still focus on areas that aren’t right at the forefront at a given time.

The bottom line? It’s important to note that, despite the lack of service level agreements, the parties in the side-project, time-to-market, and relationship-mindset situations described earlier in this article wrapped some structure around their initiatives. They established roles, responsibilities, target milestones, and feedback/review sessions. In addition, some also established key performance indicators (KPIs) to measure their success.


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