Customer Service Levels, an Idea Whose Time Has Come

These days, service levels are an integral part of outsourcing relationships. Reflecting the principle that “What gets measured, gets managed.” , the parties to an outsourcing relationship will establish specific metrics to be achieved by the supplier in performing services under the agreement, e.g. 99.99% server uptime in an infrastructure outsourcing or a call abandonment rate of less than 6% for help desk services. The service levels will be linked to penalties for failure to perform and termination rights in the event of consistent under-achievement. Suppliers may not love the idea of committing to service levels, but they recognize the benefits that come, to both parties, from having objective measure of performance and exact information on a regular basis about the level of performance actually provided. The result is that the customer and supplier no longer argue about whether the service levels ought to part of an outsourcing relationship. Instead they focus on “getting it right”: (i) selecting service levels that measure what is important in the relationship for the customer (outcomes, not interim measures of performance); (ii) defining appropriate targets and measurement methodologies; (iii) stating precisely how penalties will be calculated (100/225?); (iv) documenting the availability, if any, of earnbacks; and (v) specifying any concomitant rights of termination available to the customer.

The parties do not usually spend a lot of time talking about establishing service levels for the customer. The response to any suggestions that customer service levels be included is normally either that: (i) the customer’s only material responsibilities are to pay the supplier’s invoices; or (ii) the customer’s obligations cannot be quantified and objectively measured in the same manner as the obligations of the supplier can. This is regrettable, because there is a role for customer service levels in outsourcing relationships, especially in areas where the customer’s performance can have a significant impact on the supplier’s ability to fulfill its commitments under the contract. 

Let’s consider a couple of examples of how customer service levels might be used in an outsourcing transaction. First, consider a transformational outsourcing arrangement with a government based on the implementation of a new technology solution across all government departments. In these circumstances, during the term of the agreement, the supplier may need to coordinate multiple site visits to hundreds or thousands of government offices to survey the premises, remove existing equipment, install the new solution, provide training and perform maintenance. To avoid disputes during the term about whether the technology was rolled out and maintained in a timely fashion or why the supplier did not obtain the timely and sufficient access to government premises originally contemplated, the customer and the supplier might establish a customer service level at the time they enter into the agreement. The service level would measure the service provider’s ability to gain access to government offices in accordance with the contract schedule with specific targets to be achieved, e.g. each month, the supplier will gain timely access to 95% of the premises according to a schedule for the month agreed to with the customer sixty days in advance. If performance against this service level were reported on a monthly basis, access issues could be identified early on in the relationship, providing the customer and the supplier with the opportunity to take remedial action at an early stage.

The second example is based on the fact that, in most outsourcing relationships, there are numerous areas where the supplier requires input, advice or direction from the customer. Under system development agreements, for example, there will be many items such as functional or technical specifications, document formats and test results produced by the supplier that require a response from the customer and in respect of which the supplier cannot proceed until that response is received. In these circumstances, the parties should think about establishing a customer service level that measures the responses received from the customer within specified review periods. The customer service level could be calculated, on a monthly basis, as the total days provided for review according to the contract divided by the total review days (with anything less than 100% indicating the customer is not responding within the required periods). Establishing such a service level will not solve any “deemed approval” issues but it will ensure that, when the parties come to discuss delay issues at governance during contract performance, they will have both well-defined expectations and concrete evidence of performance on which to base their discussions. 

These examples illustrate that customer service levels can be used in an outsourcing relationship as a management tool for areas where the supplier’s ability to fulfill its obligations depends upon customer performance. The process of defining the service level will compel the parties to identify these interdependencies and to agree on what level of customer performance is acceptable. The implementation of the customer service level will focus the customer on fulfilling its obligations (remember the adage above about “what gets measured, gets managed”) and provide objective information during the course of the relationship about the level of performance actually achieved.

For this idea to work however, the parties will need to think about the same issues in respect of customer service levels as arise with respect to supplier service levels. This includes defining service levels that measure what is important in the relationship to the supplier’s ability to perform, selecting appropriate targets and ensuring the customer has the ability to measure its performance. It should also include a penalty mechanism that establishes consequences for the customer’s failure to perform. This may be a monetary amount, e.g. a quantification of the additional costs incurred by the supplier as a result of the customer’s substandard performance, but it need not be. The parties might agree, for example, that the customer’s failure to achieve a service level creates an earn back that can be used by supplier to excuse its failure to achieve a supplier service level or, alternatively, that, each time the customer fails to perform, the due date for payment of invoices is reduced by five days. The objective of the penalty mechanism is to establish consequences to substandard performance and it is open to the parties to agree as to what those consequences are.

The idea of customer service levels is not just “tit-for-tat”. Rather, they are and should be seen as a governance tool that can be used to improve the overall health of an outsourcing relationship. With that idea in mind, it is time to focus on defining the appropriate customer service levels, not reject the idea out of hand on the basis that however far partnership goes, it does not go that far.

Comments

  1. The idea of customer service levels did not originate with me. I first heard of the idea from Harriet Velazquez of Velazquez Consulting Inc. who also refers to customer service levels as “two way service levels”.