SLAs & KPIs: Contract Negotiations

These topics are going to be points of negotiation during the contracting phase or will be used in dispute resolution when there are issues regarding the quality of a vendor’s performance.

Due Diligence:  Prior to contract signature, vendors will want to conduct Due Diligence to show that the SLA performance targets requested by the client are achievable and the current IT organization has met these targets historically. The rational is that the vendor has relied upon the current environment as a basis for the estimation of the solution and if the SLA results were not achieved then the solution is likely underestimated.

The best example of this would be application availability. If a client is requiring an uptime of 99.99% but the systems have never been available more than 99.2%, then the SLA requested is not appropriate.

The easiest approach for conducting Due Diligence is to obtain the last 6 months of SLA data and compare the results against the performance targets being requested. The measures and data utilized must conform to those incorporated in the agreement. It is not permitted to vary the formulas or data sources in order for the results to be valid. 

This DOES NOT apply to all measures, only those that are heavily dependent on the current environment should be subject to Due Diligence. Measures that are within the vendor’s control such as; quality measures, on-time/on-budget delivery, training compliance, etc. are examples of tasks which would NOT require that the client achieve the performance targets for the vendor to accept accountability. 

The most common examples of measures that DO require Due Diligence would include; System – Application Availability, Severity 1-2 Incident Resolution, Application Performance, N-1 Upgrade Compliance, etc.

Options for Resolving Due Diligence Issues:  In virtually every engagement there are applications that do not meet the system availability requirements and the patch levels for systems are behind the new targets.  Simply exclude the offending systems from the SLA calculations until such time as they are either brought into compliance or the SLA performance targets are adjusted to reflect the current environment.  The efforts to bring the systems into compliance can be performed by the client or the vendor can submit a project estimate to complete the work.

When do SLAs start:  As part of the contracting process, the vendor and client will agree on a transition plan and timeline. Transition covers the period when the vendor secures the staffing to assume responsibility for the services and performs knowledge transfer from the incumbent resources.  The date that the vendor resources take over responsibility for services, referred to as “Service Commencement Date (SCD)”. 

The SCD acts as the anchor for date commitments, ex:   SCD + 30 would indicate that a deliverable is due 30 days after the Service Commencement Date. This eliminates the need for restatement in the event the go-live date moves.

Service Levels are captured and reported beginning on the Service Commencement Date, however there are variations on when the penalty structure will begin and it differs by measure.  The reason for the delay is that while the new resources have been trained and operational, they have not had enough experience to have financial penalties applied and are given time to gain additional proficiency.

A standard delay from SCD to penalties is approximately 3 months, i.e.  “SDO + 90”. 

In some situations, there is not enough information known about the environment so that service level performance targets can’t be established at the time of contracting.  These measures are deemed to need a “Baseline” which is where the actual performance of the vendor during the first 3 to 6 months of operation is used to calculate what the performance targets will be. For measures where the targets are agreed but the penalty start is delayed, those measures are referred to as “Burn-In”, which is the time given to the resources to come further up to speed while penalties do not apply.

SLAs with 100% Targets:   “perfection is not achievable” as such service levels should not have an expected performance rating of 100%.  There are very rare examples where the vendor may agree, such as; compliance with laws or company policy, adherence to training or certification requirements. But these should be the exception not the norm.  

Productivity:    often vendors will commit to improving the environment and eradicating systemic problems which will result in productivity savings.  Be sure that these productivity improvements are reflected in the agreement in such a way as the capacity of the vendor staff is reduced without proof that the output remains at the same level. For example, a commitment to increase development productivity could result in the reduction of developers without the same level of development work being delivered.