Using SLAs in IT management: coordinating mechanisms linking services and processes

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1 Using SLAs in IT management: coordinating mechanisms linking services and processes HEITOR MANSUR CAULLIRAUX, D. Sc. 1 ENG. DANIEL KARRER 2 ENG. PRISCILA SOARES FERRAZ 3 CARLOS ALEXANDRE DA SILVA PRADO, D. Sc. 4 Abstract: The main objective of this article is to propose a framework for managing IT service provision using service level agreements as lateral coordination mechanisms between IT area and other organization s functional areas and third-parties. The interplay between the IT function and internal and external service providers is analyzed in detail and trade-offs arising from the benefits of establishing service levels between them and the possible rise of transaction costs are discussed. The framework provides valuable insights into the service design, since the discussion of SLA as coordination mechanisms arises from a deeper look into the relationship between organizational processes, strategic objectives and the services themselves. The article also presents a set of tools that enable the implementation and management of the IT service provision structure within an organization. A case study in the IT area of the brazilian Independent System Operator (ISO) is presented, where both the method and the tools are applied. It shows that positive results were achieved in what refers to improvements on IT service provision. Key-Words: s, IT, SLA 1. Introduction The rising complexity of services Much has been said about services in the last years. Many publications have raved about the rise of the services economy, as how services have been playing a great role as opposed to manufacturing and goods in the global economy. Reports from as early as 1995 show the preeminence of the services sector, as can be seen bellow: 1 Graduate Production Engineering Program of Federal University of Rio de Janeiro (UFRJ) COPPE/UFRJ,, Technology Center, Block D Ilha do Fundão, Rio de Janeiro/RJ Brazil - CEP: , (55) (21) heitor.caulliraux@gpi.ufrj.br 2 Graduate Production Engineering Program of Federal University of Rio de Janeiro (UFRJ) COPPE/UFRJ, Technology Center, Block D Ilha do Fundão, Rio de Janeiro/RJ Brazil - CEP: , (55) (21) daniel.karrer@gpi.ufrj.br 3 Graduate Production Engineering Program of Federal University of Rio de Janeiro (UFRJ) COPPE/UFRJ, Technology Center, Block D Ilha do Fundão, Rio de Janeiro/RJ Brazil - CEP: , (55) (21) priscila.ferraz@gpi.ufrj.br 4 Industrial Engineering Department of State University of Rio de Janeiro (UERJ) Rio de Janeiro/RJ Brazil - CEP: , (21) alexandreprado@gmail.com 1

2 Figure 1 The share of services in the GDP Reference: (World Bank, 1995) Since then, data research done by many authors leaves no denial to this fact. According to a The McKinsey Global Institute Report (2006), local services account for more than 60 percent of all jobs in middle income and developed economies, and virtually all new job creation. There seems to be no doubt that, having focused for many years on manufacturing oriented growth, policymakers all around the world recognize the contribution that services can yield: India leads the world in offshore IT s, Dubai has tourism as well as a growing financial services hub, Singapore is building hospitals to serve patients form all across Asia; the Philippines is developing call centers (FARREL, 2006). The EU s Directive divides services into three categories: services provided to consumers, services provided to other business, and services provided to both consumers and other business. According to the McKinsey Global Institute Report, in the US, which is typical of a developed service economy, some 29 percent of the roughly 100 million service jobs are ins consumer services, which include retail, food and accommodation services, and personal services like car repair shops, dry cleaners, and beauticians. The report also points out that as economies grow richer, business to business services represent an increasing share of total economic activity. Today, they represent 27 percent of all US service sector employment, almost as much as consumer services. These activities include: professional services, such as law, accountancy and consulting, technical services, such as IT and software support, wholesale trade services; and employment services like headhunters and temp agencies. This paper focuses on this category of services (business to business). The growth of this kind of services can be partially attributed to the rise of Information and Communication Technology (ICT) in the recent years, and can be seen as an outcome of specialization. As a matter of fact, technology in general has been an active enabler of most service relationships, lowering the coordination costs among different firms and allowing the to form global value chains, where each enterprise can specialize itself and benefit from economies of scale and 2

