SLA - Look Inside

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Service Level

AgreementsModule 10 of the outsourcingtoolset

ENGAGE REGENERATEOPERATEARCHITECT


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outsourcingtoolset Module 10 Service Level Agreement

© 2009 The Cullen Group outsourcingtoolset.com ii

Contents

1

ABOUT THE OUTSOURCING TOOLSET AND THIS MODULE ...............................1

1.1 THE OUTSOURCING TOOLSET .................................................................................1

1.2 THIS MODULE ........................................................................................................3

2 INTRODUCTION..........................................................................................................4

2.1 PURPOSE ..............................................................................................................4

2.2 TIMING...................................................................................................................4

2.2.1 Point in the Lifecycle ...............................................................................4

2.2.2 Critical Timing to Manage Bargaining Power..........................................7

2.2.3

Critical Timing to Manage the Total Cost of Contract .............................9

2.3 PLANNING AND PREPARATION...............................................................................11

2.3.1 Prior to this Module ...............................................................................11

2.3.2 Planning the Effort.................................................................................11

3 OVERVIEW................................................................................................................12

3.1 DECIDING WHETHER TO H AVE A SLA....................................................................12

3.2 THE SLA IN THE SUITE OF GOVERNING DOCUMENTS .............................................13

3.3 KEY COMPONENTS OF THE SLA............................................................................16

4

SECTIONS OF THE SLA ..........................................................................................17

4.1 SECTION 1: CONTEXT...........................................................................................17

4.2 SECTION 2: SCOPE OVERVIEW .............................................................................18

4.3 SECTION 3: DETAILED SCOPE/SPECIFICATION .......................................................19

4.3.1 Goal of this Section – Minimizing the Expectation Gap ........................19

4.3.2 Practical Advice when Writing this Section ...........................................20

4.4 SECTION 4: REPORTING SPECIFICATION................................................................22

4.5 SECTION 5: KEY PERFORMANCE INDICATORS (KPIS) .............................................24

4.5.1

Purpose.................................................................................................24

4.5.2 Types of KPIs........................................................................................25

4.5.3 Precision KPIs.......................................................................................26

4.5.4 Reliability KPIs ......................................................................................27

4.5.5 Speed ....................................................................................................29

4.5.6 Effectiveness KPIs ................................................................................31

4.5.7 Satisfaction KPIs ...................................................................................33

4.5.8 Determining the Detailed KPIs in a Six-Step Process ..........................35


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© 2009 The Cullen Group outsourcingtoolset.com iii

4.5.9 Other issues to consider .......................................................................46

4.6 SECTION 6: EFFECT OF KPI PERFORMANCE ..........................................................49

4.6.1 Exploring the basis for KPI schemes - recourse versus rewards .........49

4.6.2

Regular rebate/bonus schemes ............................................................53

4.6.3 Intermittent schemes.............................................................................57

4.7 SECTION 7: THE SLA GLOSSARY..........................................................................60

5 HELPFUL TIPS AND A CHECKLIST .......................................................................62

5.1 EIGHT TIPS TO MAKE THE DOCUMENT WORK FOR YOU...........................................62

5.2 CHECKLIST FOR YOUR SLA ..................................................................................64

APPENDICES....................................................................................................................65

Appendix A – Example Project Plan ............................................................................A1

Appendix B – Progressive Intervention Forms ......................................................B1-B4

B1- Example Rectification Notice

B2- Example Corrective Action Request

B3- Example Direction Notice

B4- Example Termination Notice

Appendix C – Example SLA.................................................................................B1-B21

Appendix D – SLA Template................................................................................D1-D20

Figures and Tables

FIGURES

Figure 1: The Outsourcing Lifecycle.......................................................................................1

Figure 2: The Basic Composition of Each Module .................................................................2

Figure 3: Timing in the Lifecycle .............................................................................................5

Figure 4: Bargaining Power and the Lifecycle ........................................................................7

Figure 5: Total Cost of Contract Curves ...............................................................................10

Figure 6: The Governing Documents....................................................................................14

Figure 7: Frequency of Use ..................................................................................................15

Figure 8: Partial Example Responsibility Matrix (1)..............................................................18

Figure 9: Example Specification (a) - Call logging................................................................20

Figure 10: Example Specification (b) - Call logging..............................................................21

Figure 11: SLA KPI Types ...................................................................................................25

Figure 12: Partial Example Responsibility Matrix (2)............................................................37


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© 2009 The Cullen Group outsourcingtoolset.com iv

Figure 13: KPI thresholds .....................................................................................................42

Figure 14: KPI development worksheet................................................................................44

