Why Service Levels?

We have mentioned service levels in prior posts and lightly touched on how service levels, among other issues, can give rise to disputes.  This post will cover what a service level is and what it is designed to achieve; we plan to follow up with additional posts that will address other fundamental aspects of an outsourcing contract, such as the scope of services pricing schedule.

So let’s start with the basics.  What is a service level?  A service level is a contractual measure of the service the vendor must achieve.  As we noted in a prior post, “[t]he concept of service levels and service level credits (the penalties the vendor pays when it fails to meet service levels) came into being as a way of keeping the focus on issues that are fundamental to service quality.  Service levels are frequently used to measure and maintain many kinds of metrics measuring productivity and performance.”  Service levels should be SMART: specific, measurable, achievable, relevant and timely.  The purpose of a service level is to lay out a quantitative and qualitative measurement of the service that the vendor agrees to deliver.

What is a service level designed to achieve?  A well-balanced and effective service level is tailored to focus on issues fundamental to service quality.  It is important to strike the right balance between too many services levels (the customer’s desire) that detract from the fundamental service issues, and too few service levels (the vendor’s strategy) that do not effectively make the vendor responsible for fundamental service issues.  When you think of a spectrum, the service levels (in the aggregate) should fall around the midpoint – robust enough to measure the fundamental aspects of the service and but not so comprehensive as to make it difficult or impossible for a vendor to meet them.  This concept is one that mirrors our philosophy regarding contracting – when the contract is generally fair and balanced, it helps promote a mutually beneficial long-term relationship between the parties.

Why would you include service levels in a particular deal?  Perhaps most importantly, it is the opportunity for the vendor and customer to have the proverbial meeting of the minds before contract execution.  The customer can articulate the parts of the service it deems critical or fundamental and which require measurement; the customer’s ability and opportunity to convey these requirements can translate to specific, measurable, achievable, relevant and timely services levels…and a happy client.  Conversely, the vendor has a chance to determine not only if it can meet the customer’s expectations, but earns an opportunity to have a meaningful dialogue, and promote a positive relationship, with the customer.  Furthermore, well-drafted service levels may help drive out unnecessary costs by giving the vendor an opportunity to articulate the quality/cost tradeoffs in a quantitative way.  Finally, with the appropriate thought and planning, service levels can be used to protect the customer from degraded performance during predictable periods of peak demand.

So what does it means to have fair and balanced service levels?  As in-house counsel for a management and technology consulting services vendor, I had the opportunity to work alongside the business people who were responsible for selling and delivering the deals.  Over the course of watching the team win and deliver deals, I had some interesting conversations with those business partners.  In deals where the team held its margin and generally met a set of tailored service levels, the customers were satisfied with the services in particular and the vendor overall.  This satisfaction often led to a better relationship between the parties, one where the customer rewarded the vendor with additional work.  In deals where the service levels were either loosely defined (which may have occurred for a number of reasons) or overly prescriptive and/or comprehensive for the deal, the customer experienced a high level of dissatisfaction.  It often felt that the vendor had sold it a bill of goods, and that the service offering did not meet the customer’s expectations.  The interesting take-away from this is that the outcome is not one party’s fault, but rather a missed opportunity for the parties to tightly define a specific set of service levels at the outset to achieve that (sometimes elusive) fair and balanced contract.

I would argue that every outsourcing deal should consider including service levels, regardless of how small.  It gives the parties an opportunity to set expectations regarding fundamental aspects of the service and its delivery (delivery of it?).  If the parties can agree upon fair and balanced service levels (and resist the temptation to “win” by getting lopsided service levels), they’ve just taken a big step toward a productive long-term relationship.  We will discuss other ways to further that type of relationship in future posts.

One note of caution: Customers should approach the development and negotiation of services levels with an approach that uses logical analysis and a pragmatic view of human nature.  Service levels will drive the vendor’s behavior – that is their purpose.  But the customer needs to think “several moves ahead on the chess board” to make certain that the behavior it is driving is the desired behavior.  For example, if the outsourcing is for a help desk, a service level measuring the average call length and penalizing the vendor if the average call length for a month exceeds some metric will encourage the vendor to bring calls to a close within that time.  That outcome is great if the customer wants to drive out costs, but very bad if its goal is to maximize problem resolution and user satisfaction.