3 scope. This trend may promise higher returns based on this international division of labor, but it is definitely no piece of cake for managers. 2. The service Level Dilemma: How can an IT area deal with its service providers and offer the best added value to its enterprise? In this new reality, the IT area within an enterprise arises as a particularly important player, for it is attributed with the role of coordinating the provision of IT services so that the whole value chain can work. This area is somewhat stuck in the middle: it is still seen as a support area by many business executives, giving it a commodity flavor. However, a growing share of business executive, especially managers of enterprises in rapidly changing environments (DAVIS AND EISENHARDT, 2005) see IT as playing a crucial role in the firm s coordination and services provision capability. In many markets and countries the technology is transcending its traditional role as a back office function to a strategic role in the organizations, not only supporting business process, but also conforming new strategies (HENDERSON&VENKATRAMAN, 1993). Is there a debate in course in core competences literature in the wyas in which technology assets embedded in a set of skills and technologies can themselves forming core competences that differentiate the organization in terms of organizational efficiency and in terms of client offers (QUINN, 1992). According to Currie&Willcocks (1998) the organizations are looking for increasing the IT services portfolio outsourced, since the internal IT infra-structure are eroding. The IT outsourcing approach is often chosen for costs savings, focus on core competences or because the IT function is usually considered not efficient or technically not competent. The basis the service providers in general provides better services with lower costs (or both) (KING & MALHOTRA, 2000; CORBETT, 2004; SPARROW, 2003; HYDER ET AL., 2004). Although there is no consensus on market numbers, the estimated growth rate for IT outsourcing marketing is around 10 to 15 percent per year (SPARROW, 2003). The tendency of growth is confirmed by IDC Forecast data (2002, apud CMU, 2005). According to the institute, the IT services outsourcing will achieve 110 billions in This provides us with our dilemma: the IT area seems to have a lot of different stakeholders to satisfy: the internal users, the firms internal areas and the other firms that take part in the value chain. But that is only half of the deal: IT also has to coordinate a myriad of external services providers and internal service providers to effectively and successfully deliver its services. 3

4 Figure 2 IT as a coordination center in the firm and its value chain Hyder et al. (2004) presenting the results of a research in with around 20 to 25 percent of outsourcing relationships ends in a two years period and that 50 percent are not sucsseful in a five years period. Between the reasons for those failures is the inability to manage and coordinate those relationships. The interplay between the IT function and internal and external service providers must be discussed in terms of transactions costs. Williansom (1985,1991) presents the concept of firm as governance structure instead of the concept of firm as production function. The firm costs refers not only to production costs - the cost of capital, labor and materials but transaction costs. According to Lacity & Willcocks (1995) transaction costs can be defined as coordination costs which consist of the costs of monitoring, controlling and managing transactions. Failures in coordinate the transactions occur due to the fact that the cost transactions economies are denied when decisions to outsourcing is made (WILLIAMSON, 1985). For the aforementioned reasons, the IT area can be seen as having an important coordination part in providing the firm s services and consequently matching its demand with its value proposition. Hence, we are posed with the Level Dilemma: How can an IT area deal with its external and internal service providers and still offer the best added value to its enterprise? What is the best coordination mechanism to deal with this complexity? 3. s coordination mechanisms: are market mechanisms the answer? Drawing from the organizational design literature, we find an array of useful coordination mechanisms in Galbraith, Downey and Kates (2002). These mechanisms are presented by the authors as ways to escape the traps that emerge from the organizational M-form popularized by Chandler (1967). According to these authors, these mechanisms can be used as critical tools to design an organization (or an area) that is dynamic, and possesses the ability to reconfigure itself in the face of environmental change (ability termed in Teece, Pisano and Shuen (1997) as dynamic capabilities). 4

