Think Specificity and Clarity

Each SLA should include a definition of the service the outsourcer is providing, a performance measurement or metric, and a problem resolution. By their nature, SLAs are output-based.

The key to a good SLA is its specificity. A service level agreement that is appropriately specific can sharpen the provider's focus on what it has to produce that is crucial to the customer organization, in order to ensure customer satisfaction. Thus, the customer organization should use the SLA process to think through what aspects of the BPO services are most critical to its ability to achieve its goals. SLAs should be developed using the “SMART” technique, which is to say they should be specific, measurable, attainable, realistic, and tangible.

Certain elements of an outsourcing relationship lend themselves particularly well to SLAs. In every BPO agreement, the following components should be spelled out in detail in SLAs:

Turnaround time. These SLAs establish the acceptable length of time from the submission of a job to the job's completion. For example, an SLA might specify the maximum length of time expected to transpire from receipt of a remittance payment to deposit of the funds and transmission of data to the outsourcing customer. Providers may offer four-hour, six-hour, and eight-hour turnaround times, depending on the task.

System uptime. These SLAs have been around since the SLA concept came into vogue in the mid-1980s. The idea has migrated from IT outsourcing to the business process outsourcing industry. At BancTec, for instance, we guarantee 99.9999 percent (“six nines”) uptime for the systems through which we provide clients access to see exception items, archived items, and additional rework, as well as to do quality checks.

First-call resolution. These SLAs specify the percentage of calls coming in from internal or external customers of the outsourcing client that the BPO provider will resolve without the use of a callback. An organization hiring an outsourcing provider to manage A/R will want to ensure that a high percentage of calls made by its invoiced customers are resolved immediately. Thus, it will want to set a specific SLA for its first-call resolution (FCR) percentage.

Mean time to recovery. If there is some sort of outage, what is the average time that it takes to be fully back up and running? This is another SLA that comes out of the IT world and has become important in BPO. For example, measuring turnaround times and mean time to return started in the world of IT. However, the concepts extend to business process services, and to business process outsourcing, as well as IT outsourcing.

Quality. Quality comes in many, many forms—and literally, like beauty, quality is in the eye of the beholder. The definition of quality performance provided by an outsourcer generally revolves around the concept of “rework.” If the client must rework anything at all that the outsourcer is supposed to provide, then the outsourced process has experienced a quality breakdown. Beware, however, that many organizations have difficulty defining what “quality” really means. If this is the case with your outsourcing provider, you may have trouble communicating your definitions of quality work. That said, any outsourcer that will not provide quality guarantees for its “wheelhouse” processing is not worth another breath of conversation.

Keying accuracy. BPO providers do a lot of data capture, data scraping, and physical data keying on behalf of clients. BancTec has strict accuracy measures for the data that it takes off of different fields of documents, as well as for the turnaround times to get that data to clients. Thus, BancTec SLAs specify the standard for accuracy (itself a quality metric), along with details of how data accuracy gets measured in our processes. An SLA needs to clearly spell out the definition of “accuracy” and the definition of “error.”

Understanding the Pain Points

There's an axiom in business process outsourcing: If you outsource a bad process, it's still a bad process. When a company wants to outsource a process that's previously been managed inhouse, the first thing it should do is analyze whether its current process is optimal for achieving the outcomes it desires. Analyzing the efficiency and effectiveness of the internal process may reveal pain points that need to be resolved before the company embarks on finding a BPO provider. For example, from a service-level perspective in accounts payable, it drives management crazy when a company has received invoices that need to be paid but nobody knows where they are physically located, who approved them, or what their current status is in the organizational workflow. The company needs to determine where lapses exist in the A/P process that are allowing payables to go missing, and it needs to figure out how to eliminate those lapses. Once it's established how it can make its internal process more effective, it can draft SLA targets that will ensure its future outsourcing provider continues the improvement.

Today, most A/P process improvements revolve around improving accuracy, timeliness, and analytics. For example, in the case of A/P process improvements involving a missing invoice, the ability to track and audit every transaction ensures not only that transactions are processed, but also that the information in each transaction can be harvested and utilized for things like prompt-payment discounts (if available), supplier analysis, and procurement decision support. Workflow is inherent in A/P process improvement, and audit and automated tracking are inherent in workflow. Mature workflow applications have statistical process-control tracking, which emphasizes early detection and prevention of problems. From there, the data is used to model better workflows, reducing handoffs and unnecessary work steps, which are generally the sources of error or missing items.

