It Takes More than SLAs to Manage a Successful Outsourcing Relationship

Many buyers of outsourcing services spend countless hours defining, measuring, analyzing and discussing service level agreement (SLA) performance but fail to achieve the results, satisfaction and improvement expected from outsourcing. In many cases, this is because the buyer doesn't fully understand how to take advantage of all of the performance levers available through the agreement.

SLAs provide a mechanism to address deficient performance while maintaining contract integrity. For most buyers, however, it is far more critical to achieve performance expectations, rather than see a reduction in fees that have already been planned and budgeted. With this in mind, it is key to include non‐financial obligations in agreements, which can potentially be more effective than service level credits to drive provider performance. Such obligations include: 1) productivity commitments, 2) project-focused resources, 3) senior executive participation in governance meetings, and 4) reference obligations. Each can be applied strategically to ensure that providers are properly incented to align their objectives and performance targets with those of the buyer.

Productivity Commitments. SLAs often include continuous improvement obligations, which are beneficial, but incorrectly assume that this correlates to buyer cost reductions or other benefits. Productivity commitments address this issue directly and obligate the provider to "do more with less." This ensures that even if the fees for each resource unit increase over the life of the agreement, the total number of resource units consumed decreases. This enables the buyer to "hard wire" financial benefits, and focus service levels and day-to-day management on operational service delivery quality.

Project-Focused Resources. Outsourcing agreements tend to focus on "run" activities that cover day-to-day operations, but many providers demonstrate a willingness to invest in their clients by including a predefined number of resources (typically a pool of professional service hours) to perform project-based work. This is essentially a business development effort as it is an opportunity for providers to identify ways to expand their scope of services.

While the decision to include these hours in an outsourcing agreement is specific to each unique situation, to the extent that such resources are in place, buyers can create leverage when there are service delivery performance concerns by not allowing the provider to utilize these hours until delivery quality improves. This helps limit the provider's business development opportunities and typically results in executive attention for providers (especially those whose executives are focused on revenue growth more than profit margin), which will likely drive focus and attention to the delivery issues.

Senior Executive Participation in Governance Meetings. Most agreements include a multi-tier governance model, but often the highest-ranking executive named in the top tier is more of a middle manager in the provider's hierarchy and may not be a person with ultimate profit and loss responsibility for the buyer's account. Further, many agreements do not require physical attendance at the governance meetings. While this may be entirely reasonable when performance meets expectations, this becomes a problem when performance lags. Requiring senior executives to participate in face-to-face meetings based on repeated service level failures can be an effective way to ensure that such a meeting never takes place. When the risk of failure has personal implications to an executive, he or she becomes far more focused on preventive measures and more actively participates in ongoing delivery oversight.

Reference Obligations. Providers will naturally call on their best clients to act as a reference and providing such a courtesy is not something taken lightly by the provider. Many agreements require the buyer to serve as a reference upon reasonable request, but a better approach is to affirmatively require the provider to use the buyer as a reference. This obligation means that regardless of performance, the provider must include the buyer in their business development process. As the provider does not want a bad reference, this can be an effective tool to ensure that the solution design and business development teams instrumental in defining performance expectations to begin with remain connected to the service delivery over time so performance exceeds expectations.

SLAs are very effective tools to ensure proper focus on the day-to-day delivery of outsourced services, but are not the only tools. Buyers that think diligently about how their business priorities drive focus throughout the provider organization, from the top executives through to the operational delivery teams, can create relationships that align incentives based on both financial and non-financial obligations. When the optimal combination of the two is in place, relationship management becomes more proactive than reactive and benefits both providers and buyers. That is the essence of a "win-win" relationship.

Marc Tanowitz, a principal with outsourcing advisory firm Pace Harmon, provides guidance to Fortune 500 and high-growth middle market organizations on complex IT and business process outsourcing and complex sourcing transactions, process optimization and vendor governance. He has more than 20 years of experience in outsourcing advisory services, strategic sourcing and process improvement, in which he has served more than 30 Fortune 500 and middle-market clients and generated more than $1 billion in client savings.