A Strategy for the Right Service Levels

by Joe Auer

Service levels are an important part of any results-oriented contract where specific supplier performance is required—and where it must be measured. Service levels are especially important in outsourcing and telecommunications deals in which the customer becomes vulnerable because he depends on the supplier. A results-oriented contract with meaningful service levels and remedies is an effective mechanism to help customers actually get what they’re paying for and minimize exploitation by opportunistic suppliers.

Establishing realistic service levels and remedies for supplier nonperformance can be very difficult. With some pressure from a prospective customer, suppliers are generally willing to contract for service levels and, sometimes, remedies to go along with them. But suppliers usually try to make service levels as broad and as loose as possible, which makes them easier to achieve—and tougher to measure. Meanwhile, customers want service levels to be as tight as possible to ensure maximum and measurable performance. The challenge manifests itself during contract negotiations.

As a customer, remember that the supplier is always trying to minimize its risk by placing as much of the burden of proof on your shoulders as possible. Here’s a recent example:

During negotiations for a global telecom deal, a customer was faced with the service-level challenge. Several prospective suppliers proposed their standard service levels. The customer believed those levels were too broad for some critical components of its network. The suppliers stuck to their standard rhetoric, stating that their service levels were reasonable and consistent with industry practice.

The customer didn’t fold and argued that while the levels may be consistent with industry practice, they weren’t sufficient for the company and some parts of its network. The customer’s procurement team focused the prospective suppliers’ discussions and proposed solutions on the actual network. The team presented its network map and pointed out there were certain locations that were critical to operations. The supplier-proposed service levels weren’t adequate for these critical locations because they left the customer vulnerable to too much downtime in the event of a network failure. (But the proposed service levels were acceptable for some other noncritical locations.)

The customer then stressed the need for location-specific service levels to guarantee the robustness and serviceability of its network as well as the continuity of operations. This argument seemed to be new to the suppliers and was met with some initial skepticism.

The customer pulled an ace out of its sleeve by saying, “This is a way to distinguish yourself from your competitors. It’s an opportunity to excel and gain an edge. It’s an opportunity to win a global deal without assuming an inordinate amount of risk. We’re willing to accept your standard offering for most locations if you give us a display of confidence in your ability to perform for the critical ones. These locations are critical for us, and we need to more fairly allocate the risk of network failure.”

Two suppliers agreed and proposed their best location-based service levels. That’s just what the customer needed to be competitive and maintain negotiating power. Isn’t that what it’s all about? Suppliers with real confidence that they can do the job shouldn’t be afraid of performance guarantees. What’s more, having supplier competition on service levels helps both the evaluation and negotiations processes for the customer.

The difficult task ahead is actually agreeing on the specific metrics that ensure that all three critical service-level components—time, money and quality—exist and are meaningful. In other words, every performance factor must be measurable, including how long it will take, what the maximum cost is and how acceptable (to the customer) quality will be verified.

 

 

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