One example is an open-items report that shows the differences between purchase orders, bills of lading, and invoices received. Any items remaining open after bills of lading and POs are reconciled would automatically indicate that the invoice was not received. The open-items report, tied out by the vendor invoice turnaround time report, would then alert managers that an expected invoice was not in the shop. If that invoice might have prompt-payment discounts, tightening down the process with the right analytics would proactively ensure the discounts are taken and save the company money.

Drawing up specific SLAs around A/P workflow can also help a company capitalize on opportunities for deductions. There are two reasons that companies take deductions: either they didn't receive what the vendor said it delivered, or they qualified for a discount for paying early. Companies like to take early-pay deductions because it's a good use of working capital, but they can't take the deduction if they don't know where the bill is as the deadline for deductions approaches. An SLA might address this issue as well—for example, setting a target for the proportion of eligible invoices on which the company receives prompt payment discounts (PPDs) or early payment discounts (EPDs). If I were a buyer of invoice prep and processing services, I would want an SLA that required my outsourcing provider to guarantee that 100 percent of PPD invoices will be captured accurately.

Finally, there's analytics. Some companies don't have the ability, even in their enterprise resource planning (ERP) systems, to run specific analytics on spending or on line-item detail and invoices. Instead of deploying an analytics software package in-house, they might seek a BPO provider that can provide the insights they need.

A good analyticsoriented BPO provider can supply intelligent mail barcode updates. These updates tell the end customer when mail has been received at its destination point, where the bill went, and when return mail has been sent (when paying something back). With this, a company can start to do predictive analytics on how long the buyer's customer is sitting on the payment and thus assist the end customer in its working capital decisions. Also, predictive analytics on the A/P side can help the buyer predict which suppliers are open to taking additional discounts if they get paid faster.

You can see how some pain points become discussion points, then needs, then SLAs to improve overall service. The sidebar Typical A/P SLAs, on page 2, shows what a company outsourcing its payables might expect from its BPO provider.

Monitoring SLA Performance

Whether or not it's part of the BPO contract, an SLA has to be codified. It has to be an actual document. Conventional wisdom suggests that an SLA agreement should consist of five parts:

1. A description of what has to be provided—i.e., a service description.
2. The metrics that need to be accomplished.
3. Severity levels: It might clarify that a “Severity Level 1” incident is extremely serious and that failure to achieve the SLA in this area would have a substantial impact to the business. “Level 2” might be an incident that is significant but not serious. “Level 3” might be a breach of the service level that has a small impact, and “Level 4” might be negligible to the business. Sometimes this takes the form of a severity table inserted into the document.
4. A remedy if the SLA is missed; the extent of the remedy will depend on the SLA's severity level. For example, if a BPO provider has turnaround-time SLAs, and its outsourcing customer needs its daily A/R file at 8 p.m. in order to handle its daily postings, failing to meet the turnaround-time SLA would be very serious. What happens if the provider breaches the SLA and 100 percent of the A/R file isn't ready by 8 p.m.? Some companies include a penalty in the agreement. The penalty for the initial breach is usually a service credit per occurrence, but the SLA may impose more severe penalties if the same problem were to occur with a certain, specified frequency.
5. Incentives. Enlightened companies, if they're going to put consequences for breaches into their SLAs, will also include incentives to encourage their outsourcing providers to go above and beyond. Outsourcing customers need to seek ways to creatively balance rewards and penalties because a good partnership with a BPO provider offers intangible benefits. One approach is to give the BPO provider “credits” when it does particularly well for the client. Then, if the provider were ever to breach an SLA, it should have lots of cookies in the jar, so to speak.

Regardless of how SLAs are structured, their key role is to provide clarity to customers and outsourcing providers alike on what everyone should expect, in order to ensure that there's agreement up front about each organization's roles and responsibilities. In this way, an SLA facilitates a successful BPO relationship.

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Michael Alfonsi, CTP, CRM, WPT, is a vice president at BancTec, a global leader in business process outsourcing. He is also managing director of the company's financial transactions portfolio. His insights are based on 25 years of experience in finance, shared service center management, and treasury consulting services.