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1 Contract and Performance Management Intellectual Property of the Centre for Outsourcing Research and Education (CORE). May be used with permission of CORE.

2 Agenda Service Levels for BPO Preliminary Matters Use of Weighting Factors Use of Severity Levels Use of the Balanced Scorecard 2

3 Preliminary Matters for All BPOs Precisely define the services to be provided (the Services ) Since not practical to measure performance for all Services, carefully identify which of the Services are most important to the business and should be measured ( Measured Services ) Determine whether Measured Services are currently being internally tracked and calculated If they are, determine whether existing performance levels ( Service Levels ) meet the needs of the business or whether they require improvement If so, determine whether level of improvements is required If not, determine what Service Levels are required to meet the needs of the business 3

4 Use of the Service Level Agreement (the SLA ) Used to document with service provider the Measured Service Levels required Use to document with service provider the amounts payable (the Service Level Credits ) for failure to achieve the Measured Service Levels Use to permit customer to terminate Master Agreement When significant or on-going failures to achieve Service Levels ( Service Level Failures ) Will discuss further in Termination Service Levels below 4

5 Prioritizing Measured Services First step is to prioritize the importance of the Measured Services Two frequently used approaches A. Weighting Factors (Mathematical) B. Severity Levels (Non-Mathematical) 5

6 A. - Using Weighting Factors Weighting Factors Based on importance of portion of Service ( Service Element ) being measured Examples of Weighting Factors might be: Failure of the Service Level triggers a payment of the Weighting Factor against the monthly fees they are cumulative (as per slide 8) 6

7 Weighting Factors and Limits on Credits Customer must negotiate relative weights (i.e.,.50,.25,.10) because comparative importance is critical Because higher aggregate Weighting Factors result in higher Service Level Credits, there is almost always a debate on the aggregate in order for service provider to limit Service Level Credits 7

8 Example of Cumulative Weighting Factors Measured Service Element Payroll Administration System HR Administration System Staffing Administration System Training System External Job Posting System External Candidate Résumé System Candidate Screening System Total Weighting Factor

9 The At-Risk Amount Using Weighting Factors also requires a cap on amounts payable to determine Service Level Credits This liability cap is sometimes called the At- Risk Amount Percentages vary between service providers Large value transactions (over $250M), range is between 8% and 12% of monthly fees Lower the value, higher the cap should be so as to make payment meaningful (painful) 9

10 Limits using Weighting Factors Service Level Credit = A x B where: A = the sum of all Weighting Factors for all Service Levels not met in a month not to exceed the Weighting Factor Limit; and B = the At-Risk Amount in a month (8% - 12% from previous slide) 10

11 Example 1 Assume The charges for the Services are $1M per month The At-Risk Amount is 10% ($100K) The negotiated Weighting Factor Limit is 1.5 The sum of the Weighting Factors for all Measured Service Elements not met in the month is 1.7 (i.e., sum of.50,.25 etc.) Then, the Service Level Credit that would be 1.7 x $100K = $170K reduced to $150K because the Weighting Factor Limit is 1.5 This is a potential loss of Service Level Credits of up to 12 (months) times $20K = $240K 11

12 Example 2 Assume: The charge for the Services are $1M per month The At-Risk Amount is 10% ($100K) The negotiated Weighting Factor Limit is 1.3 The sum of the Weighting Factors for all Measured Service Levels not met in the month is 1.7 (i.e., sum of.50,.25 etc.) Then, the Service Level Credit that would be 1.7 x $100K = $170K is reduced to $130K because the Weighting Factor Limit is 1.3 This is a potential loss of Service Level Credits of up to 12 (months) times $40K = $480K (compared to $240K in Example 1) 12

13 B. - Using Severity Levels Severity Levels Also based on importance of Service Element being measured Severity level types might be: Essential Major Minor Severity Level Examples in HR BPO: Payroll Administration System - Essential HR Administrative System - Major Training System Minor Others such as External Job Posting System will vary 13

14 Example of Use of Severity Levels Measured Service Element Severity Level Availability Service Level Employee Services Payroll Administration Essential 99.85% System Human Resources Major 97.85% Administration System Staffing Administration Major 97.85% System Training System Minor 90% Employment Services External Job Posting Major 97.85% System External Candidate Résumé Major 97.85% System Candidate Screening System Minor 90% 14

15 Severity Levels and Service Level Credits Having established agreed-upon Severity Levels, parties must then determine Service Level Credits Need to address multiple scenarios Single Failure Repetitive Failures The following table is one example using same At-Risk Amount of $100K per month as above 15