5 These mechanisms are, in order of increasing complexity: a. Networks interpersonal relationships and communities of practice that underlie all other types of lateral capability. They are mainly used to coordinate work informally. b. Lateral Process Coordination mechanisms that aid the movement of decisions and information through the organization in a formalized flow. c. Teams these are cross business structures that bring people together to work interdependently and share collective responsibility of outcomes. d. Integrative Roles managerial, coordinator, or boundary-spanning positions charged with orchestrating work across units. e. Matrix Structure used to create dual reporting relationships in order to manage the conflicting needs of functional, customer, product or geographic forces. These five types of lateral capability can be placed on a continuum of complexity and can be catgorized on those that will occur on their own or the ones that need to be purposefully put into place, as shown bellow. Figure 3 Array of coordination mechanisms as a way of dealing with complexity According to the authors, the key of choosing among these lateral mechanisms is to use only the ones that are required by the strategy and structure in order to minimize complexity and to build them on a strong foundation. As the complexity of those mecanisms increases, the management time and energy also increases and therefore transactional consts are elevated. 5

6 However, the coordination mechanisms mentioned above work in a product based reality where information and decisions are mainly transmitted inside the firm. In another words, this means that they are excellent ways to deal with complexity inside the firm. As seen before, however, the dilemma with services is that complexity arises from business to business relationships, where IT plays a particularly important role. Our hypothesis is that the solution to this problem lays in market coordination mechanisms. This insight comes from the work of Coase (1937) and Richardson (1972) with the nature of the firm and its relationship with markets. Both author set the path to break the idea that firms could be envisaged as islands of planned co-ordination in a sea of market relations. The firm is most accurately seen as a mix of planned coordination mechanisms and market mechanisms. This idea has a special appeal for the service level dilemma, where the IT area has to deal simultaneously with market and non market stakeholders. The best way to coordinate service provision would be, therefore a mix of market and non market coordination mechanisms: processes and Level Agreements, usually named SLAs. 4. s coordination mechanisms: are market mechanisms the answer? Processes and services share a very close relationship. Considering processes as the mechanisms that firm utilize to fulfill its operational and strategic objectives, one can very rapidly agree that the services that are provided to the multiple stakeholders can be seen as combinations of the outputs and outcomes of the processes that are performed by the organization. Processes are a specific ordination of activities throughout time and space with a begining and an end, besides a set of clearly defined inputs and outputs (DAVENPORT, 1993; 2000). We contend that services can also be seen as the output of processes. However, services are a particular kind of output, different from products, that share particular characteristics: intangibility, heterogeneity, inseparability and perishability (Lovelock and Gummenson, 2004), as well as non-apropriability and technical feasibility (Vargo and Lusch, 2004). Although there are current discussions around the validity of using those characateristics as differentiators of products and services, they are still commonly used in service literature. Thinking of processes in terms of the clients of the organizations can be very different from process view assuming internal areas perspectives. In general each area or function unit in the organization is responsable for a set of specific activities or part of a process and not the whole process. This point of view is enforced in case of support processes whose activities are not directly linked to the generation of products or providing vallue-adding services for the final clients. Those are the cases of resource management, technology manangement and other functions in the organization. How it s possible to position the support activities in the overall processes discussions which is originally related to value creation for the client of the organization? The ITIL (Information Technology Infrastructure Library) proposes a new perspective and presents the IT are as a service provider internal of the organization. In line with the model, we propose architecture of coordination mechanisms, composed of SLAs (service Level Agreements between the IT area and its clients), UCs (Underpinning contracts service 6

7 levels between the IT area and external service providers) and OLAs (Operational Level Agreements between the IT area and its internal service providers). The architecture is ilustrated in the Figure 4 below. Figure 4 The structure of proposed coordination mechanisms The structure proposed deals with the paerticular world of services through the proposition of a combination of processes and Level Agreements established by the IT area. 5. The case study 5.1 IT area of the brazilian Independent System Operator The brazilian Independent System Operator (ISO) was created with the finality of operating the electrical national interlinked system and administrating the basic net of energy transmission in Brazil. Its institutional mission is operating the system in an integrated way, with transparency, equity and neutrality to guaratee the security, continuity and economicy of electric energy supply in the country. Among the IT responsibilities in the brazilian ISO are supporting the current organizations activities and at the same time enable a future vision of the organization, besides assist the firm s users, the firm s internal areas and external agents of the electrical sector. To achive those goals the IT department decided to make internal improvents in the provision of IT services, by launching an improvement project. These improvement actions included creating coordination mechanisms to deal with external and intenal services providers, besides other actions within scope of this project. The expected benefits included: a) Aligning IT services with business needs, b) Defining IT area, users, areas, external agents, internal and external service providers rights and responsabilities, c) Establishing quality services levels, leveling clients and users expectations and allowing IT area performance. 7

