In the IT industry, the SLA seems to be the holy cow. As soon as a contract is ready, terms and conditions are discussed. Penalties and bonuses are part of the SLA, which clearly will put us in a stronger position.
Is that really the case? Obviously: penalties and bonuses are not part of the outsourcing business without reason. Especially in the first years of outsourcing, performance has been under par many times. But times have changed. As far as I am concerned, we will get rid of the SLA as soon as possible, as the concept is outdated.
First of all, the objective of the SLA has become unclear. The SLA was conceived as a kind of guarantee because businesses entered into a long term agreement. This long term was necessary to enable the supplier to amortise the dedicated hardware he purchased for customers. The customer was depending on optimal service which was described in an SLA. Today, this is different. In an era of virtualization and cloud, hardware and capacity are disengaged. This enables a customer to quickly switch suppliers. The costs involved are also much lower. There is no reason anymore to lock in a customer for an extensive period (that is except for a commercial one).
Additionally, anyone who outsources core processes has not much to gain by a paper guarantee or a fine, which normally does not surpass the service fee. Businesses need a decent service; they do not want to collect fines. This also applies to the supplier. In essence, outsourcing is a recurring business, based on either lock-in or ‘recurring by nature’. Reputation is the main differentiator, looking at recurring by nature. As an outsourcing supplier, one can make the occasional mistake, but only once. When the mistake is made twice, a supplier’s reputation is weakened. A customer will start looking for an alternative. With today’s technology, this is not that difficult anymore.
Obviously, it is always important to make the right arrangements with one’s supplier. You want to know if the supplier has the right people at the right time at the right place. You also want to be in the clear on the efforts of the supplier. Today it is much easier for a customer to prioritize. If you put this down in clear practical arrangements you do not need an enormous set of SLAs. Let’s get rid of them!
Léon van den Bogaert