SLAs: The Achilles heel of IT contracts

By : |April 25, 2011 0

INDIA: They say, inking a compact and favourable IT contract is a ‘promethean’ task. The word incidentally has more power here than that to merely bloviate.

In Greek mythology, Prometheus was the person who emerged a champion of mankind. It is said that he used his wily intelligence to full purpose and very deftly stole fire from Zeus and gave it to mortals.

If you are an IT manager or CIO all intent to unleash the brave and astute side of yours for your company by stealing hot SLAs and making them land to your advantage, wait….the story is not finished yet.

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Zeus punished Prometheus brutally. He was bound to a rock while a great eagle ate his liver every day only to have it grow back to be eaten again the next day.

Some promethean part inside you is confessing silently right now, because we very well know, what it means when the so-called full-proof SLAs backfire.

If the contract fails to put down clear and sharp deliverables or falters in measuring them or attributing them to the provider, the liver of costs and precious business time will get eaten every day without mercy.

Myth has it that Prometheus is both credited with — and blamed for — playing a pivotal role in the early history of mankind.

It’s not hard to guess why.

If you want to make your IT contract a strong one, SLAs or Service Level Agreements or any of their other siblings need a real good homework. That’s some pivotal work.

The big question is — are you ensuring that your expectations are written and understood well and are there robust mechanisms that will guarantee that lofty sales promises would indeed be delivered?

For a CIO, the commercial savoir-faire is going to be way more important in times to come.

Because what you say and what vendor listens might not really be the same thing.

It’s much more than nine months

Vendors know more about their organisations for a nine-month horizon. Beyond these nine months, customers know more. And that exactly spawns a lot of differences in many negotiations, reasons William Synder, Research VP, Gartner.

“Implement on strategic levels, if you will,” he advises. “And think really long-term in light of full cost of ownership.”
And put on the business-glasses.

Dennis Drogseth, Vice President, Enterprise Management Associates, Inc. takes that vein. All contracts, as he suggests, are based around objectives that should relate at some level to business goals.  CIOs and the people managing those contracts should have that understanding.

“ In other words, just ‘acquiring’ a server, or a set of SW licenses, or a service (telecommunications, app hosting, cloud resources) should never be viewed in isolation — but in a larger service delivery / business impact context.”

So should one go beyond the typical ‘keep the lights on’ uptime metrics, MPLs for extracting IT Service delivery? If yes, what other metrics should be incorporated?

Hackett Global Business Services Practice Leader Honorio Padron argues that if a company has the capability to measure services at a detailed level via automation, SLA’s need to match the level of the available information.

In the past, he explains, since these detailed metrics were not available, the tendency and advice was to settle at a high service outcome level, that has changed to a more detailed level. Additionally the payments or penalties have also changed to a more granular level.

“One very important consideration in this area is the type of outsourcing in question. Vendors have totally confused the market in their favor by calling most outsourcing a "BPO". BPO stands for Business Process Outsourcing and it is supposed to be used when the vendor brings their processes and systems to execute your work, which by the way very few have their own capabilitiy, and only have it in selected areas. Examples are a call center, payroll, cloud-based SaaS like Workday. In these real BPO cases the SLAs will be at a higher level since companies do not control the delivery details.”

Then there is the other league- Managed Services.

Now for the majority of outsourcing where the vendor is coming on to the company’s system to execute the work, these are called Managed Services and not BPOs, he tells.

In Managed Services cases, Padron recommends more detailed SLAs, and more visibility into the environment, since it is the company’s environment after all.

In any case, being business-savvy is inevitable for CIOs.

The emerging trend of externally sourced services will require on part of CIO organization a broad commercial understanding of integrating the Service Level Agreements, Contract Management, and Vendor Management under the guiding framework of measurable ROI, as Dr. Bharat Bhasker, Professor, Information Technology and Systems, Indian Institute of Management Lucknow observes.

“CIOs have to adapt themselves to new reality and take responsibility of increased ownership of Capital Expenditure (CAPEX) and Operating Expenditure (OPEX) budgets.”

And there are many ways to do just that.

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Anti-incumbency vote

As per Synder, many other companies might have the ability to compete, if you have the courage to look at alternatives and the patience and ability to walk out. “If you are having a long-term view, even the vendor knows that you have power. Negotiations can be emotional, and that’s where you have to be calm.”

He qualifies the advice though. “A level of caution is needed while dealing with smaller companies. In some circumstances, they may actually be a good fit.”

Hackett’s Padron exhorts here towards an important area to be alert about: The error of mixing current operations with improvements.

History has proven that in better than 80 per cent of the cases the Managed Service vendors do execute well against improvement targets, as he underlines.

