|
Evolving Buyer Expectations
and their
impact
on SLAs
By Arun Jethmalani, and Arpita Bedekar with ValueNotes
Even as outsourcing and offshoring gain momentum and maturity, not everyone is gung-ho about their benefits. While buyers with a positive experience are increasing the scale of outsourcing, several others are re-evaluating their options. Recent cases of “backsourcing” as well as contract re-negotiation serve to highlight the growing pains. Outsourcing may not be right for everyone or every process, and even when it is, not doing it right can lead to disillusionment.
Consequently, the humble service level agreement, or SLA faces ever-increasing scrutiny and analysis. Newer and changing needs are linked to greater complexity of work, increased offshoring and new types of “knowledge” services. This is driving SLAs to become more comprehensive and well defined – reflecting the increasing maturity and sophistication of the buyer-vendor relationship.
We have looked at the dynamics of changing SLAs, but with a difference – by soliciting the views of BPO and KPO vendors. Some of the key trends and issues are discussed in subsequent paragraphs.
Interestingly, most vendors believe that the extent of the customer’s prior experience with outsourcing is the primary variable impacting the design of SLAs. First-time buyers are often more rigid in defining SLA metrics. This is because their SLAs are guided by standard templates or outsourcing consultants. Many new buyers like to get involved in the smallest of details, even recruitment procedures or working conditions.
However, with time, this kind of micro-level involvement reduces and operational decision-making is left to the vendor’s team. Comfort levels with vendor capabilities and a strong relationship make buyers more ready to listen to vendors. As a result, SLAs can actually become more flexible when renewed.
Sameer Walia of Smart Cube, a research and analytics KPO, says that, “Newer SLAs are very stringent, whereas the ones with older customers are becoming more relaxed. Comfort levels with older customers are rising, plus they have a past experience of working with us, so they are more flexible. In the newer relationships, clauses are more stringent because there is no prior experience.”
Cost is still the most important metric, and will continue to remain so. However, buyers who have already tapped the low-hanging fruits (wage arbitrage) of offshoring are shifting focus to performance and quality-based metrics. Earlier, the emphasis was on operational aspects of the delivery process – in getting things done right and at the right time. According to a leading KPO vendor, “the shift to productivity and process ownership comes a little later in the relationship, when buyers get more comfortable with the vendors.”
This transition from cost saving to value-addition is now widespread, and all the vendors we spoke to confirmed that existing clients’ expect more ideas and innovation. Mr Arjun Srinivasan, who manages F&A outsourcing at Mphasis BPO says, “As the relationship evolves, we are seeing more pricing pressures and also definite expectations to add value.”
Another driver is the clear shift in the nature of processes or tasks being offshored. From relatively low-end and repetitive tasks, offshoring is moving on to complex tasks such as analytics, contract research, patent verification, legal services, critical data management, etc. Buyers today expect more from vendors than just the “cost” benefit, even if cost was the starting point of the relationship.
SLAs are no longer static documents, but dynamic. Earlier SLAs were written, signed and then forgotten till renewal date arrived. But now, the approach is gradually shifting to continuous review and fine-tuning of SLAs. Many buyers now demand flexibility to review and revise key benchmarks periodically, based on regular monitoring of the performance.
Overall, instead of a rigid reliance on pre-set metrics, buyers now want SLAs to incorporate the flexibility for change or re-design based on learnings, or changes in objectives. This is expected to facilitate and enhance value addition, but can make life much more difficult for the vendor.
The increasing flexibility does not mean that SLAs are becoming less demanding. On the contrary! Smart buyers are tightening productivity and quality norms. Past experience and better benchmarking/metrics are ensuring that SLAs are becoming increasingly “watertight”. Jacob Samuel, partner with Elixir Web Solutions says “SLAs are becoming more ‘scientific’ and detailed”, with clearer definitions and benchmarks.
Today’s buyers are better able to deal with cultural, business and partnering issues related to offshoring. They are also more aware of the costs and vendor options available. Mr Walia concurs, “Buyers are now more aware of the operating structure in India, earlier it was almost a black box for them”.
As a result, SLAs are becoming much more comprehensive, encompassing human resources, IT and infrastructure support and much more. Essentially, savvy clients seek “to ensure all the key enablers and ask for the vendor’s commitments on that”, according to an India-based vendor.
Another gradual, but definite trend visible since 2004, is the inclusion of compliance and regulatory clauses in SLAs. More onerous reporting norms in the US and Europe, coupled with heightened risk perceptions related to data protection, information security, intellectual property rights are driving this trend.
Among the important regulations that vendors are being asked to comply with are HIPAA (Healthcare Insurance Portability and Accountability Act), Sarbanes-Oxley Act, UK Data Protection Act, FDCPA (Fair Debt Collection Practices Act) and the US-EU Safe Harbour Agreement. Going forward, COBIT is likely to be made mandatory. Others include BS 15000 and CISP (Card holder Information Security Program).
This is raising fresh challenges for buyers and vendors. New metrics and norms need to be worked out. Also, many buyers themselves are not compliant, and most vendors even less so. In such a situation, hastily incorporating these clauses in the SLA can be counter-productive. However, all the vendors we spoke with said that buyers were increasingly looking to build compliance into SLAs, and that this trend would only intensify in future.
Yet, many problems remain:
Despite the progress in evolving more complex, yet flexible SLAs; there are many instances of failure. Our conversations with vendors threw up a few of the most common pitfalls, along with some thoughts on how to avoid them.
The biggest problem area is the “timeline” – vendors believe that buyers often set unrealistic targets. This is especially true of new buyers, who lack a clear idea of performance metrics, or work with un-mapped processes. Others under-estimate the extent of internal resources required or do not provide enough time for “transitioning” the process. Samuel believes that buyers need to “understand that ‘transition’ is not an instantaneous process, and process re-engineering will take time, (or else) there will be repercussions in implementation.”
Apart from timelines, there is often a tendency for new buyers to impose impractical conditions on vendors. For instance, expecting 99.5% accuracy in the outsourced process when 95% would be acceptable (and greater than current achievements). And unfortunately, in the haste to beat back the intense competition, many vendors accept such unrealistic terms in the SLA. This only leads to disappointment all around.
Vendors complain that many clients don’t have a “larger perspective” of the processes they outsource. As buyers see it, the vendor is doing something very simple. They expect the vendor to instantaneously achieve the same time and accuracy benchmarks that they may have taken years to refine internally.
According to one vendor, “the main problem is that buyers get carried away with the cost package”. As a result, the longer-term objectives and transition issues are neglected. Vendors insist SLAs must factor in the vendor’s learning curve period. One VP of a large knowledge services vendor told us that “Buyers have to be convinced to build in ramp up times, training costs, etc into the agreement. Basically, they need to get a longer-term focus.”
The better vendors have already developed a “customer engagement process”, and that has come about from years of experience with different types of customers. Again, new buyers often want to approach the process in their own way, and try to re-invent the wheel. This leads to problems, especially if the buyer is not ready to listen to the vendor’s point of view.
The key takeaways from our research suggest that outsourcing relationships and SLAs, which help define these relationships, are moving towards greater flexibility in order to adapt to and incorporate specific situations. Buyers are insisting on greater accountability, productivity and congruence with their long-term objectives. However, this is not a one-way street. In order to successfully design and implement such SLAs, the relationship with the vendor needs to flexible as well. The savviest buyers no longer look at outsourcing providers as mere vendors, but as ‘partners’, and going forward, this will be the key to sustainable relationships.
|
