In our history of Client advocacy in thousands of professionally managed supplier engagements globally, we have seen virtually every Service Level Agreement (SLA) ever developed, constructed, negotiated, implemented, monitored, measured, reported on, or renegotiated. In that history, we can recall some that stood up well to the situations they were designed to protect. However, most SLAs don’t have the ability to change over time and almost none evolve to keep pace with the changing nature of the relationship between the Client and the supplier, or the changing environment. This is the fundamental premise on which we base most of our “Organic Contracting” best practices.
Most contracts are unfortunately stale snap-shots of the original agreement. They are historical artifacts of what the relationship used to be and are more effective at documenting the originating transaction than providing a roadmap for future success. These conventional contracts are generally used as reference material for both sides to form polarizing views of disputes at best, or to fortify embattlement positions for litigation at worst.
This is true unless your SLAs are SMART (Specific, Measurable, Attainable, Realistic, and Timely). In addition to SMART SLAs, they also need to be unambiguous, easily enforceable, somewhat punitive in nature to discourage reoccurrence, and must outline and detail specific penalties and provide examples of explicit remedies that apply when they are not met. Further, the impacts of these SLAs must be quantified to know what benefits are realized for SLAs that are met, and what value is lost when SLAs are not met.
If missed SLAs push past reasonable thresholds, they are likely not missed SLAs any longer, rather they are chronic failures or, worse yet, simply incorrect characterizations of the service itself. In situations like this, it only seems reasonable that clients should have rights to (a) dynamically re-price the service to better reflect the actual value being delivered going forward, (b) terminate for cause (without penalty) for chronic failures and potentially (c) seek remuneration and transition assistance to move to another, more capable service or supplier that can meet the required service levels.
One of the biggest problems we see in the industry is that, for the most part, suppliers write the SLAs including so many carve-outs and exclusions that there’s no real-world instance of anything ever happening to violate the service level, and therefore, render the SLAs meaningless. Another critical problem - SLAs often do not properly specify what is being measured to determine if the SLA has been met or not. Some questions about the SLA measurements include – Is this the right thing to measure to determine if the SLA is met or not? Who will be doing the measuring? Are these trusted, independent third parties? Do they provide specific and objective evidence? What is the measurement methodology? Is that methodology appropriate for the type of service you are using? What is the frequency of the measurement period? Measuring pings for availability once every day, or hour, may not detect problems with sub-second transaction processing for example.
In addition, even when SLAs are well conceived, and artfully constructed, the standard “out of the box” remedies for failure to achieve them are, at best, marginally beneficial. For most of our Clients, the value they lose for non-performance is many times more than the service credit remedy itself. In one case, our client was hosting its application that earned them several hundred thousand dollars per hour with a cloud computing company that offered a big service credit multiple for any downtime. However, that downtime didn’t get the client their money back for the lost income during that time their service was down. In this as with many cases, the service credit remedy for service availability was not a suitable remedy for the value lost as a result of the missed SLA.
From a provider perspective, SLAs are generally not the key motivating factor. Giving away some free future services is just salt in the wound of a diminished reputation in the industry. Suppliers are much more hurt by losing potential future clients due to a perception of shoddy service than they are by crediting your monthly bill 10% for a missed service level.
Therefore, instead of viewing SLAs as a reward and punishment system, view it as a way to set explicit expectations and gain explicit commitments from your suppliers to achieve an enhanced level of performance.
Some helpful questions:
1. What is guaranteed? What is the unit: uptime, availability, responsiveness? What is the level: 99%? What is the time granularity: 99% per hour, per day, per month, per year?
2. What is measured? If service availability is being guaranteed, for example, what is tested? The uptime of a particular URL and the assertion it will respond successfully to a valid http request?
3. How is it measured? Who does the measuring, and how frequently is it done? You’ll get very different results if you check availability every minute vs. every 3 hours. Whenever possible, look for independent third-party monitoring, and not internal/closed monitoring?
4. What is the remedy? If the service level isn’t met, what happens? Do you get a refund or a credit? How much? When? What do you have to do to trigger the remedy, if anything? Most SLAs offer a credit towards ongoing service, not a refund; and most cap the credit amount to no more than 100% of your monthly service cost. Is this reasonable in your case?
5. What are the exclusions? Most SLAs will have carve-outs for problems beyond the control of the service provider. Expect a few for things like your acts, errors or omissions, force majeure events, scheduled downtime, and emergency maintenance to be excluded.
Beware of SLAs with too many exclusions. We have seen SLAs that literally exclude everything, such that no downtime whatsoever, for any reason, is covered by the SLA. It’s easy to guarantee 100% uptime when 100% of downtime is excluded from the guarantee.
Most importantly, work with an expert in the industry like NET(net) to get the expertise you need to build a Supplier Performance Management business process and capability and/or incorporate the SLA tracking, reporting, and monitoring into your organization’s Supplier Performance Management initiative. Next, look to automate the data collection, tracking, reporting, and trending process and the workflow with an industry leading Supplier Performance Management platform like WIN(win). Getting the expertise you need and deploying industry best practices in this area will ensure you are “Winning at Supplier Management”.
As our Clients grapple with “The Shifting Line of Accountability”, Service Level Agreements with strategic suppliers are more important today than ever before as the stakes have never been higher. Few clients realize that without a strong supplier performance capability, on average they will fail to realize 34% of the expected benefits, and will not successfully mitigate 22% added risk and cost. On $10M worth of annual contract value, that’s $5.6M of value at stake over a 3-year period. The business case for Supplier Performance Management has a clear justification. Contact us if you are interested in furthering your organization’s Supplier Performance Management initiatives, as we have helped many organizations build the business case to make the necessary investments in this impactful capability.
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