“The ideal situation is to fix the work before giving it to a vendor (transform and shift vs. lift and shift).  However if for one or several reasons you must execute a managed services contract prior to transforming the work legally, organizationally, and payment wise separate the work from the current operations.”

Do not let the vendor talk you into mixing the two with the promise of the improvements being reflected in lower charges in the future, is what he stresses. The research indicates that within three years you will be re-negotiating the agreement due to the vendor’s lack of improvement performance.

Synder believes that if a customer can leverage the time factor properly, that’s great. There’s also the incumbent software factor, as he opines. “How much would it cost me to move this software? It’s important to have some rough idea here. That’s the amount of money that can take you hostage, so understand the money part really well.”

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Penalty or Guarantee?

Are guarantees/penalty-based SLAs going to make an impact? Or would incentives work?

As Reetika Joshi, an analyst from ValueNotes illustrates with the trend in Analytics industry, lower-end is where the FTE (Full Time Equivalent) model still operates and contracts are still negotiated that way.

“Yet, a lot of short-term contracts have moved to transactional or quasi-transactional pricing. Few players, like strategic clients are also getting keen on gain-sharing models. It is interesting to see payments side as percentage of business value.”

The new genre is not a flash in the pan but when you flip it, it’s not sunny-side up always.

How much percentage of the business value delivered can actually be attributed to the provider? How can you link the benefits to payments?

She is not alone in harbouring these doubts.

Sudev Muthya, President, IT Business CMS Infosystems proffers the same argument.

In many cases, there is no one way to measure the consistency of SLAs. There is a lot that hangs around their measurement. A service provider can always show three-errors on customer’s side. “What then?”  Muthya reasons.

These are some tough questions, but the new trend nevertheless enthuses the service provider with better accountability and confidence, Joshi believes.

“It’s still not replacing FTE contracts but is defintely a potential model.” She stresses.

Padron notes the same drift. “There’s definitely an increase in price for performance clauses.” SLAs are critical and yes incentives, when applied wisely, also work as well as penalties, he adds.

So, what to do to surf this wave on the right side?

Having stressed the weight long-term vision has on contracts, Drogseth from EMA tells us how deliverables can be spread on scales.

At the most basic level, for instance, SLAs and KPIs (Key Performance Indicators) impacting application performance need to be calculated backwards from the response time and cost perspective (security requirements could also apply). Rather than isolating SLAs on a component basis (server availability is less important, e.g. than its impact on the application or applications it supports).

This is key in calculating priorities for negotiating external services.” He recommends.

Muthya takes the middle road. Penalties enforce a minimum level of services. Premiums ensure both. “I guess doing both would be better. It is like carrot and stock, whatever works.”

Again, in Managed Services contracts where the company has more control, Padron advises to insist that the SLA performance be tied to the employees’ performance. “It is a magical formula…and a world-class practice as well.”

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Beware of the Eagle

Being on the negotiating table calls for a different poise and charm.How can CIOs be savvy enough for extracting best deals from vendors? What falls under reasonable gambit of expectations and what would fall under the category of ‘arm-twisting’ or ‘asking for the moon’? Are there still no ‘free-lunches’?

You pay for what you get is a basic law of business, is how Padron answers these curiosity cats. “And yes, there are even less apparent free lunches.”

Synder meanwhile has many more caveats to offer.

Understand what the salesperson is interested in, for instance. Do not pay a lot on maintenance as that might be coming out of the need of someone’s commission. And what motivates a salesperson is entirely different from what motivates a vendor corporation and of course, from what motivates a customer.

Understanding the value and impact of services is also key, Drogseth adds. How much are they really used, and by whom, and to what affect?  This is also a key set of insights to help prioritize contract negotiations, he says.

Dr. Bhasker iterates how Return on Investment (ROI) analysis will be the prime driver of the technology deployment. “The ROI based transformation will bestow greater responsibility on CIOs and move up their role in the corporate hierarchy.”

Anantnarayan Seivur — AVP – Head ISG & PMG, KPIT Cummins Infosystems Ltd sums it up perfectly. Contract Management, as he describes it, is a process in itself and has a complete life-cycle associated with it.

But even after imbibing the process, most companies still face some of the basic challenges and questions like: Do you know your contacts expiration date? What is the mechanism and how it is tracked? Do you know a specific deliverable or milestone within a contract and has it been completed on time or not? Can you identify and monitor high performance metrics for a supplier based on contractual agreements?

As it turns out, not having a good contract management process in place has consequences both to the buying organization as well as to the purchaser.

Reminds me of another Greek God.

Even though Achilles’ mother felt relieved she had bathed her son for immortality in the powerful water of a mystical river; Alas! She missed his heel.

And that oversight, just a heel, made the invincible emperor succumb to death.

All it takes is one vulnerable heel.

For once it doesn’t sound all Greek, eh?

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