slas in bpo agreements
TRANSCRIPT
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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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CORE: Nov. 2011 Service Level Agreements 33
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
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CORE: Nov. 2011 Service Level Agreements 55
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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CORE: Nov. 2011 Service Level Agreements 66
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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CORE: Nov. 2011 Service Level Agreements 77
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
8Service Level Agreements
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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CORE: Nov. 2011 Service Level Agreements 99
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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CORE: Nov. 2011 Service Level Agreements 1010
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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CORE: Nov. 2011 Service Level Agreements 1111
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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CORE: Nov. 2011 Service Level Agreements 1212
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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CORE: Nov. 2011 Service Level Agreements 1313
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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CORE: Nov. 2011 Service Level Agreements 1414
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
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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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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)
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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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CORE: Nov. 2011
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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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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Weighting and Success Categories
Weighting factors are used in the same way as
more traditional measurements discussed above
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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
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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
Application Software
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CORE: Nov. 2011
Metric Categories
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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
Application Software
Timeliness (25%)
Quality (75%)
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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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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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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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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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Cautions in Using the Balanced Scorecard
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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Cautions in Using the Balanced Scorecard
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