SLAs in BPO Agreements

8/12/2019 SLAs in BPO Agreements

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CORE: Nov. 2011

Service Level Agreements

Contract and PerformanceManagement

Intellectual Property of the Centre for Outsourcing Research andEducation (CORE). May be used with permission of CORE.


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CORE: Nov. 2011 Service Level Agreements 22

Agenda Service Levels for BPO

Preliminary Matters

Use of Weighting Factors

Use of Severity Levels

Use of the Balanced Scorecard


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Preliminary Matters for All BPOs Precisely define the services to be provided (the

Services)

Since not practical to measure performance for allServices, carefully identify which of the Services aremost important to the business and should bemeasured (Measured Services)

Determine whether Measured Services are currentlybeing internally tracked and calculated If they are, determine whether existing performance

levels (Service Levels) meet the needs of thebusiness or whether they require improvement

If so, determine whether level of improvements isrequired

If not, determine what Service Levels are required tomeet the needs of the business


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CORE: Nov. 2011

Use of the Service Level Agreement (the SLA)

Used to document with service provider the

Measured Service Levels required Use to document with service provider the

amounts payable (the Service Level Credits) for

failure to achieve the Measured Service Levels Use to permit customer to terminate Master

Agreement When significant or on-going failures to achieve Service

Levels (Service Level Failures)

Will discuss further in Termination Service Levelsbelow

4Service Level Agreements


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Prioritizing Measured Services

First step is to prioritize the importance of theMeasured Services

Two frequently used approaches

A. Weighting Factors (Mathematical)

B. Severity Levels (Non-Mathematical)


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A. - Using Weighting Factors

Weighting Factors

Based on importance of portion of Service (ServiceElement) being measured

Examples of Weighting Factors might be:

.50

.25

.15

.10

Failure of the Service Level triggers a paymentof the Weighting Factor against the monthlyfees they are cumulative (as per slide 8)


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Weighting Factors and Limits on Credits

Customer must negotiate relative weights (i.e.,.50, .25, .10) because comparative importanceis critical

Because higher aggregate Weighting Factorsresult in higher Service Level Credits, there is

almost always a debate on the aggregate inorder for service provider to limit Service LevelCredits


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CORE: Nov. 2011

Example of Cumulative Weighting Factors


1.70Total

.10Candidate Screening System

.25External Candidate Rsum System

.25External Job Posting System

.10Training System

.25Staffing Administration System

.25HR Administration System

.50Payroll Administration System

WeightingFactor

Measured Service Element


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The At-Risk Amount

Using Weighting Factors also requires a cap

on amounts payable to determine Service LevelCredits

This liability cap is sometimes called the At-

Risk Amount Percentages vary between service providers

Large value transactions (over $250M), range

is between 8% and 12% of monthly fees Lower the value, higher the cap should be so as

to make payment meaningful (painful)


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Limits using Weighting Factors

Service Level Credit = A x B where:

A = the sum of all Weighting Factors for all Service

Levels not met in a month not to exceed the WeightingFactor Limit; and

B = the At-Risk Amount in a month (8% - 12% from

previous slide)


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Example 1 Assume

The charges for the Services are $1M per month

The At-Risk Amount is 10% ($100K) The negotiated Weighting Factor Limit is 1.5

The sum of the Weighting Factors for all Measured ServiceElements not met in the month is 1.7 (i.e., sum of .50, .25

etc.)

Then, the Service Level Credit that would be 1.7 x $100K= $170K reduced to $150K because the Weighting Factor

Limit is 1.5

This is a potential loss of Service Level Credits of up to 12(months) times $20K = $240K


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Example 2 Assume:

The charge for the Services are $1M per month

The At-Risk Amount is 10% ($100K) The negotiated Weighting Factor Limit is 1.3 The sum of the Weighting Factors for all Measured Service

Levels not met in the month is 1.7 (i.e., sum of .50, .25etc.)

Then, the Service Level Credit that would be 1.7 x $100K= $170K is reduced to $130K because the WeightingFactor Limit is 1.3

This is a potential loss of Service Level Credits of up to 12(months) times $40K = $480K (compared to $240K inExample 1)


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B. - Using Severity Levels

Severity Levels Also based on importance of Service Element being

measured Severity level types might be:

Essential

Major Minor

Severity Level Examples in HR BPO: Payroll Administration System - Essential

HR Administrative System - Major Training System Minor

Others such as External Job Posting System will vary


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Example of Use of Severity LevelsMeasured Service

