When it comes to commodity type services like web hosting, desktop support or broadband provision hammering out a service level agreement that ensures you get the right level of service is not exactly a great challenge. Firms have been purchasing these kinds of services from providers from many years now and the issues around their provision are well documented.
But for more complex outsourcing and managed service agreements drafting the right SLA so that both sides come out with what they need can be a difficult task. After a slow start total outsourcing of IT functions has become much more common in Ireland in the last couple of years and getting the SLA right in those cases can be a protracted job.
The stakes
The stakes have been increased even further with increasing evidence from international studies that shows that outsourcing is not always the panacea that is expected. A major study from Deloitte published earlier this year found that “contrary to the optimistic portrayal of outsourcing by vendors and the marketplace, outsourcing is an extraordinarily complex process and the anticipated benefits often fail to materialise.” Amongst the problems cited in Calling a Change in the Outsourcing Market were vendor complacency once contracts were signed, outsourcing adding a level of rigidity to operations, hidden costs (suffered by 38% of respondents) and vendors unwilling to fully absorb the cost of business losses.
Clearly many of these issues could be tackled up front by spending more time hammering out the service level agreement before responsibilities are transferred.
“There’s often a mismatch in expectations,” says Stuart McLaughlin, business development director with outsourcing giant Accenture. “There’s no point in the buyer thinking he’s bought into a commodity arrangement to fix a problem cheaper, if the supplier thinks he’s adding strategic value.”
Two parts
Pat Millar, managing director of Clarion Consulting says there is two distinct pieces to an SLA – the service description and the management level. The service description describes in detail what the service provider will do, covering things like how they will provide the service, the hours or operation, the cost and escalation procedures and as Millar puts it “most people get that ok.”
The management level part of the SLA should deal with issues like the overall level of service provided, how disputes will be resolved and how often the agreement will be reviewed. “People don’t pay any or very much attention to it and as a result when things go wrong they have a row,” says Millar.
Brian Hurley, managed services country manager with HP Ireland admits that planning and putting together an SLA is a time consuming process but one that is “very worthwhile.”
“It provides a description of the services and the customer then agrees that’s what they have bought,” says Hurley. “If there is any grey areas that’s where you’ll have a problem because the customer will say they thought they were getting x instead of y. If the customer needs a different level of service that will have to be priced accordingly.”
Transferring problems
It is important that outsourcing isn’t just seen as transferring a problem part of your infrastructure to a third party or the relationship is doomed to failure. As Paschal Naylor of outsourcing providers EDS GFS points out there are obligations on both sides to make the agreement work.
“The SLA protects both the customer and the supplier and it’s as important for the supplier as the customer,” says Naylor. “The key to the relationship for the supplier is understanding the customers business. The client also needs to fully understand what their need is. For a particular business, if a component of the service is ingrained in how they do business, not meeting that service level would damage their business so much.”
Naylor suggests that rather than outsourcing a problem it is much better practice to fix the problem first and then decide whether to keep it in-house or hand it over to an outsourcing company. “Even if you decide to keep it in-house there’s no reason why you can’t have internal SLAs in an “in-source” model,” he says.
As a result the SLA shouldn’t just be seen as listing the obligations on the service provider. It also clearly needs to state what the customer has to do in order for the service provider to be able to meet the agreed service level.
Another potential pitfall that can occur before negotiations even get started is overly focusing on cost savings.
Savings focus
“Outsourcing enables you to control costs but it’s not necessarily cheaper than doing it yourself,” says John Sexton, Sales Director with System Dynamics. “You should be looking at outsourcing to deliver enhanced services and improvements in productivity.”
With the groundwork done and both sides clear on what they are getting into the detailed negotiation on the SLA gets underway. This covers issues like hours of service, lines of reporting, response and resolution times, escalation paths, penalties and credits for delivering above and below the stated service level, outline of key metrics, timetable for reviews and the dispute resolution procedure.
“There’s a tendency early on to measure everything,” says McLaughlin. “But it’s a cycle. You start off with a service level report delivered monthly containing a couple of hundred service metrics. As the relationship matures that narrows down to the core metrics which tell you if the relationship is working.”
However even then McLaughlin cautions against either side focusing too much on the numbers.
“It’s possible to deliver service indices that meet the SLA but you still have an unhappy customer,” says McLaughlin. “It’s important to have the measurements in place but they are not everything.”
Unless it’s a well-defined service that can be easily separated from the rest of your business e.g. web server hosting, be very wary of using a standard agreement provided by the vendor. While their standard agreement might be fine as a starting point for negotiations your needs are likely to be unique to your business.
Drafting steps
The first step to drafting an SLA from scratch according to Gary Cobain, General Manager with BT’s solutions division is to understand the impact to your business if that application or services goes down.
“The BT approach, called Application Assured Infrastructure, which we launched four or five months ago globally, is about assuring the availability of a business application rather than SLAs per se,” explains Cobain. To support this approach BT goes through a five step process which includes benchmarking how the application is performing currently and optimising that performance if required. BT also looks at the context in which an application is being used – for example, a teller at a retail bank will find a 15 second delay in pulling up customer balances unacceptable but if emails arrive from the server a minute late it is not going to impact on how he does his job. Accordingly the two applications would be prioritised differently under the terms of an SLA.