Figure 15: Progressive intervention pyramid ........................................................................51

Figure 16: Example escalation of at risk amount with intervention ......................................55

Figure 17: Example points scheme provision.......................................................................56

Figure 18: Example extension provision...............................................................................58

Figure 19: Example step-in provision ...................................................................................59

Figure 20: Example termination provision ............................................................................60

TABLES

Table 1: Module Quick-Reference Table................................................................................3

Table 2: Example Reporting Table (1)..................................................................................23

Table 3: Example Reporting Table (2)..................................................................................24

Table 4: Example KPI – delivery to specification.................................................................26

Table 5: Example KPI – compliance with policies ................................................................27

Table 6: Example KPI – accuracy of records .......................................................................27

Table 7: Example KPI – meeting milestones........................................................................28

Table 8: Example KPI – equipment availability ....................................................................28

Table 9: Example KPI – reliability of equipment at delivery ................................................. 29

Table 10: Example KPI – fault response and resolution ......................................................30

Table 11: Example KPI – order and delivery cycle time .......................................................31

Table 12: Example KPI – effectiveness of sales function.....................................................32

Table 13: Example KPI – customer satisfaction ...................................................................35

Table 14: Steps for developing KPIs ....................................................................................36

Table 15: Example stakeholders and their expectations......................................................39

Table 16: Example Contract Scorecard metrics...................................................................41

Table 17: Example KPIs (partial) - original ...........................................................................46

Table 18: Example KPIs (partial) - revised ...........................................................................47

Table 19: Example KPI stratification – standard versus non-standard hours ...................... 48

Table 20: Example write-up of the progressive actions........................................................52

Table 21: Example rebate scheme – percent method..........................................................54

Table 22: Example rebate escalation scheme......................................................................54

Table 23: Points example, telecommunications carrier ........................................................55

Table 24: Example Glossary Definitions – excerpts.............................................................61


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© 2009 The Cullen Group outsourcingtoolset.com 3

1.2 This Module

This module covers the preparation of a Service Level Agreement (SLA). A number of case

vignettes are presented to help clarify the intention of the techniques offered. A simplegeneric example of a SLA has been provided in the Appendices.

The tools provided for this module, in addition to this guide, are:

Appendix A – Example Project Plan (Microsoft Project™);

Appendix B – Example remedial action forms (Microsoft WordTM

);

Appendix C – Example generic SLA (Microsoft WordTM

);

Appendix D – Template SLA (Microsoft WordTM

); and

Presentation slides (Microsoft PowerPoint™).

TABLE 1: MODULE QUICK-REFERENCE TABLE

Position in the

Lifecycle

Design Phase Building Block 4.

Objective Ensure the parties have a shared understanding of the

work required and accountabilities.

Processes1. Gather the pre-SLA work conducted earlier in the

Outsourcing Lifecycle;

2. Select the right drafting team (to ensure

breadth/depth);

3. Draft the SLA, conducting internal workshops as

appropriate;

4. Review and revise the SLA; and

5. Issue the SLA with the Market Package1 to be bid

upon by the potential providers.

Deliverables Service Level Agreement.

Resources

required

Commitment and allocation of effort from personnel on

the drafting team, evaluation team, and the review

team.

1 The Market Package is the Request for Proposal and supporting documents sent out to bidders as

part of the competitive tendering process. For further information, refer Module 14 – Going to Market

and the Request for Proposal.


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The Regenerate Phase is where future options are assessed. In the lifecycle, each phase,

and its building blocks, prepares the way for the following phases and building blocks.

Likewise, the success of each building block depends on the preceding ones, with the last

one paving the way for the next-generation sourcing strategy and its lifecycle. Following this,the lifecycle can recommence, returning to the Architect Phase and the planning of the next-

generation deals. Depending on whether the work is to be re-tendered, backsourced

(brought back in-house) or renegotiated with the incumbent provider, the deal will need to be

reconsidered, option by option. Organizations should therefore re-assess their initial

sourcing decisions well before the end of the current contract.

The SLA is prepared by the client organization in the Design Building Block 4, preceding the

selection of the provider, and it should be issued with any competitive tender process to the

prospective bidders. It is sequenced this way because, logically, accepting a bid for an ill-

defined product is a very unsound practice. SLAs are your organization’s formal “product”

specification documents. The contents of the SLA must be detailed at some point. Leaving ituntil later means that the provider has far greater bargaining power and more opportunity to

channel the process, which is rarely in your organization’s best interest.

When the provider drafts the SLA, it rarely represents your organization’s perspective or

expectations, and can look more like a bid than a SLA. Furthermore, the provider’s version

tends to represent the provider’s needs rather than the organization’s expectations. The SLA

is what you are going to get for your money, so do not let other parties decide what that will

be.

