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Back to Basics – SLA

Back to Basics – SLA

How is a SLA contract constructed? What differs SLA from KPI? How to properly construct a catalogue of outsourcing services? What penalties are worth incorporating in an outsourcing contract? With this article we start a cycle of educational publications by Piotr Rutkowski, Managing Partner of SourceOne Advisory.

Outsourcing already became a commonly used business tool, thank to which managers-optimize business processes of the enterprise. Does it mean we have an in-depth knowledge how to optimally and safely implement outsourcing in our own companies? On the side of the suppliers – certainly yes. On the side of buyers – not necessarily.

Talking from my professional experience (as an advisor in such projects and a lecturer on postgraduate studies in two renowned Polish Universities) I can say that, even the basic knowledge of outsourcing is still heavily lacking. I’m not saying about skills of building advanced outsourcing contracts with a broad scope of services, including takeover of large groups of employees and purchasing significant material assets, at all. (Please refer to my previous article on NordicIT on Mega-Outsourcing Contracts: Mega-Contracts). What I`m talking about is a full understanding of completely elementary concepts and mechanisms used in outsourcing, for instance the question of distinguishing KPI and SLA. Please believe me, not more than 20-30% of people with whom I talk to (all of them being business practitioners, not students!) is able to correctly answer my question, what is KPI and what is SLA!!!

Let us get back to the basics and together think of the description of the quality of services in outsourcing contacts and let`s define those basic terms.

While giving away some part of our business or process of our company to be serviced by the outsourcer we must overcome in us the urge to force on him the “how” it should be done. The core of the outsourcing relation is paying (or penalising) of the supplier for reaching (or failing to reach) pre-agreed between the sides goals of the service. Contract as such should describe the goals not the way the service should be done by the outsourcer. This in turn means that the key in such a contract is valuation of the quality of the service delivered by the outsourcer. That is enabled if in our contracts we implement effective SLA model.

Building of such a model we begin with something else – from detailing the scope of the service. Agreeing on “WHAT?” the outsourcer must do, should be the first stage of building the contract (we will get back to building a service catalogue in the next of our BACK TO BASICS articles cycle). To specific services from the service catalogue (sometimes to all services) we attach additional parameters, those we call KPI (Key Performance Indicator). Those are the parameters, which describe our expectations and business needs as a client. Those are not the parameters, which describe the quality of the service delivered by the outsourcer!!!

Examples of KPI thus can be:

• Bandwidth of the telecommunication connection
• Time needed to repair a faulty vehicle
• Time of generating a specific report from the IT system

After fulfilling above tasks, then in the next step we describe the SLA (Service Level Agreement) model inserting a set of additional parameters, which will be definitely describing the quality of the services of the outsourcer. For example if we agreed that time for generating the X report from our IT system should be not more than 15 minutes, then the quality of the service would be determined be the percentage of the reports that would be generated in the agreed time scale in the settlement period (usually a month).
We agree with the service provider (Still an example!), that if 95% of reports in a month were generated within 15 minutes then the service is delivered correctly and we pay the outsourcer a full monthly payment. If the outsourcer fits in the region between 70% and 95% then he has to pay a fine, for example 1% of the monthly value for every 1% of the service quality below 95%. If the number of reports generated in the agreed timescale falls below 70% then the client (again just an example) has the right to double the fine and terminate the contract immediately with the fault on the side of the service provider.
Simple? Of course!

Obviously a SLA contract should incorporate much more elements than the known to us all “five nines of system availability”, but whiteout understanding of the fundamentals of building SLA there is not much point in going further.

About the author
Piotr Rutkowski, for 20 years in business and 15 years of experience in outsourcing industry, advised on projects worth up to $100 million.
Laureate of many outsourcing industry awards. Author of numerous publications in the field of outsourcing and sourcing. Lecturer on outsourcing, sourcing strategies and procurement at Warsaw School of Economics and Kozminski University.
In 2006 created and has since managed his own independent consulting company SourceOne Advisory (, specializing in outsourcing consultancy and supporting IT procurement processes.
In his career, he advised, among others for T-Mobile, DHL, HDI, ING Bank, Polish Television, Polish Railways, PZU, Polkomtel, PKN Orlen, Energa, Raben, Meritum Bank, Kredyt Bank, Budimex, Pinebridge, AmRest, KOPEX.

About the Publication
Article originally posted in Polish language as a part of a series “Outsourcing Academy”

Piotr Rutkowski Source