It pay to research outsourcing contracts
Monday, 8th October 2007 by Liz Loxton
Many IT outsourcing contracts lack flexibility and fail to deliver over the long term, so getting the service level agreement right is essential.
Traditional thinking would have you committing to your IT outsource contract for the long term. But IT changes, markets change and consequently the needs of your business will change. As the client, you will be keen to embrace new technology that will result in your costs coming down, while your outsourcing suppliers will be less keen to factor in a reduction in revenues.
Any company signing up to a long-term outsourcing deal risks losing the competitive advantage that retendering might bring. Phil Codling, an analyst with Ovum, says that companies negotiating second and third generation IT outsourcing deals are now pushing for greater flexibility.
Deals are being written with the option for the customer to retender different elements from ERP to desktop management – so if the supplier’s performance slips, the customer has the option of taking their business elsewhere. “The value of incorporating flexibility into contracts is not just that you can take account of changing circumstances. It also acts as an incentive to your supplier,” says Codling.
So how can FDs frame service level agreements (SLAs) so that suppliers are properly incentivised?
Margaret Harvey, a partner specialising in IT and outsourcing at law firm Addleshaw Goddard, says SLAs should align service levels with business needs. “Think about the impact that any failure would have on your business. If you stipulate speed of response in a call centre, factor in how crucial speed is. If that call is from a customer who can’t be put on hold, then speed of response is definitely a factor to build into the SLA.”
Getting KPIs into the contract depends on evidence of their achievability. If you have provided the service in-house, you will already have data on typical areas of difficulty and problems. Many service providers will want evidence on prior standards before signing up to a level of service, says Harvey. If the work is new to you, research the industry norms from analysts such as Gartner.
At the most basic level, KPIs should cover accuracy, speed of response to problems and speed of resolution of those issues. Agree the period over which the performance is being measured and what level of service is acceptable.
The devil is in the detail. For instance, when you set a standard for speed of response you will need to agree when the clock starts running. Does it start from the time a problem comes to light? Or does it start at the beginning of the next business day if the issue was logged after hours? “Listen to suppliers to find out what they believe to be achievable and reasonable,” says Harvey. “If you are at odds on that from the outset then you won’t end up happy with the service.”
Get a clear sense of who will carry out the work and how. A straightforward process such as payroll may be handled by a bulk processing centre. A bespoke service should be tailored to suit you.
Expect a service credit regime to cover eventualities if desired performance levels haven’t been met. Providers will look to cap reductions, so scrutinise reports closely. “You might get something that says you have a performance level of 97 per cent for 18 out of 20 KPIs,” notes Harvey. “But on two indicators you’re getting complaints about the level of service. You would get credited on those areas, but you need to address them if they are key to your business.”
Liz Loxton is a freelance financial journalist
What next...
www.uk.country.csc.com/en Outsourcing giant that numbers Royal Mail and BAE Systems among its clients.
www.noa.co.uk A trade association promoting best practice in outsourcing. Its members are evenly split: users, suppliers and support services.
www.gartner.com Independent research consultants.
www.ovum.com Independent research consultants.
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