Element

Severity Level Availability

Service Level

Employee Services

Payroll Administration

System

Essential 99.85%

Human Resources

Administration System

Major 97.85%

Staffing Administration

System

Major 97.85%

Training System Minor 90%

Employment Services

External Job PostingSystem

Major 97.85%

External Candidate Rsum

System

Major 97.85%

Candidate Screening

System

Minor 90%


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CORE: Nov. 2011

Severity Levels and Service Level Credits

Having established agreed-upon Severity Levels,parties must then determine Service LevelCredits

Need to address multiple scenarios Single Failure Repetitive Failures

The following table is one example using sameAt-Risk Amount of $100K per month as above



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CORE: Nov. 2011

Use of Severity Levels

Service Level Failed Service Level Credit/Remedy

Essential Severity Level in any 1month

12% of the At-Risk Amount forAffected Service Element

Essential Severity Level in any 2

of 3 consecutive months

24% of the At-Risk Amount for

Affected Service Element

Major Severity Level in any 1month 7% of the At-Risk Amount forAffected Service Element

Major Severity Level in any 2 of

3 consecutive months

14% of the At-Risk Amount for

Affected Service Element

Minor Severity Level in any 1

month

Best Efforts to Repair within 45 days

Minor Severity Level in any 2 of

3 consecutive months

Best Efforts to Repair within 30 days

Service Level Agreements 16


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CORE: Nov. 2011

Termination Service Level Failures

Irrespective of the measurement method used,

there must be a level of failure that permits thecustomer to terminate the Master ServicesAgreement

Can be based on the severity of a single event (i.e., Essential Severity Level falls below a very low

minimum)

Can be based on repetitive failures (i.e., Major Severity Level 3 fails for consecutive months

or 3 out of 6 rolling months)



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CORE: Nov. 2011

Call Centre BPOs

Need to establish Measured Service Levels

Will be different from HR and other PBOMeasured Service Levels due to nature of

business function

There are both Objective measurements and

Subjective measurements



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CORE: Nov. 2011

Call Centre Objective Measurements

Sample objective measurements

Number of rings to pick-up of call Wait time on hold

Percentage of abandoned calls

Percentage of problems resolved by first call

Degree of escalation to 2nd and 3rd level support

Other? Suggestions?



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CORE: Nov. 2011

Deceptive Solutions

Need to identify deceptive solutions proposedby service provider such as: Additional staff

Additional lines

Additional infrastructure

They are not viable solutions as all these reallydo is result in additional costs to the customer

That being said, change in scope (added country)may result in need for one of these changes



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CORE: Nov. 2011

Call Centre Subjective Measurements Satisfaction Surveys

To ensure that survey results are not ambiguous orskewed, customer must be very careful about variables ofthe survey methodology

Such variables to consider are:

Survey frequency Survey sample size

Nature and scope of survey questions (the right questions)

Types of employees surveyed (exempt* vs. non-exempt)

Geographical factors in survey questions (cultural & language)

(* exempt from overtime)



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CORE: Nov. 2011

Key Recommendations for Surveys

Hire qualified and experienced survey designer to

work with in-house staff to develop surveys Possibly put out RFP to determine experience of

survey designers in customers industry (or typeof survey)

Service Level Agreements 23


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CORE: Nov. 2011

Service Level Reporting

The nature and frequency of the reports is critical

to ensure sufficient information to permitcalculation of Service Level Credits

Beware of provision that customer must reportService Level Failures

Usually, the customer does not have the relevantinformation

Obligation should be on the service provider toprovide the data to determine Service LevelCredits



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Sample Service Level Report Table



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Background of the Balanced Scorecard

Conceived by Robert Kaplan and David Norton

Published in the Harvard Business Reviewin 1992 Entitled The Balanced Scorecard Measures that

Drive Performance

Urged companies to complement financialmeasures with operational measures of customersatisfaction, internal processes and innovation

and improvement activities Now used in BPO transactions in conjunction with

performance measurements discussed previously



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CORE: Nov. 2011

Use of the Balanced Scorecard In the outsourcing context, the balanced scorecard is

simply a method of measuring improvements achieved by

the service provider using non-traditional, non-financialmeasurements

The balanced scorecard measures improvements inperformance by measuring changes in the performance ofagreed-upon measurable parameters (Metrics) that areselected by the customer for inclusion into the balanced

scorecard for one period and comparing them to theperformance of the same Metrics for previous periods



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CORE: Nov. 2011

Development of Metrics

The Metrics in any particular outsourcing

agreement will invariably vary depending on theintent of the parties

However, for the analysis in this presentation,only the three Metrics suggested by Kaplan andNorton are used

This is sufficient because the approach used indeveloping a Balanced Scorecard Model isessentially the same irrespective of the numberand types of Metrics actually used in a particulartransaction



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CORE: Nov. 2011

Success Categories

For this presentation, the three non-financial

elements of the Balanced Scorecard Model aretreated as distinct success categories to bemeasured (Success Categories) so that thecustomer may prioritize them