8 First of all the IT services catalogue was created through a series of structured interviews with IT managers. This catalogue is a central piece of the project, as it compiles a list of the services that are offered by the IT area to all its stakeholders. A general example of this catalogue can be seen bellow: A s A.1 A.2 A.3 A.4 A.1.1 A.1.2 A.1.3 A.2.1 A.2.2 A.2.3 A.3.1 A.3.2 A.4.1 Processs Sourcing Type Provider Contract Expiration Date Contracted Levels Process A Insourcing Internal Area X xx/xx/xx UC 1 SLA1 SLA2 SLA1 SLA1 SLA3 SLA1 SLA2 SLA1 Process B Process C Process D Process E Outsourcing Outsourcing Outsourcing Outsourcing Third Party Provider X Third Party Provider Y Third Party Provider Y Third Party Provider Z Process F Insourcing IT Area xx/xx/xx Product 1 Product 2 xx/xx/xx OLA 1 SLA2 SLA3 SLA1 SLA2 SLA2 SLA2 SLA1 SLA1 xx/xx/xx OLA 2 SLA3 SLA1 SLA1 SLA2 SLA3 SLA1 SLA3 SLA1 xx/xx/xx OLA 2 SLA1 SLA2 SLA1 SLA1 SLA3 SLA1 SLA2 SLA1 xx/xx/xx OLA 3 SLA2 SLA3 SLA1 SLA2 SLA2 SLA2 SLA1 SLA1 Key Performance Indicator X Product 3 Product 1 Product 2 Product 1 Product 2 Product 3 SLA3 SLA1 SLA1 SLA2 SLA3 SLA1 SLA3 SLA1 Process G Insourcing Internal Area Y xx/xx/xx OLA 2 SLA1 SLA2 SLA1 SLA1 SLA3 SLA1 SLA2 SLA1 Process H Outsourcing Third Party Provider X Process I Insourcing IT Area xx/xx/xx xx/xx/xx UC 2 SLA2 SLA3 SLA1 SLA2 SLA2 SLA2 SLA1 SLA1 Key Performance Indicator Y Offered Levels Organizational Unit 1 Area 1.1 Area 1.2 Area 1.3 SLA3 SLA1 SLA1 SLA2 SLA3 SLA1 SLA3 SLA1 Figure 5 The proposed tool for Level Management through processes and SLAs Compiling the services catalogue included defining the set of services and subdividing them in different aggregation levels. It should be pointed out that there is a limitation related to the impossibility of guaranteeing the sufficiency of the list of services and the pertinence of the IT services categorization. By sufficiency we mean the degree by which our representation matches the actual array of services that are provided by the IT Area. Cronk & Sharp (1998) highlight that some services will be considered as indivisible by the organization, and therefore it is very hard to achieve a complete list. This happens partially because of the aforementioned characteristics of services: intangibility, heterogeneity, inseparability and perishability (LOVELOCK AND GUMMENSON, 2004), as well as non-apropriability (VARGO AND LUSCH, 2004). After that each IT service was related to the process that is performed by the IT area to produce it. As we have already mentioned before we see services as a byproduct of processes. We envisage services as representing a combination of the output and the outcome of processes that are executed by a given organization (in this case, an IT Area). This relationship can be exemplified as the figure bellow: 8

9 Figure 6 An example of the relationship between processes and services Alongside these are the actors that are involved in the delivery and in the performance of the services (The IT Area itself, another internal area or a third party service provider). These actors all have to work the sourcing type, the contract service levels (OLAs and/or UCs) and the Levels offered to the client. King & Malhotra (2001) define four IT sourcing types: outsourcing, insourcing, strategic alliances and internal markets. Outsourcing is the use of external agents for performing the IT activities. Insourcing means that the organization itself executes the IT functions internally. The strategic alliances occur when the activities are conducted together by two or more organizations. There are diverse formal and legal types through which this alternative can be materialized, as in a joint-venture. Finally, internal markets are structures that provide services not only for the organization but also to the external market. This classification was used to fill up the Sourcing Type column of the matrix. A more detailed classification can be seen in the figure bellow. It shows a good example of the multiple kinds of relationships among the IT Area and its services providers. 9