16 Use of Severity Levels Service Level Failed Essential Severity Level in any 1 month Essential Severity Level in any 2 of 3 consecutive months Major Severity Level in any 1 month Major Severity Level in any 2 of 3 consecutive months Minor Severity Level in any 1 month Minor Severity Level in any 2 of 3 consecutive months Service Level Credit/Remedy 12% of the At-Risk Amount for Affected Service Element 24% of the At-Risk Amount for Affected Service Element 7% of the At-Risk Amount for Affected Service Element 14% of the At-Risk Amount for Affected Service Element Best Efforts to Repair within 45 days Best Efforts to Repair within 30 days 16

17 Differences Between the Two Methods As seen from the above example: Using Severity Levels to calculate Service Level Credits is different from using Weighting Factors Critical difference - no need to develop Weighting Factors for each Measured Service Element Rather, the parties simply establish Severity Levels for use with the At-Risk Amount for each Measured Service Element 17

18 Termination Service Level Failures Irrespective of the measurement method used, there must be a level of failure that permits the customer to terminate the Master Services Agreement Can be based on the severity of a single event (i.e., Essential Severity Level falls below a very low minimum) Can be based on repetitive failures (i.e., Major Severity Level 3 fails for consecutive months or 3 out of 6 rolling months) 18

19 Call Centre BPOs Need to establish Measured Service Levels Will be different from HR and other PBO Measured Service Levels due to nature of business function There are both Objective measurements and Subjective measurements 19

20 Call Centre Objective Measurements Sample objective measurements Number of rings to pick-up of call Wait time on hold Percentage of abandoned calls Percentage of problems resolved by first call Degree of escalation to 2 nd and 3 rd level support Other? Suggestions? 20

21 Deceptive Solutions Need to identify deceptive solutions proposed by service provider such as: Additional staff Additional lines Additional infrastructure They are not viable solutions as all these really do is result in additional costs to the customer That being said, change in scope (added country) may result in need for one of these changes 21

22 Call Centre Subjective Measurements Satisfaction Surveys To ensure that survey results are not ambiguous or skewed, customer must be very careful about variables of the survey methodology Such variables to consider are: Survey frequency Survey sample size Nature and scope of survey questions (the right questions) Types of employees surveyed (exempt* vs. non-exempt) Geographical factors in survey questions (cultural & language) (* exempt from overtime) 22

23 Key Recommendations for Surveys Hire qualified and experienced survey designer to work with in-house staff to develop surveys Possibly put out RFP to determine experience of survey designers in customer s industry (or type of survey) 23

24 Service Level Reporting The nature and frequency of the reports is critical to ensure sufficient information to permit calculation of Service Level Credits Beware of provision that customer must report Service Level Failures Usually, the customer does not have the relevant information Obligation should be on the service provider to provide the data to determine Service Level Credits 24

25 Sample Service Level Report Table 25

26 Background of the Balanced Scorecard Conceived by Robert Kaplan and David Norton Published in the Harvard Business Review in 1992 Entitled The Balanced Scorecard Measures that Drive Performance Urged companies to complement financial measures with operational measures of customer satisfaction, internal processes and innovation and improvement activities Now used in BPO transactions in conjunction with performance measurements discussed previously 26

27 Use of the Balanced Scorecard In the outsourcing context, the balanced scorecard is simply a method of measuring improvements achieved by the service provider using non-traditional, non-financial measurements The balanced scorecard measures improvements in performance by measuring changes in the performance of agreed-upon measurable parameters ( Metrics ) that are selected by the customer for inclusion into the balanced scorecard for one period and comparing them to the performance of the same Metrics for previous periods 27

28 Development of Metrics The Metrics in any particular outsourcing agreement will invariably vary depending on the intent of the parties However, for the analysis in this presentation, only the three Metrics suggested by Kaplan and Norton are used This is sufficient because the approach used in developing a Balanced Scorecard Model is essentially the same irrespective of the number and types of Metrics actually used in a particular transaction 28

29 Success Categories For this presentation, the three non-financial elements of the Balanced Scorecard Model are treated as distinct success categories to be measured ( Success Categories ) so that the customer may prioritize them One of the most common methods of doing this is for the customer to apply Weighting Factors to each of the Success Categories as illustrated on the next slide 29