If your view is that an SLA needs to be hammered out in fine detail so that you have a big stick to beat the service provider with down the line, you are definitely starting on the wrong footing.
“It’s all about the relationship,” says Millar. “You are going to be working with them for five or seven years. It’s a big life changing event which has the potential for massive disruption to your business. It’s in the interest of both sides that the relationship works out.”
Open and honest
It’s also important that both sides are open and honest with each other and share all relevant information.
“Historically there was a view that people were not willing to share proprietary information with a service provider,” says Sexton. “But if you are just squeezing the outsourcer and not providing them with all the information then you are defeating the purpose.”
In fact, David Murphy, Director of Professional Services with Sabeo who provide very specific services around high availability Linux and Unix installations, suggests that it is often his role to challenge what the customer is asking for.
“The customer will start off by giving you a broad brush and telling you they need a 24 x 7 capability with a two hour response time for every element of their infrastructure,” says Murphy. “You have to break down the service and look at what’s mission critical and what isn’t. You might want a two or four hour response time on the mission critical stuff which you may define as revenue generating systems. But your internal systems could be down for a day and there would be no impact on your business.”
“We had one client that wanted a stringent SLA around the performance of the network – they wanted service penalties if they were not met,” explains Cobain. “We said we were quite happy to do that but conversely if we exceeded expectations they were to pay more.”
Penalties
Murphy concurs that punitive penalties are not a problem but customers have to be aware that service providers will price that into the contract. “You have to balance penalties and credits so that it’s a win/win for both sides,” says Murphy.
The increased complexity of the outsourcing undertaken in this country and the move towards business outsourcing rather than pure IT means that quite often there is more than one provider involved in the agreement. As Sexton points out this challenges the IT manager as they are now increasingly managing vendor relationships as much as technology.
“You have to try and keep it simple and we would always focus on our core areas,” says Sabeo’s Murphy. “We avoid where possible sub-contracting to other service providers because we have less control of what we are doing and thus our ability to meet the SLAs. When we do it, it’s with companies that we know can provide the level of service we want to provide to our customers.”
Customers prepared to accept that SLA’s are a two way street may want to consider including a gain-share clause in the contract. Under such a clause, if the service provider introduces new processes or technology that enable the service to provider more cheaply, then both the customer and outsourcer will share the gains. This ensures that it is in the interests of the service provider to introduce new innovations.
“There will always be new technologies,” says Cobain. “The question is whether they will benefit the customer.”
“Typically there will be a tech-refresh built into the SLA – it would be unwise to write it around a set of hardware and software for the next five or seven years,” says Hurley.
Agility
With the IT industry now focusing on how to help clients be more agile and responsive to changing business needs service providers are now looking at how to make their services fit with peaks and troughs in client demand.
System Dynamics response is a particular form of managed service which it has dubbed Agile Services. Targeted at both operational IT departments and developers, customers sign up for a base level of support but can quickly add additional capacity as it is required. Rather than abdicating their responsibility the IT department see it as a way to complement their own resources.
“Budgets are always tight but at the same time there’s always an element of unpredictability to demand,” explains Sexton. “As a result the IT and operations guys are trying to guess what the peaks are going to be for sales, marketing and all the other business units. Agile Services enables them to use a partner to get some head room.”
Solicitors
Of course once an SLA has been agreed between the parties it, and the rest of the agreement, will be forwarded to both sides solicitors. Anne-Marie Bohan, a partner with Matheson Ormsby Prentice and head of that firm’s outsourcing group believes that legal advice shouldn’t just be an afterthought. While acknowledging that solicitors don’t need to be involved every step of the way, she feels its important to consider the legal implications at the outset of negotiations.
“You need to keep an eye on the broader right to terminate the agreement if the service levels keep dipping,” says Bohan. “As a customer you need to be very clear what is a material breach of the agreement and you need to define that in terms of service levels.”
Termination of the agreement raises numerous issues such as the process of transferring the service back in-house, the return of staff who may have moved to employment with the service provider and the transfer of knowledge – all of which has to be managed while continuing to provide a seamless service.
She also cautions clients to be aware of the difference between a customer agreeing to respond to a problem within a certain timeframe and committing to have it resolved within that window. She’s also a firm believer in a service credit regime should the service provider fail to meet its obligations.
“The more objectively you can measure something the easier it is to have credits in the SLA,” says Bohan. “But when it comes to business process outsourcing it’s much more about customer satisfaction which is much more nebulous.”
While it’s clearly essential to have any agreement checked over by a solicitor to ensure it covers all the necessary bases, some in the industry believe it is too easy to get caught up in red tape with the legal advisors.
“If they took half the time they spend with solicitors looking at the process of how to resolve issues they would be a lot better off,” says Millar. “Solicitors should just be dotting the i’s and crossing the t’s.”
Legal aspects
In fact HP’s Hurley suggests that the legal aspects of the agreement should be addressed in a different schedule entirely to the SLA. In fact the SLA is just one document in the overall agreement and one of the most important other schedules according to Hurley is the one covering change management.
“An SLA is a living document – it’s not something that’s just done and then you leave it on a shelf,” explains Millar. “It’s about how the relationship will be managed, how you will contact each other, and deal with change. You are drafting an SLA on the basis of what you know then but the reality will be different. Six or nine months down the line you will find yourself saying ‘I didn’t think of this’ and it will need to be changed.”
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