Should we include service credits when we design a service level agreement?
Service Credits in a SLA good or bad idea?
In terms of a general principle it is not recommended to build into an SLA a so-called ‘service credit’ process. In such schemes, when the service measure falls below the agreed levels, a form of credit to the buyer is given.
As an example, a payment schedule is defined for, say, a 98 per cent service level and, should service be 95 per cent, a lower price band becomes applicable – I have also seen SLAs with performance credits, with increased revenue for a supplier should the ‘standard’ performance be exceeded. There are several reasons why this is old-fashioned and bad practice.
* First, the point of a service level is to define the required levels needed to support the business and no more. Improvement levels over time can be defined but the service needed is what the business should pay for – if it is exceeded you may have to increase your targets, but certainly not pay more for just doing the job.
* Second, with a service credit clause you have no leverage over the supplier to fix the problem. The focus should be to restore the service to the agreed levels as soon as possible.
Rather than a service credit clause, it is far better to put in place governance that forces the supplier to act to fix the issue, perhaps to the extent of the customer being able to call in independent consulting advice at the supplier’s expense to support service resolution. This use of an ‘independent’ adviser can be useful in monitoring the overall value of the outsource deal as it matures through its stages. It is important to include this in the SLA and agree the principles and ground rules for such an ‘independent’ with the outsource partner.
Your staff will often see the problems much later down the line if you get it wrong, as one of our research participants said:
“Because the company have these people, they’ve got professionals who only write contracts, and they know how to work them, and the client haven’t got a clue, eventually they tried using some outside firm of solicitors, to read through the contract, but it’s too late then, and even they might not have been professional contract people. And they still got screwed in the end, and they still don’t understand, nobody, I haven’t met anybody who understands what the hell outsourcing is all about, has it saved them a lot of money, no it’s cost them more, have they got an improved service, no it’s much worse, why? Why have they done it? They say ‘oh well we are saving money on pensions’, you are not, you’ve transferred the pension money over, ‘we’re saving money on accommodation’ well you’re not really, ‘we’re saving money on pay’ well you might be saving money on some aspects of pay but look at how much money you are paying the outsourced companies to run these things, and of course the classic mistake they made is, they’re paying for a fixed sum of money, millions of pounds a year, for maintenance of the existing system, nobody mentioned, changes to the system, like, I don’t want the machine here any more I want it in the room next door or in the new building, ah that’s a change to the contract, it will cost you an extra x hundred thousand pounds, and I think the contract in the first six months was something like thirty million over the estimate because they are moving things all the time, closing buildings, building new ones, every time you get a change of hierarchy, it’s new broom, right we will change all this we’ll have the (Dept.) over here and that group over there, we’ll swap those two over, and they do it regularly and it all gets charged!”