30 Weighting and Success Categories Weighting factors are used in the same way as more traditional measurements discussed above Success Category Weighting Factor Customer Satisfaction.50 Internal Processes.20 Innovation and Improvement Activities.30 Total

31 Weighting and Success Categories Because there are often diverse objectives for the three Success Categories, the next step is to identify the specific business objectives ( Operational Measures ) for each Success Category Success Category Customer Satisfaction Operational Measures Customer Retention Internal Processes Innovation and Improvement Activities Employee Satisfaction Management Effectiveness Improved Functionality of Supported Application Software New Functionality of Supported Application Software 31

32 Metric Categories Because there are different Metrics for the Operational Measures, the next step is to break down the Operational Measures into different sub-categories of logical groupings Then the customer must specify the relative weights to be applied to those groupings in order to determine how the results will be built into a total set of measurements for the Operational Measure The next slide illustrates this assignment of a weighting percentage to each of those measurements that comprise a Metric for a Success Category and its Operational Measures ( Metric Categories ) 32

33 Metric Categories Success Category Operational Measures Metric Category Customer Satisfaction Customer Retention Semi-Annual Survey (60%) Customer Loss Reviews (40%) Internal Processes Innovation and Improvement Activities Employee Satisfaction Annual Survey (75%) Management Effectiveness Improved Functionality of Supported Application Software New Functionality of Supported Application Software Exit Interview Information (25%) Performance of Supported Application Software (50%) On time Delivery of Supported Application Software Percentage (25%) Application Software Error Correction Targets Met (25%) Timeliness (25%) Quality (75%) Timeliness (25%) Quality (75%) 33

34 Implementation of the Balanced Scorecard To implement the Balanced Scorecard, the customer would first supply the service provider with comprehensive information about all the functions to be included into the Services The parties would then agree upon which business functions of the customer will be affected by the Services and thus subject to the Balanced Scorecard measurements. 34

35 Implementation of the Balanced Scorecard The parties would then agree upon a time frame to finalize: The Success Categories The relative Weighting Factors for the Success Categories The Operational Measures The Metric Categories The methodology for measuring the Metrics Finally, the parties would agree upon the frequency of the measurements to establish a regular period of measurement ( Measurement Period ) 35

36 Baseline Results & Scorecard Targets Once these items are agreed upon, the service provider would be obligated to perform an initial performance measurement on the affected business functions using the agreed-upon Balanced Scorecard the results of which would constitute the baseline results ( Baseline Results ) Once the Baseline Results have been analyzed, the parties would set targets for improvements across the various Metric Categories ( Scorecard Targets ) that the service provider would be expected to achieve, both over the entire term of the agreement and year over year during the term 36

37 Remedies As with the traditional SLA, the final step would be to develop specific credits to be paid by the service provider to the customer for the failure of the service provider to achieve the agreed-upon Scorecard Targets As with SLAs, these will vary from transaction to transaction As a rule, the Balanced Scorecard would also deal with payments, termination rights and critical failures, all of which would need to be customized to align with the approach of the Balanced Scorecard 37

38 Cautions in Using the Balanced Scorecard Excessive Scorecard Targets Avoid a large number of Scorecard Targets There is a danger that using too many may result in the customer losing sight of the critical Scorecard Targets Better approach is to only establish Scorecard Targets that are truly essential to the business operations and to carefully construct those that are selected 38

39 Cautions in Using the Balanced Scorecard Irrelevant Scorecard Targets The customer should also bear in mind that constructing irrelevant or inaccurate Scorecard Targets may result in credits being paid if the service provider fails to meet the Scorecard Targets but will not result in key business requirements actually being addressed 39

40 Cautions in Using the Balanced Scorecard Any organization contemplating using the Balanced Scorecard in an outsourcing should keep in mind Kaplan and Norton s warning that: Even an excellent set of balanced scorecard measures does not guarantee a winning strategy. The balanced scorecard can only translate a company s strategy into specific measurable objectives. 40

41 Other SLA Topics of Interest Ramp-Up of Service Levels Annual changes to Service Levels (Annual Planning Process) Ad-Hoc changes to Service Levels (Change Order Process) Improvements to Service Levels (Annual Planning Process) Bonuses for Achievement above Service Levels If applicable, a portion of amount should be re-invested by service provider in some agreed-upon manner to improve Services Relief from Service Levels customer failures Force Majeure and Disaster Recovery Service Levels (Not suspension of Service Levels) 41

42 Adam D. Vereshack Barrister & Solicitor 42