2.2.2 Critical Timing to Manage Bargaining Power

The Architect Phase is when your organization is building up to its greatest position of

influence. If you enter the Outsourcing Lifecycle without having built up the best possible

bargaining power prior to Building Block 5 Engage, where you select the provider, you will

not have built your bargaining power to its full potential. Figure 4 shows the how bargaining

power operates.

FIGURE 4: BARGAINING POWER AND THE LIFECYCLE


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2.3 Planning and Preparation

2.3.1 Prior to this Module

Before beginning a SLA there are a number of preparatory steps that will have taken place if

the Outsourcing Lifecycle has been followed:

Building Block 2 Target

– the seven profiles regarding the scope of work to be outsourced will have been

detailed and provide much of the information required to draft the SLA including the

services and stakeholder profiles.

Building Block 3 Strategize

– the “strategic rules” for the outsourcing initiative will have been articulated,including, but not limited to, the use of recourse and/or rewards for KPIs (key

performance indicators) and asset retention/sale/transfer; and

– the configuration will have been outlined including the scope, provider, duration,

resource ownership, commercial relationship structures.

2.3.2 Planning the Effort

Your organization’s first SLA is likely to take a few months to prepare; but only if you have

completed the previous steps in the Outsourcing. If these early steps have not been

complete, you will be in a significantly inferior position for drafting the SLA – effectivelybeginning with little information. This will at least double the standard drafting time, and the

resultant SLA will typically be of inferior quality. However, an experienced SLA writer can

draft one in only weeks (even days!).

An example project plan has been included in Appendix A. An MS Project™ version has

been included in the module for you to tailor, should you wish to use this in your organization.

The client organization writes the SLA because the initial version should be released with the

Market Package. Having the provider draft the SLA is becoming increasingly rare, as most

clients want to be in control of setting their expectations to ensure their needs are met.

When the provider drafts the SLA, it rarely represents the client organization’s perspective orexpectations, and can look more like a bid than a SLA.

During the bidding process, the provider can suggest modifications, but the contract

documents represent the conditions under which the organization desires to spend its money

- as opposed to the provider’s version that represents the conditions under which the

provider desires to provide the work for the price quoted.


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The key governing documents are

The Conditions of Contract – the “legals” surrounding the outsourcing initiative;

The Service Level Agreement (SLA) – the definition of successful work includingwork statements, KPIs (Key Performance Indicators), reporting, etc.;

The Financial Schedule – the manner in which the work will be billed and payments

made (refer Module 11 – Pricing Options and the Financial Schedule);

The Governance Charter – how the parties will manage the contract (refer Module

12 – Governance Charter); and

The Procedure Manuals – the operating processes of the two parties, as well as the

inter-party procedures.

The following diagram (Figure 6) shows how the SLA fits into the Governing Documents.

FIGURE 6: THE GOVERNING DOCUMENTS

As Figure 6 highlights, the first three documents (above the dotted line) form the crux of the

contract documents. The Conditions of Contract forms the body of the contract and the

SLA, Financial Schedule, and Governance Charter are schedules to the body of the

contract. Of course, there are typically more schedules than just these; however, all

outsourcing deals have these two schedules as a minimum.

Complex deals may have many SLAs, typically under a “Master SLA” with service level

schedules underneath representing each major work area. A complex agreement may also

have many Financial Schedules which can involve a transition price schedule, schedule of

rates (labor), schedule of fees (work activity prices), schedule of equipment prices (if


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4.5.3 Precision KPIs

Precision measurements seek to quantify the degree to which the work was performed

accurately and in compliance with the rules set up under the contract.

The first rule might be the specification. Specification-related performance measures

typically begin with an assessment as to whether the work was conducted, or the product

delivered, or the asset built, in accordance with the specification, statement of work, or to a

specified standard. An example of such a compliance KPI is shown in Table 4. This KPI

was set up to ensure that all equipment ordered by the client was delivered as per the

purchase order.

TABLE 4: EXAMPLE KPI – DELIVERY TO SPECIFICATION

Calculation

KPIKPI Minimum

StandardFrequency Formula

Source

Data

Delivery

accuracy

No delivery

errorsMonthly

Delivery error = any variance not

authorized by the Client from the

Purchase Order 3

Service

desk

One KPI often included in contracts that relates to accurate performance is an assessment to

which the work/item meets a specified standard such as that published under the

International Standards Organization (ISO). The ISO has 17,000 standards on a variety of

technical subjects as well as on generic management systems such as quality management

and environmental management.

