Do SLAs hinder collaborative relationships with our supply chain?

Pretty much all outsourcing contracts in the IT Service Management world rely on, or at the very least, utilise the Service Level Agreement (SLA).

Certainly they are important as they are the physical representation of performance of the contracting party and used as the measure by which trends in supplier performance is understood.

But is there too much reliance on SLAs as a measure of performance and are they often inserted by the eager contract or procurement manager to mitigate risk or provide a means for the insertion of penalty / reward clauses because “that is what is expected in a contract”?

In my personal experience SLAs are often poorly defined or their alignment to the realities of IT service delivery misunderstood.  Because of that, there has been many mitigating circumstances offered as to why an SLA has been failed by the contracted organisation, followed with significant discussion as to whether the mitigation can be accepted.  This has a tendency to suck up both time, effort and therefore money, from both organisations into managing the performance measures, drafting contract change notices and often not looking at the root cause of why SLAs are being missed or in one case I have dealt with perpetually exceeded (plainly in that case the SLAs were too generous or measuring the wrong outcomes).

Problem 1

The vendor will look to win the opportunity and subsequently concern themselves with making the delivery side work (especially when the bid team is not going to be involved in delivery).  They will obviously try their utmost to meet the targets set, but also expect to provide mitigations in the event of failed SLAs.  They have the experience of dealing with a number of clients and so have reference points to support them, whereas the contracting organisation does not have the same level of experience or number of reference points.

A common resolution is the instigation of a continuous performance improvement plan, and when that has been met redrafting of workable SLAs agreed by both parties, or if it fails penalty clauses or litigation.

Problem 2

Poorly defined requirements from the customer.  Either they are unsure what they want, have over / under specified the level of service really needed, they are looking to outsource a problem, or the business units have been poorly engaged, if at all, by procurement through the tender process.  In such circumstances the supplier is almost being set up to fail from the outset (which from their experience they will probably realise) and therefore they will look to manage their way around the issues as they arise.

The common resolution is a redefinition of the SLAs probably with an element of contract renegotiation once the customer has determined the service it expects or requires.

So what should a good SLA really be about?  A well constructed SLA should be seen as an important measure to support a positive contractual relationship, it should also be periodically reviewed for its applicability in light of changing business demand.  However, the SLA should not replace or overshadow the development of the relationship between the customer and supplier.  Rather, the SLAs in place should support a collaborative attitude towards delivering a contract outcome that benefits both parties; the customer receives the service they need, the supplier makes the profit margin they expected and the customer is satisfied with.

Neither party should be wasting time and money negotiating mitigations, instead the time saved can be spent on delivering future value.  Unfortunately developing proper, mutually beneficial collaborative relationships in a business environment is not easy where customer and supplier aspirations are not aligned.

How to Segment and Prioritize Vendors and Suppliers

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Vendors and suppliers need to be managed. Some will require more management than others. How do you go about differentiating between them and managing their delivery to you?

Vendor Segmentation

Vendors can and should be segmented within a supplier relationship framework, as it is important to recognise that the method of engagement and measurement of performance is different dependant upon their relative importance to your business processes.

For example a disposal program may be considered a commodity service, but actually the value to your reputation, environmental and legal liabilities is considerable and should require considered management of their service.

To segment your vendors the first aspect is to consider two variables; how aligned is the vendor to your business model and how difficult / costly would it be to extract exit the relationship that you have with that vendor? The framework is represented in the image.

There are four potential areas where your supplier can sit; tactical, emerging, strategic and legacy.  It is perfectly feasible that your supplier will flow through each of these in turn, indeed some parts of their delivery to you as an organisation will exist within the separate sectors.  The important aspect overall though is to recognise that the model should be applied to the relationship rather than the delivery of aspects of the service.

Tactical Vendors

A tactical vendor has low alignment to your business, they provide transactional commodity to you and it should be easy to switch to an alternative supplier.  Similarly they probably represent a low spend relationship or provide in a market that is saturated with competitors.

The effort expended in managing these relationships should focus on the efficiencies of the particular supplier both in the speed / processes utilised in servicing your business requirements and also how competitive are they in their market place.  If they were delivering a poor service or uncompetitive pricing it would be very simple to lift and shift to an alternative supplier.

The aim of the tactical relationship should be to understand how to drive towards an emerging supplier relationship, or even if this is appropriate.

Emerging Vendors

An emerging vendor is one who aims to service a need in a market where competition is low.  They should be looking to drive innovative solutions into your business, giving your organisation competitive advantage through early adoption in an unsaturated market environment.  Their aim should be to become more strategically involved with you.
Management of these relationships should be through collaboration to identify innovation that they can bring to you.  There should be a commitment to a long-term relationship and naturally within this framework competitive pricing / benchmarking of the vendor’s offerings is one of the key methods of defining who is truly remaining in the emerging space.  It is possible for an emerging vendor to lapse into a tactical position if there is not a continued focus on how to leverage the relationship knowledge to drive continued growth.  Indeed as their competitors catch up, their product may well become a commodity.

A tactical supplier who wishes to become emerging should be attempting to understand how their external partnerships can be brought to enhance the capability and positioning of your organisation.

Strategic Vendors

A strategic vendor is one with whom there is excellent alignment to your business requirements and with whom you have a deeply embedded set of services (e.g. asset lifecycle, enterprise software) and often they are identified by the size of your company’s spend with them.

They will have a deep understanding of your business requirements, so it is incredibly important that they are managed effectively and that you understand all their touch points.  Perception is important in measuring these vendors, but metrics on performance should also be reported upon, as should their staff turnover on your account.  The lower the staff turnover, the likelihood is there is a greater commitment to your organisation’s needs.

An emerging vendor should be looking to become more valuable and enhance their delivery to you such that it is a difficult choice to terminate the relationship.  Conversely a strategic vendor who begins to lose touch with your requirements and begins to lose commitment to your service delivery will begin to fall towards a legacy vendor.

Legacy Vendors

A legacy vendor is, as described above, one where the services provided support potentially critical aspects of the business (maybe a critical, legacy software system), but the drive and commitment to continue developing the relationship and business model is waning (their attentions may lie elsewhere).  With such a vendor it is costly to move away from them, but if the opportunity were to present itself then it is likely the exit strategy would be implemented.  As such it is important to ensure that the vendor is still focussed on servicing your needs as a customer.

Summary

Each vendor should be considered and segmented according to the values of each of the four segments and then managed in accordance with that segment’s consideration.  For those readers who manage supplier relationships, it is best to focus on one or two of the strategic vendors and expand from there.