10 Figure 7 The multiple kinds of relationships between the IT Area and its service providers Reference: (HYDER ET AL., 2004) An extract of the final matrix can be seen bellow. Some things are important to point out: a) The services are gathered up to match the classification within the Independent System Operator s Desk Tool. This classification is shown on the first level of the services tree: Micro Computer Support, Database Support, Corporate Systems Support and Telecommunications Support. This is highly important because it ensures that the management structure provided by the matrix matches the monitoring capability of the organization (mainly represented by the service desk tool); b) The SLAs provided by the IT were segmented by the products of the stakeholders. This reflects the fact that support the database of payroll system may not be as important as support the database containing information that is crucial to the operation of the electric system. Hence, the SLAs were divided into three categories (not critic, average and critic) and allocated regarding the stakeholders relevance. c) This matrix contains hyperlinks to other databases. This matrix was meant to be the universal management tool that integrates all the knowledge that exists within the company regarding the IT service provision. Therefore, through this tool one can access the process flowcharts, the contracts related to the services, the service provider s contacts and even procedures and scripts related to the service provision. d) Finally this tool was also meant to register monthly the delivered OLAs, UCs and SLAs, so that management can take appropriate action when needed. 10

11 Offered Levels Organizational Unit 1 Area 1.1 Area 1.2 Area 1.3 s Processes Sourcing Type Provider Contract Expiration Date Contracted Levels Product 1 Product 2 Product 3 Product 1 Product 2 Product 1 Product 2 Product 3 Micro Computer Support Virus parameters update Password retrieval/change Desk 1st Level Support Virus Verification Desk 1st Level Support Desk 2nd Level Support Password Management Outsourcing Outsourcing 1st Level - QBY Systems 2nd Level - QBY Systems 3rd Level - ONS 4th Level - Third Party Support 1st Level - QBY Systems 2nd Level - QBY Systems 3rd Level - ONS 4th Level - Third Party Support QBY Systems - 31/05/2007 Other Third Party - see attached chart QBY Systems - 31/05/2007 Other Third Party - see attached chart 1o nível - 20 min 2o nível - 40 min 3o nível - 90 min 4o nível - diversas - ver tabela em anexo Desktop Maintenance Desk 1st Level Support Desk 2nd Level Support etc.. 1st Level - QBY Systems 2nd Level - QBY Systems 3rd Level - ONS 4th Level - Third Party Support QBY Systems - 31/05/2007 Other Third Party - see attached chart Database Support Database Backup Database Tunning Desk 1st Level Support Desk 2nd Level Support Desk 3rd Level Support Database Tunning and backup process Desk 1st Level Support Desk 2nd Level Support Desk 3rd Level Support Database Tunning and backup process Co-Sourcing Co-Sourcing 1st Level - QBY Systems 2nd Level - QBY Systems 3rd Level - ONS 4th Level - Third Party Support 1st Level - QBY Systems 2nd Level - QBY Systems 3rd Level - ONS 4th Level - Third Party Support QBY Systems - 31/05/2007 Other Third Party - see attached chart QBY Systems - 31/05/2007 Other Third Party - see attached chart 1st Level - 30 min 2nd level min 3 rd Level min 4th Levell - see attached.xls Systems Support Applications Maintenance System development Desk 1st Level Support Desk 3rd Level Support Applications Corrective Maintenace Applications Preventive Maintenance Applications Evolutive Maintenance Desk 1st Level Support Desk 3rd Level Support New system development Third-party contracting Outsourcing Co-Sourcing 1st Level - QBY Systems 3rd Level - ONS 4th Level - Third Party Support 1st Level - QBY Systems 3rd Level - ONS 4th Level - Third Party Support QBY Systems - 31/05/2007 Other Third Party - see attached chart QBY Systems - 31/05/2007 Other Third Party - see attached chart 1st Level - 20 min 2nd level min 3 rd Level min 4th Levell - see attached.xls Not critic SLA Average SLA Critic SLA Figure 8 The applied matrix a powerful instrument of integrated service provision Another important thing to point out is that this matrix represents all the relevant relationships and actors that work together to provide IT-enabled services for the Independent System Operator. This allowed management to envision a clear structure of responsibility, accountability and management of the provision of services. Figure 9 The management Structure 11