If you want the provider to follow your specific policies and procedures, you might consider

another common KPI that assesses the degree to which your organization’s policies and

procedures were followed in conducting the work. All of these compliance-orientated KPIs

operate as a pass/ fail KPI, or one scored by your organization.

An example of this type of KPI is shown in Table 5. This KPI was set up to ensure that the

provider at least partially complied with the policies and procedures specified in the contract

and in place within the client.

3 All the KPI examples in this module use terms that have been defined in the glossaries of the various contractsfrom which the examples were taken. These contractual defined terms are denoted by the capitalization of thefirst letter in each word of the term (in this case, Purchase Order).


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Step 1: Assign party ob ligations - identify who is accountable for what

Many organizations end up with meaningless KPIs because the measurements involve

variables outside the provider’s control. Thus, the provider is able to invoke the common‘uncontrollable events’, or ‘force majeure’, provisions in a contract when performance is

assessed. These provisions release the provider from its obligations if events occurred

outside its control.

As an example of this in action, assume you had set up an IT systems availability

measurement with your IT infrastructure provider. However, your provider is dependent upon

an independent telecommunications provider. If the system goes offline due the fault of the

telecommunications company, and there is a force majeure provision in the contract, your IT

infrastructure provider will ignore that outage for the calculation of their availability KPI since

it was not their fault. Alternatively, let us say the outage was due to an action your

organization was responsible for, say your applications developers brought down the systemwhile they were making minor changes in code and did not test it properly. Again, this

outage would be ignored for the KPI calculation.

All this is fine if that is what both parties had anticipated and agreed to. If not, you might

believe the provider is playing around with the calculations when, in fact, they are merely

trying to measure only their component. To ensure there are no surprises, the areas of

control of the parties (as well as any other third parties) need to be carefully specified.

To articulate all of this, the most efficient technique is to have the responsibility matrix from

Section 2: Scope Overview already completed. This matrix sets out all the major activities

under the contract and allocates accountability between the parties (and other third parties, ifappropriate). Figure 12 provides a different partial example of a responsibility matrix for a

printing contract than shown in Section 2: Scope Overview.

FIGURE 12: PARTIAL EXAMPLE RESPONSIBILITY MATRIX (2)

2.4 Replace Unsatisfactory Stock

2.3 Conduct Emergency Print Runs

2.2 Print new Stock

2.1.4 Maintain offsite backup

2.1.3 Make changes to artwork as instructed

2.1.2 Code and file artwork

2.1.1 Deliver artwork

2.1 Artwork2. Printing (section 3.2)

1.3 Order Stock as required

1.2Provide customer service support

1.1 Provide online ordering system

1. Order Management (section 3.1)

ClientContractor

Responsibility Act ivi ty

2.4 Replace Unsatisfactory Stock

2.3 Conduct Emergency Print Runs

2.2 Print new Stock

2.1.4 Maintain offsite backup

2.1.3 Make changes to artwork as instructed

2.1.2 Code and file artwork

2.1.1 Deliver artwork

2.1 Artwork2. Printing (section 3.2)

1.3 Order Stock as required

1.2Provide customer service support

1.1 Provide online ordering system

1. Order Management (section 3.1)

ClientContractor

Responsibility Act ivi ty


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FIGURE 14: KPI DEVELOPMENT WORKSHEET

100% in1 hr

Target

- Response log

- Call log

Responses w/in 1 hr

# calls

Responses > 3 hr

# calls

>95% within 1 hr

Residual within 3

hrs

Responsetime

Source DataFormulaMinimum

Standard

KPI

100% in1 hr

Target

- Response log

- Call log

Responses w/in 1 hr

# calls

Responses > 3 hr

# calls

>95% within 1 hr

Residual within 3

hrs

Responsetime

Source DataFormulaMinimum

Standard

KPI

The only KPI specification most contracts have The area under most dispute, if left unspecified

As shown in Figure 14, most contracts stop at only specifying the KPIs. However, it is

equally important to specify how the KPIs will be calculated and what the source data to be

used (the source of information that must be used in the calculation) is. Most disputesregarding KPIs centre on these two last two items. It is not the number that is most argued

about, it is how the party doing the calculation determines it. Leaving such calculations to the

discretion of the other party can produce questionable, if not unreliable, results. Therefore,

the dispute is rarely around whether the provider has achieved the KPIs, just the math used.

The following case highlights just this situation.

Case: KPIs that d id not feel right

The provider of a fault desk consistently reported the response times as meeting the

minimum standard, yet the client’s contract manager was being sent an increasing amount oftechnician complaints about poor response times. There were just too many complaints for

the service to be reporting such good numbers. He had an analyst obtain the provider’s data

for the most recent month and calculate the response times. It added up.

