SLAs & KPIs: The Fundamentals

The SLA is the basis of understanding between the vendor and client regarding the scope of services to be performed and the quality that is being committed to.

The SLA structure is one of the most unique and complex aspects of an outsourcing engagement. While you will have experienced operational measures within an internal IT organization, the complexities around managing IT performance under an SLA and KPI structure is very different.

Definitions:

Service Level Agreement (SLAs):  the primary measures which the client and vendor agree will be utilized to evaluate the vendors performance under the contract.  The SLA commercial construct will include provisions for financial penalties and even termination for cause in the event the vendor fails to meet agreed upon performance standards.

Key Performance Indicators (KPIs):  the second level of measures that are important to the client, but do not rise to the level of importance as to have financial penalties associated with them.  The vendor is expected to adhere to the performance targets in the same manner as an SLA.  There are normally provisions in the agreement that allow the client to promote a KPI to an SLA in the event the vendor is not performing as expected.

The definitions of the SLA and KPI will include the following items:

• The name, description and the formular of the measure. It is also important that the parties agree as to the source of the data to be used for the calculation.

• The performance requirement – the performance target for each task or event

• The expected performance – the percentage of successful tasks or event that the vendor should deliver

• The minimum performance  -  the percentage that triggers the potential assessment of penalties

• The significant minimum – the result that is any individual event falls below (not the aggregate) penalties will be incurred

Measures:  each key service performed by the vendor will have one or more quantifiable performance metrics identified. As tasks are delivered, they are evaluated as to achievement of the agreed upon performance requirement and determined to have either passed or failed. At the end of the reporting period, the passed/failed results will be totaled.

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Example:

Incident Management typically has two type of measures;  response time and resolution time. The performance requirements vary based on the severity of the incident, so there are actually 8 individual measures that are evaluated independently.

SLA Definition – Incident Management:

                                      Performance Requirements

Severity                               Resolution Time                               Expected             Minimum

     1                                            2 hours                                                 99%                      97%

     2                                            4 hours                                                 95%                      90% 

     3                                            5 business days                                  90%                      85%

     4                                          30 business days                                 90%                      85%

At the end of the month, each incident that has been closed is evaluated against the response and resolution times (individually) and determined if the performance passed or failed expectations, resulting in a percentage.

For our example, we will use the Severity 2 Resolution measure and assume that there were 10 Severity 2 incidents, 9 were solved in under 4 hours, making the Severity 2 Incident Resolution metric 90%.  In this case the vendor did NOT meet the expected performance and is under the minimum performance, therefore evaluation as to the application of penalties needs to be conducted.