Service Level Agreements: Creating Separation Between a Rock and a Hard Place

Service Level Agreements standing between two rocks

5 min read

At the heart of every service is a contract.

In this series of blog posts, we’ll be exploring various case studies of actual challenges that arise out of contractual agreements in the BPO industry and how we use advanced analytics to optimize operations not just for happy customers, but equally happy, and profitable, providers. To begin, we’ll focus on the general risks and most common issues and scenarios we see play out particularly in business process outsourcing (BPO) contracts.

The Rock: Key Performance Indicators, Slim Margins, and Penalties

BPO contracts generally consist of service level agreements (SLAs) that define the quality and extent of service provided using key performance indicators (KPIs) that often carry monthly – sometimes hourly – penalties whenever broken.

For example, consider a customer’s workforce calling into a service desk with issues they need resolving. SLAs attempt to quantify ‘good service’ such as how long it takes to get in touch with an agent (Average Speed of Answer, or ASA) and the percentage of customer issues that are resolved on the first call (First Contact Resolution, or FCR).

These contracts are generally the result of a customer’s request for proposal (RFP) of a multi-year arrangement to outsource work such as running a service desk. The winning provider usually prices their proposal very competitively with expectations to operate with slim but still satisfactory margins should they win the bid.

What we find, in our experience, is that these contracts make or break the success of the relationship. Most challenges for service desks are rooted somehow in contracts. This relates to the way they manage their agents and internal processes through to the way they communicate with their customer and accept or deny (usually accept) the customer’s requests for change over the life of the contract.

KPI performance

The Hard Place: Dynamic Volume, Unforeseen Obstacles, and Evolving Parameters 

All contractual agreements, especially those with penalties, carry some level of risk. Particularly with slimmer margins, there is potential for the provider to actually lose money on the work. Nevertheless, some contracts are significantly riskier than others.

Three main considerations are:

  1. Volume/changes in scope
  2. Unplanned outages/unexpected events
  3. Longer-term commitments of the provider to improve service and reduce cost. 

Solving Volume Changes Involves Anticipation in the Contracting Stage

Customer changes to products and services that are likely to occur could dramatically change the landscape of the service desk. If the contract is based on the total number of users, and not volume, this would mean the provider is receiving the same revenue while doing potentially significantly more work in the face of volume increases, hence requiring more people. Moreover, there is also no motivation on the client’s side to reduce volume through automation or root cause fixes, which makes it even more difficult for the provider to control volumes, especially when working in the customer’s environment. These contracts can quickly lead to significant losses for the providers!

Instead, incorporating volume and growth into contracts, along with a mandated collaboration on automation and environment enhancements, will ensure that both provider and customer can grow amidst new customer business. Additionally, opting for shorter contracts or opportunities for reevaluation can ensure both customer and provider are satisfied with their relationship and allow the provider or the customer an early opportunity to exit if they are unable to earn the margin they originally expected or if the service levels are below expectations.

Managing Unplanned Outages through Exception Clauses and Transparency

Unplanned outages (often due to externalities or to customer’s application changes) could swamp the service desk putting all SLAs at risk. When this becomes routine, more resources are needed to maintain low ASAs and high FCRs and minimize penalties. If there are no contractual standards on how to deal with these outages the provider never has leverage and will lose every time. Instead, consider incorporating exception clauses into contracts for unexpected events, which can forgive impacted SLAs, and enforce a collaborative change management approach to ensure proper communication and preparedness for any expected events.

Leverage Synchronized Process Improvement to Enhance the Viability of Long Term Commitments

Commonly seen in modern BPO contracts, providers will commit to reducing price year over year based on confidence in their ability to automate, to digitalize, and to improve processes to reduce cost or to win the business. These improvements are hard to make, as the provider can often be blocked by its customer from making improvements or influencing the adoption of new processes.

Given the trend, it is important providers learn how to do this better, with not only contractual obligations that require customer participation in areas of automation and process improvement but also with the use of better tools that can identify where work is taking place to best focus their improvement plans and identify/remove blockers.

Stubborn Contracts are like Stubborn Donkeys

Service Contracts Made for Today Must not Be Stubborn to the Needs of Tomorrow

So what should be done? Contracts, which ultimately define the working relationship, and carry responsibilities and rights, need to help focus and influence management decisions both on the provider’s and the customer’s end.

Customer discussions will evolve throughout the life of the contract, focusing on outliers and different aspects of service that were not thought of during the writing of the contract. In fact, some SLAs may become irrelevant or less important. New technologies like chatbots and AI-led incident resolution as well as new standards for collaboration also change customer’s expectations for service.

Today, we see the emergence of sophisticated customer sentiment metrics and analyses in service contracts that were essentially non-existent 6 to 18 months ago. These increased expectations and focus on problem areas often lead customers to ask for changes and make requests that the provider accepts with the hope to please the customer and increase the likelihood of renewing the contract. However, these changes always have consequences, which may mean some SLAs might begin to fail. Even though the provider is doing what the customer asked, they might still be penalized. In order to implement the changes and meet the SLAs, more resources are often required. This creates a vicious cycle that always puts the provider between a rock and a hard place and alters the relationship negatively.

When Great is the Enemy of Good, Nobody Wins

Managing multi-channel services with a variety of different types of work across a wide set of hours is hard. Providers sometimes over-deliver (or “gold-plate” particular services), incidentally providing something better than the customer is paying for or care for, and under-deliver or miss particular problem areas for the customer, which might not even be covered in the contract.

Unfortunately, as part of human nature, customers will generally be more focused on problem areas and pay less attention to good service. Even worse (for the provider), the customers do not appreciate how much good service costs. It is therefore important the provider delivers what the customer is paying for and is also open about making tradeoffs to improve certain aspects of service while maintaining operating costs. For example, the customer may accept some modifications to SLAs they don’t notice or care about as much, like increasing ASA thresholds from 10 seconds to 30 seconds or reducing FCR thresholds from 90% to 80%, in the interest of other service improvements, like new priority queues or extended hours.

The Client is Always Right Until they Change their Mind

While it is important to please the client, maintaining business viability is also essential. The provider should therefore not shy away from using the contract to their benefit in their discussions with the client. The provider is being paid to perform a specific scope of work under defined assumptions after all. Should any of that change, so should the contract. If every requested modification or enhancement to service is reflected in the contract and mutually agreed upon prior to taking effect, both parties should win.

Until those changes and reprioritizations are reflected, however, the provider needs to remain focused on its contractual commitments, including making all SLAs and finding ways to improve its service.

But how do you do this?

CKM Frees you from the rock and the hard place

T-K Uses AI to Optimize the Space Between the Rock and the Hard Place

We understand good customer service is not just about “meeting SLAs,” but rather listening to your customers and providing them with an ever-improving service that fits their evolving needs. Nevertheless, it is important not to understate the difficulty in doing more for less. It is incredibly challenging to know how to change and evolve a service, to know which “what-if” scenarios will be best for optimizing service and cost, and to know how the customer and service levels will respond. All of this is an optimization problem, which is exactly what we set out trying to solve when we first designed and conceptualized our product T-K

In an upcoming series of blog posts, we’ll dive into these concepts in much greater detail, exploring specific case studies that demonstrate how to leverage capacity in multi-channel environments with variable volumes and challenging SLAs. We’ll review actual contractual examples to see specifically how TK can be applied to maximize resource productivity and realize tangible automation and process improvements.