Are service level agreements really necessary in outsourcing?

Jacques Greyling, Rackspace Managed Hosting UK

Jacques Greyling, managing director of Rackspace Managed Hosting UK, discusses the value and impact of the service level agreement (SLA). Should this often contentious document take a leading role in your outsourcing relationship, or are other factors ultimately more important?

Outsourcing has emerged as one of the leading global trends in IT management. According to Forrester's European Application Outsourcing Spending Forecast: 2006 To 2011, application outsourcing is expected to be one of the quickest-growing categories of IT services over the next five years, with a CAGR of 10 per cent.

Firms in mature outsourcing countries, such as the UK, the Nordics and the Netherlands, will account for the majority of the spending, which will grow from €17 billion in 2006 to €27.5 billion in 2011.

As companies increasingly acquire the IT services they need from external partners, there is a greater need to formally document these arrangements in contractual agreements. Service level agreements are formally negotiated agreements that help to identify expectations, clarify roles and responsibilities and can facilitate communication between a service provider and its customer, whether this is an internal customer or external.

The concept of service level agreements originated from the telecoms industry where service providers are familiar with sharing bandwidth and agreeing clear technical definitions of what they are entitled to. However, as outsourcing arrangements have hit the mainstream, it has become clear that not all providers are created equal.

Competitive pressures have tempted some providers to promise customers more than they can deliver and the resulting under-performance has sometimes clouded perceptions of a mostly high-achieving industry.

In such a climate, the service level agreement can become a battleground between customer and provider, with customers suspicious that the contract may provide the outsourcer with buffers and safeguards that protect them from taking responsibility for non-performance.

We are now finding that the outsourcing of web hosting has matured and with this experience the role of the SLA has been re-examined. Some experts believe that an SLA is a requirement for success, while others are saying that SLAs are far over-rated and often unnecessary. What is the value and necessity of SLAs in outsourcing today?

One issue that businesses commonly find is that the SLA is being used as a defensive tool. Not all vendors deliver and in these cases the SLA can be used as a system to ensure performance. If a customer has been burned once by an outsourcing provider, they often make it a point to negotiate the SLA to protect themselves against anything that might go wrong.

The SLA is a lot like a prenuptial agreement; you only use it if something goes terribly wrong and emotions begin to cloud everyone's judgement. In this way the SLA could be considered vital, but only in a defensive role, as a redress once a problem has already occurred or, in the worst case, to give the customer a way to separate from their relationship for non-performance.

The conviction can be held that SLAs are still necessary, but they really shouldn't be. If the relationship with your outsourcing provider is solid you will simply have little or no call to refer to the SLA. When trust is built and maintained in an outsourcing relationship, the customer will expect that the vendor will take care of the problems and the vendor will ensure this will happen.

In this way the SLA is usually discussed during the initial contract negotiations, but rarely thereafter, as it does not need to be. This is not to underestimate the value of discussing and agreeing the service requirements, but to suggest that the relationship should not be led by the SLA document, or require the customer to police the SLA to keep tabs on the provider.

The SLA can be a double-edged sword and can occasionally cause problems for both parties. Sometimes the SLA becomes a problem for the client if the targets are not set correctly. If the SLA doesn't set the bar high enough and the SLA gradually becomes the standard for performance, then the client isn't really getting the service they've paid for or expected.

Conversely, if the SLA is negotiated and sets an unrealistic bar, then the service provider will constantly be battling to live up to the agreement. If the bar is truly set too high, then the provider is set up for failure from the outset. The key is setting the service level targets exactly right and that can be tough before the two parties have any experience with one another.

Initial discussions with customers are key in exploring their objectives for the outsourced service and the business needs that the service will be meeting. The service levels established should make sense to both parties. The customer should be prepared to ask for what they need and this should be considered carefully. For example, in a hosting environment, a customer should consider whether every application needs 100 per cent availability or whether some may need 99.5 per cent, or even 98 per cent.

Customers should also prioritize and identify critical components of the outsourcing deal. The agreement reached should exactly suit the customer's needs, while at the same time they should be realistic, achievable targets for the service provider. While this may sound obvious, it can take an experienced hosting provider to know exactly what flexibility they have to tailor their offering to fulfil customer needs and still be sure to deliver.

Other good pointers are to use plain English in the SLA rather than legalspeak. SLAs should be drafted by the techies, not the lawyers, and should speak clearly to a customer business contact. Customers should not be asked to pick through and interpret a lot of legal jargon in the SLA. The language must be easy to understand and the targets make sense.

Providers cannot help but be aware of the poor reputation and distrust that may exist in this area. It is important to make efforts to build trust, especially through the initial meetings. A provider can demonstrate the committed attitude it is taking towards the SLA, indicating that it is prepared to keep its promises outlined in SLAs.

The provider should make the penalties fit the crime and this means that any failure to meet the SLA will carry a substantial penalty. This penalty should be offered proactively. This means that in the event the provider has breached the SLA they will not only call the customer and let them know, but also immediately apply the agreed penalty. Conversely, when there is an arduous process for requesting credits, the customer can become frustrated, further deteriorating the service experience.

Customers will have more faith in a provider that commits and delivers to taking the initiative in managing the service and is happy to give strong penalties against the agreed service level. Explaining this to a prospective customer can immediately instill trust and set the tone for the relationship. This simple approach of taking responsibility for the good provision of the service and not waiting for the customer to flag up any problems is not yet the norm in the outsourcing industry.

Negotiating an appropriate service level agreement also means listening and responding to the customer. Some requests may seem strange, but the provider should be open to a prospective customer's wishes while still bearing in mind what is realistic.

A provider should seek to be reasonable and even-handed in establishing terms, being prepared to meet in the middle if some specific term is disputed, or to seek out a remedy that seems fair to both sides.

If a compromise isn't forthcoming for a particular term then the provider can alternatively offer a get-out clause around the SLA, where if the client experiences repeated failures to perform in a particular area, for example more than three, they are given the option to terminate the contract. This kind of commitment can reassure the customer and help build trust at the beginning of the relationship.

Trust needs to be built and maintained between both parties in an outsourcing relationship. Providers need to be open and honest in the event of a breach of the SLA and be prepared to stand up to the penalty. If the provider views the SLA as the performance platform and not the ceiling then it will rarely, if ever, need to refer to the SLA.

See also
A Guide to Global Sourcing - Offshore Outsourcing and Other Global Delivery Models