One of the most common methods of doing thisis for the customer to apply Weighting Factors toeach of the Success Categories as illustrated on

the next slide



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CORE: Nov. 2011

Weighting and Success Categories

Weighting factors are used in the same way as

more traditional measurements discussed above


Success Category Weighting

Factor

Customer Satisfaction .50

Internal Processes .20

Innovation and Improvement

Activities

.30

Total 1.0


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CORE: Nov. 2011

Weighting and Success Categories

Because there are often diverse objectives for the

three Success Categories, the next step is toidentify the specific business objectives(Operational Measures) for each SuccessCategory


Success Category Operational Measures

Customer Satisfaction Customer Retention

Employee SatisfactionInternal Processes

Management Effectiveness

Improved Functionality of Supported

Application Software

Innovation and

Improvement Activities

New Functionality of Supported



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CORE: Nov. 2011

Metric Categories


Success Category Operational Measures Metric Category

Customer Satisfaction Customer Retention Semi-Annual Survey (60%)

Customer Loss Reviews (40%)

Employee Satisfaction Annual Survey (75%)

Exit Interview Information (25%)

Internal Processes

Management Effectiveness Performance of Supported Application

Software (50%)On time Del ivery of Supported

Application Software Percentage (25%)

Application Software Error Correction

Targets Met (25%)

Improved Functionality of

Supported Application Software

Timeliness (25%)

Quality (75%)

Innovation and

Improvement Activities

New Functionality of Supported


Timeliness (25%)

Quality (75%)


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CORE: Nov. 2011

Implementation of the Balanced Scorecard

To implement the Balanced Scorecard, thecustomer would first supply the service providerwith comprehensive information about all thefunctions to be included into the Services

The parties would then agree upon whichbusiness functions of the customer will beaffected by the Services and thus subject to theBalanced Scorecard measurements.



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CORE: Nov. 2011

Implementation of the Balanced Scorecard The parties would then agree upon a time frame

to finalize: The Success Categories

The relative Weighting Factors for the SuccessCategories

The Operational Measures The Metric Categories

The methodology for measuring the Metrics

Finally, the parties would agree upon the

frequency of the measurements to establish aregular period of measurement (MeasurementPeriod)



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CORE: Nov. 2011

Baseline Results & Scorecard Targets Once these items are agreed upon, the service provider

would be obligated to perform an initial performance

measurement on the affected business functions using theagreed-upon Balanced Scorecard the results of which wouldconstitute the baseline results (Baseline Results)

Once the Baseline Results have been analyzed, the partieswould set targets for improvements across the variousMetric Categories (Scorecard Targets) that the service

provider would be expected to achieve, both over the entireterm of the agreement and year over year during the term



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Remedies As with the traditional SLA, the final step would

be to develop specific credits to be paid by theservice provider to the customer for the failure ofthe service provider to achieve the agreed-uponScorecard Targets

As with SLAs, these will vary from transaction totransaction

As a rule, the Balanced Scorecard would also dealwith payments, termination rights and criticalfailures, all of which would need to be customizedto align with the approach of the BalancedScorecard



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CORE: Nov. 2011

Cautions in Using the Balanced Scorecard

Excessive Scorecard Targets

Avoid a large number of Scorecard Targets

There is a danger that using too many may result in thecustomer losing sight of the critical Scorecard Targets

Better approach is to only establish Scorecard Targetsthat are truly essential to the business operations and tocarefully construct those that are selected



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Irrelevant Scorecard Targets

The customer should also bear in mind thatconstructing irrelevant or inaccurate Scorecard

Targets may result in credits being paid if theservice provider fails to meet the ScorecardTargets but will not result in key businessrequirements actually being addressed



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Any organization contemplating using theBalanced Scorecard in an outsourcing shouldkeep in mind Kaplan and Nortons warning that:Even an excellent set of balanced scorecard measures

does not guarantee a winning strategy. The balancedscorecard can only translate a companys strategy intospecific measurable objectives.



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CORE: Nov. 2011

Other SLA Topics of Interest

Ramp-Up of Service Levels

Annual changes to Service Levels (Annual Planning Process)

Ad-Hoc changes to Service Levels (Change Order Process)

Improvements to Service Levels (Annual Planning Process)

Bonuses for Achievement above Service Levels If applicable, a portion of amount should be re-invested by

service provider in some agreed-upon manner to improveServices

Relief from Service Levels customer failures

Force Majeure and Disaster Recovery Service Levels (Notsuspension of Service Levels)



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CORE N 2011

Service Level Agreements

Adam D. Vereshack

Barrister & [email protected]

42S i L l A

SLAs in BPO Agreements

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