Still suspicious however, he had an analyst go through his emails and attempt to diagnose

what the problem was. The analyst was able to determine that the complaints tended to

come from two of the fourteen regions. Further investigation of the source data showed that

these regions had not been included in the calculation. When the provider was questioned, it

was discovered that these two regions had not been coded into the response tracking system

due to an ‘oversight’

If the math underpinning the KPI and the source data for the calculations are not specified,

then a provider that self-reports its performance (which is the norm) is allowed discretion as

to how to calculate performance. Not only can the provider make up the math, they also get

to make up which sources of data they want to use. Unsurprisingly, the reported KPI will

show that the KPIs have been met. No provider left with total discretion as to how to report

its performance would do otherwise.


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FIGURE 19: EXAMPLE STEP-IN PROVISION

1 Abili ty of the Client to Step-In

1.1 (Step-in rights) Without prejudice to any other remedy the Client may have, if the Contractorfails to meet the KPIs, the Client may, at its discretion, take control of so much of the Services asis necessary for that function to be performed.

1.2 ( Appointment of third par ty) The Client may obtain services similar to the Services elsewhereor may make any other arrangements considered necessary by the Client to maintain theServices, appointing any third party to provide the Services.

1.3 (Good faith) The Client must act in good faith in exercising its rights under this clause andmanage any contract with the third party in good faith.

1.4 (Notice) The Client will give notice to the Contractor as soon as practicable of its intention toexercise its rights under this clause. This notice must include:

a. the reason for exercising these rights;

b. details of the third party; and

c. description of the intended contract with any third party.

1.5 (Duty to assist) The Contractor must assist the Client and the third party in the exercise of itsstep-in rights including:

a. facilitating access to the Contractor’s relevant files and systems;

b. providing access to its Confidential Information, information, data, Contract Material andrecords; and

c. making the Workforce available to provide information and assistance;

as required by the Client or nominee.

1.6 (No remuneration) The Contractor is not entitled to receive fees, charges or any remunerationwhatsoever that relate to the services performed by the Client or an third party under this Clause.

1.7 (Liability) Neither the Client nor third party is liable to the Contractor for any act or omissioncaused during the period of step-in unless the act or omission is caused by gross negligence.

1.8 (Recovery of amounts) The Client will be entitled to recover from the Contractor the differencebetween any amounts paid to a third party and the amount by which the payment of fees orcharges has been reduced. The Client must act reasonably, insofar as the circumstances permit,in appointing any third party to provide the Services and in agreeing a fee for those services.

1.9 (Cease of step-in) The appointment of the third party will cease when:

a. the Client determines, in its absolute discretion, the Contractor has demonstrated its abilityto meet the KPIs;

b. the Contract is terminated by the Client; or

c. the Term expires by the passing of time.

1.10 (No termination waiver) Nothing in this clause prevents the Client from being entitled to givenotice for termination for cause.


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Termination (full or partial) – at some stage, as a last resort, you may want the right to

terminate for poor performance. This can be the right to terminate the entirety of the

contract (full termination) or the work for which the KPIs are failing (partial termination).

Figure 20 provides you with a simple example. It is worth noting that, in the event ofpartial termination, you should always retain the right to escalate to full termination at your

absolute discretion, if you determine that partial termination is not practical.

FIGURE 20: EXAMPLE TERMINATION PROVISION

9.2 In addition to any other rights it has to terminate this Agreement, the Client may, in itsabsolute discretion, terminate this Agreement in whole or in part with respect to any oneor more Services if the provider:

(a) fails to meet at least 3 (three) KPIs, without justification acceptable to the Client, inany 1 (one) measurement period

(b) fails to meet at least 10 (ten) KPIs, without justification.

These disincentive rights of your organization can be powerful without having to be actually

executed. These deterrents can provide your organization with strong negotiation power

over the provider to put in other resolutions, or to improve the arrangement.

4.7 Section 7: The SLA Glossary

A good SLA is written to ensure that there is minimal opportunity for people to misinterpret it,

and to be easily understood by anyone who reads it. The glossary plays an extremely

important part in achieving this.

The glossary section contains all the reserved words, phrases, and acronyms used in the

SLA. Table 24 shows an excerpt from a SLA glossary as an example.

Without this glossary, both parties will naturally interpret key terminology in a manner that

best suits them. Reaching a common interpretation can be difficult as each party is also

likely to have a reasonable claim supporting their interpretation. The one with the greatest

bargaining power at the time will be the one who wins the argument. This is not the best way

to ensure a successful deal.