Insight by: Steve Martin
It ranks among the top flaws of an IT outsourcing or services contract – too many service level agreements (SLAs) with limited relevance and with overwhelming focus on financial penalties rather than other remedies.
Whether we like it or not, over the past 20+ years, IT outsourcing has become virtually inevitable across all industry verticals, including healthcare, pharmaceutical, financial services, manufacturing, retail, and even the IT sector itself. Far more often than not, IT infrastructure, application development and maintenance, IT security, and even cloud management have transitioned from being internally managed to externally operated by third party service providers (suppliers or outsourcers), who, by the way, are in the business to make a lofty profit while at the same time, doing whatever they can to avoid financial exposure for providing sub-adequate services.
Corporate IT staffs, very often with their trusted external business and legal advisors spend months pitting suppliers against one another in fiercely competitive processes, with a dual focus on driving costs down and attempting to place as much service risk as possible on the eventual chosen outsourcer(s). The shifting of service risk from the internal corporate IT staff to the outsourcer in large part involves the creation of SLAs (e.g., platform availability, time to resolve a major outage, software quality) and the attachment of material financial consequences to the outsourcer for failure to meet those SLAs.
But here’s the problem: most corporations do not invest the necessary time to appropriately link their SLAs to the outcomes that matter to their business such as efficacy of product development, customer satisfaction, or supply chain throughput. Instead, companies take the road more often traveled, blanketing their contracts with as many SLAs as possible (the “safety net” approach) assuming that they’ll make up what they lack in targeted SLAs, with volume (the “more is better” approach). This generally results in the outsourcer having to increase their fees to cover their risks (antithetical to the corporation’s desire to drive lower pricing) and a reasonable probability that even when SLAs are met, the desired business outcomes are not – due to driving the suppliers to the wrong set of behaviors [how many times have we heard, the SLAs are “green” but the service is awful?].
As indicated above, corporations should start the SLA process by a) identifying the core objectives and outcomes that are meaningful to the success of their business, b) isolating the IT components that are critical and/or necessary to meeting those business objectives and outcomes, c) targeting a more refined number of service levels that must be met in order to drive success across those IT components, and d) ensuring the suppliers have the proper financial motivation (more sticks than carrots) to meet that more limited number of SLAs. Moreover, corporations should include additional SLA remedies such as root cause analysis, more severe consequences to the supplier for repetitive problems, and the requirement for the supplier’s executives to baby sit the problems until resolved.
In the end, more is not necessarily better; better is better.