12 5.2 The solution an integrated framework to manage services, processes and SLAs Though the developments of the Independent System Operator Case, several lessons were learned and a larger framework linking processes and services through the use of market mechanisms emerged. The rationale behind the framework is the following: The organizations operations can be better understood when modeled by process flowcharts. This concept is widely known and accepted as BPM (Business Process Modeling). These processes are the way the organization has to operationally execute its strategy, and therefore processes are real world instruments by which the organization achieves its operational and strategic goals. A byproduct of processes is services. We envisage services as a combination of the output and the outcome of services. In our particular case study, of an IT internal area, these services are the link that connects several external service providers and internal service providers that come together in the act of IT services provision to satisfy a multiple array of stakeholders. This services (and hence the service providers) have different relevance to the business and different natures, and therefore should be managed differently. This cognition is achieved through the construction and maintenance of the services matrix. Figure 10 The complete framework that links services, processes and market mechanisms 12

13 An important corollary of this framework is that the practices used to manage the external service providers are highly dependent of several different dimensions such as the relevance of the service they are providing/supporting, the nature of the service, the complexity of the acquisition market, the possibility of substitution of the service provider and the total net income loss in the case of failure. Therefore, service providers must be managed differently. This allows the top managers to better divide their attention span, and also to not get caught up in the service provision operation instead of the service provision management. Hence, we also propose a provider management chart, where the service provider s management (and the relevant management practices) is segment according to dimensions related to the services they provide, as bellow: Figure 11 provider management chart Together, the service provider management chart and the services matrix compose our proposed process-based framework for managing services through market coordination mechanisms. 13

14 7. Conclusions and directions of further research Although this framework has only been applied in a very specific context that of an IT services provision within the Independent System Operator (ISO) in Brazil we content that it can be applied in any other area whose job is to fuel an organization with services. This happens because, although taken from IT Sourcing and IT s literature, the contents of the model are highly unspecific. However, further research would have to be made to verify more thoroughly which adaptations would have to be made in order to apply this framework to other specific situations. In the particular case of the Independent System Operator (ISO) the gains from using the model can be already seen. Although this improvement project is recent, and therefore financial measures like the Return on Investment and global services provision are still been gathered, some more subjective measures can already be pointed out: a) The model has provided a clear definition of the problem of the complexity of the array of providers and multiple stakeholders for which the services are provided. Through the model the whole IT Area could be made aware of the nature and dimensions of the problem and therefore start working on a solution; b) Top managers were able to prioritize their actions and span of attention through. The services matrix allowed them to become less concerned about operational problems that happened all the time with various services and started to spend more time doing management work of the critical services; c) This priorization of services was clearly stated to all members of the organization and service providers, through the institution of SLAs, OLAs and UCs that reflected them. d) The actual management of the services provision became the issue of a particular area a sourcing management office. This area centralizes the management of all provision of services, dissociating the operation of the services structure from its management. Operation and management still worked very closely together to make the whole structure work, but management has become a job on its own right. This has allowed a better division of labor and a focus on improvement. e) The knowledge that was dispersed among different people and organizational levels, a lot of times in a very tacit way, was formalized in a tool of shared understanding of the provision of services. The services matrix, alongside with the modeled processes, the service contracts and SLAs, came together to be a live tool of management, and register all actions taken to improve of change the services provision structure. This allowed the organization to be less dependent on specific employment, and the risk of operational failures due to the lack of competence or specific knowledge has diminished. In concluding the discussions it remains to be seen that future research is needed to further investigate the validity and applicability of this model for overall areas that provide services to the organization. 14

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