Today’s strategic long-term outsourcing or partnership deals are frequently
worth millions of pounds, but for every success story, there is a provider that
has fallen short of expectations. Nearly seven in 10 of respondents to last
year’s outsourcing survey, by PA Consulting, reported that business benefits
were either only partially realised, or not delivered at all.
The service level agreement (SLA) not only forms the cornerstone of your
requirements – what will be delivered and how much it will cost – but is also
the main point of redress should the relationship end.
Why is it important?
Outsourcing of HR services has the potential to deliver a variety of
benefits, including cost reduction, enhanced service levels and a competitive
advantage, but the decision to hand responsibility for the function to a third
party is far from easy.
Any HR department considering the transfer will need to feel secure about
how the function is valued and its future role within the organisation. You
also need to be satisfied the right skills are in place to oversee and manage
this change so that it doesn’t become a decision you live to regret, and a
permanent blight on your career.
Where do I start?
You need to be absolutely clear from the outset what it is you expect from
the provider – provision of a comprehensive brief should go some way to
averting the risk of a standardised, one-size-fits-all service. It is also
essential to have a solid appreciation of your own department’s strengths and
weaknesses, as it is entirely impractical to attempt to monitor and evaluate a
provider’s service delivery if you haven’t carried out a detailed review of
your own performance first.
If you are at the stage of having identified a provider, then a service
specification will already exist. "This should detail what the provider is
being asked to deliver, written in output rather than activity terms,"
says John Ingham, principal consultant at human capital management consultancy
"These expectations will usually surround better value for money,
process improvement or further value added. Once the provider is selected, the
parties need to negotiate further regarding the specification that will be
refined into a SLA."
If you are entering into a long-term agreement with a provider, the
consequences of getting it wrong and being locked into an unsatisfactory
relationship are dire. As a result, a great deal rests on the negotiation
discussion. There is every chance that you will form part of a negotiating team
made up of a variety of experts – if not, the one key person you still need on
board is a legal negotiator or lawyer.
While you may have experience of negotiating in a variety of HR contexts, it
is the hard-nosed commercial variety that holds sway here, and taking a
calculated approach to who performs what role in the negotiation will pay
dividends. Request examples and case studies of how the proposed model will
work. You will also have to do a fair amount of internal negotiation – if the
board is not behind it, it’s likely to fail.
The contractual details
Providers will be keen to impart their own recommendations about the finer
points of the contract, but it would be unwise to accept this information at
face value. At a minimum, the contract – which could run to several hundred
pages in length – should contain clear performance goals that the provider
needs to deliver against. It also needs to spell out where accountability lies.
What, for instance, happens if the provider merges, goes to the wall, signs up
your rival or some other disaster befalls the arrangement?
Insist on regular performance updates in a suitable format, and the
opportunity to audit the provider. Make sure the contract is flexible enough to
adjust for variations in targets and to reflect performance upgrades or outside
Managing the service provider
In the quest to reduce costs it can be forgotten that managing the quality
of service is a work in progress, and requires a framework and procedures. Many
organisations also have a tendency to forget that outsourcing is a
‘partnership’, so it is important to bear in mind that responsibility for the
relationship to work lies with both parties.
It is essential to appraise performance on an ongoing basis through a
combination of regular informal meetings and six-monthly/annual formal reviews.
These review periods need to be built into the contract.
Where can I get more info?
Strategic Outsourcing: Exploiting the Skills of Third Parties, Jill Percy,
Ian Benn, Hodder Arnold, £16.99, ISBN 0340850507
The Outsourcing Dilemma: the Search for Competitiveness, J Brian Heywood, FT
Prentice Hall, £24.99, ISBN 0273656171
If you only do five things…
1 Be clear about what you are trying
2 Get yourself a good lawyer
3 Build contingency into the contract
4 Conduct regular performance appraisals
5 View the relationship as a partnership
Expert’s view John Ingham on
implementing a service level agreement
John Ingham is principal consultant
at human capital management consultancy, Penna Consulting.
How would you recommend monitoring
and evaluating the service provider?
The provider needs to produce ongoing reports on performance,
with ad-hoc updates if there are any signs of deteriorating performance, or if
agreed improvement objectives are not being met. The SLA therefore needs to
define problem reporting and escalation procedures.
Evaluation should also include client and customer
satisfaction, which is commonly measured by surveys and assessed against
targets in the SLA. General, anecdotal feedback should also play a role.
What type of contract or payment
structure is currently in vogue?
Partners are moving towards shared profit arrangements to
ensure that both parties are focused on the same outcome. These arrangements go
beyond extracting penalties for failing to meet minimum service levels, which
are balanced by incentives for exceptional perform-ance. Instead, they allow
the provider to value bills for meeting stretch targets and delivering extra
Is it important for both parties to have an exit strategy?
The SLA needs to include some sort of escape clause. However,
it is important that it focuses on ensuring the relationship between supplier
and client works, rather than catering for what happens when it goes wrong, as
with pre-nuptials. The escape clause needs to focus on material breaches of
contract, and give examples of what would constitute such a breach.
In addition, a competitive bidding process should be held every
two to five years. Nevertheless, these exit strategies may not reduce risk as
much as it might seem, as a change of provider or a move to bring operations
back in-house may not be as easy as it might appear.
Why do SLAs tend to fail?
A surprisingly high proportion of outsourcing contracts do not
incorporate a SLA – implementing one is a success in its own right.
SLAs often fail because expectations are not explicitly clear
at the outset. However, it is important to strike the right balance between
being meticulous in specifying requirements, and building a working and
fruitful relationship with the provider. It is imperative that the provider is
fully engaged and committed to meeting and exceeding service goals.