One Thing or Two on SLAs and KPIs

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Get your facts straightRecently, there has been a lot of discussion about Service Level Agreements (SLAs) and Key Performance Indicators (KPIs), although not always with due attention and accuracy. Specifically, some suggest that the two concepts are very closely related, while only a loose connection exists, thus offering an incorrect and distorted view of them, especially from the point of view of their application.

This is rather bizarre given the abundance of information on both topics everywhere in the Internet.

Hopefully, this article might help clarify.

SLAs

SLAs are a critical component of any outsourcing contract and are extremely important in regulating the customer/supplier relationship, especially when it is not occasional.

SLAs were born in the manufacturing industry from companies looking for securing quality levels, supply times and costs.

Most often, an SLA follows the response to a Request for Proposal (RFP), which is ‘just’ a specification of requirements and will affect the provider’s offering and pricing. An SLA gathers all the information on the contracted supply into a single document, with metrics, responsibilities and expectations to prevent either party from pleading ignorance or misunderstanding in case of issues and remedies or penalties when not meeting the requirements. For this reason, an SLA should also include metrics for measuring performances and a protocol for adding, changing and removing metrics.

As SLAs define the nature and scope of a supply, any order issued within an SLA will not have to contain a detailed statement of work, and a reference to the agreement will suffice.

Setting general requirements upfront allows the parties to run their relationship knowing what each one can expect from the other. For this very reason, SLAs typically name which party is responsible for what, possibly in measurable details. As contractual instruments, once signed, SLAs assume the meaning of contractual obligations and are thus enforceable by law. To this end, definition of supply, duration, availability, quality, unit prices, responsibilities are typically fundamental components of the agreement. SLAs may also have a general terms and conditions section with a termination clause.

The rationale for separate SLAs is that they can be revised without having to revise the general contract, as this might just refer to a SLA and then last for x years while the SLA may be reviewed quarterly, thus reducing the administrative burden.

For this reason, SLAs apply perfectly to conceivably long-term partnership/relationship, with all parties finding their own advantage in the agreement. The supplier, for example, can rely on stable rapports and sure payments. This will help them planning for investments and for incoming assignments, thus for development. The client, on the other hand, can rely on the provider’s availability and readiness, and on stable performances.

On the other hand, if SLAs ensures the provision of services at pre-negotiated levels, they usually also entail the payment of penalties in case of failure to reach these levels.

Anyway, SLAs are not for everyone, and indeed they are quite extraordinary in the translation industry. LSPs do not fancy them because they perceive them as excessively binding, being often incapable of pooling highly reliable resources for a long time at virtually the very same conditions the customer would pose to them. Of course, LSPs could offer their freelancing staff a reciprocating SLA, but these would most possibly object with the very same reasons LSPs would object their customers. After all, being at liberty to choose is the main reason for self-employment.

This means that signing an SLA requires organizational and staff endowments that most industry players are lacking, making things further easier for the larger LSPs.

KPIs

SLAs and KPIs may be even closely related, but they are intrinsically different. While SLAs are forward-looking instruments meant to maximize outsourcing results, KPIs focus on past performance to measure a business’s success as a grade of the achievement of its goals.

Both may be helpful for incremental improvement of processes. SLAs allow for periodic adjustments to long-term contracts to improve their effectiveness by setting benchmarks ahead of time. KPIs allows for assessing progress against strategies, i.e. for understanding how well an organization is performing and make decisions accordingly. KPIs must then be relevant to a specific organization and its strategy.

Every business should measure performances against goals to substantiate its existence and justify paychecks on solid arguments that customers can understand. Therefore, when shared, KPIs help both parties in a business relationship measure performances against predetermined benchmarks.

In this respect, a client and a vendor might integrate an SLA with KPIs to measure how well the vendor is doing. Anyway, any organization should measure its performances regardless of its relationship with a specific customer. Indeed, it might set the same indicators for different customers, for example, to assess profitability differences.

Similarly, a client may use the same indicators to monitor how different providers are performing.

In this respect, when responding to an RFP, attaching a capability statement, with the competences, skills, experiences, and performances of the organization and a few KPIs grouped by topic and subject field relevance.

No Confusion

There should be no confusion, then, between SLAs and KPIs and no overlapping.

When there is, either your consultant has no clear ideas about it, so they are not exactly reliable and you should better look for another one, or you and your client started off on the wrong foot.

You should define the KPIs that are important to your organization beforehand and, if necessary, agree for more with your customer to help both measure how well you will be doing within the scope of a possible SLA, i.e. how well you will be meeting expectations.

Metrics

Whether you are presenting a progress report within a SLA or assessing your own organization’s performances, you must pay attention to pick the right data to derive meaningful indicators.

You may be willing to read the other posts in this blog on data, metrics, measures and KPIs. Possibly, you might find what you need in Upstream or in its recent addendum.

Anyway, what follows is a recap of the basic KPIs for a typical LSP.

Capacity Utilization Ratio (CUR)

CUR expresses the output produced in a given period and reflects the way in and the extent to which an organization uses its installed productive capacity. The difference to 100% indicates room to improvement without incurring costs of increasing capacity, while a low value highlights serious process inefficiency.

DIFOT (Delivery In-Full, On-Time) Rate

DIFOT express the ability of a business to fulfil orders and meet customer expectations and provides a measure of the effectiveness and efficiency of processes and supply chain, conveying a measure of delivery reliability.

The FPY (First Pass Yield) Rate

FPY expresses the percentage of units coming out of a process with no rework and provides a measure of process effectiveness.

The Order Fulfillment Cycle Time (OFCT)

OFCT expresses the average time taken to source, make and deliver a product or service from order to customer receipt. It represents the total “time waiting” experienced and provides a measure of an organization’s delivery capacity in an end to end process.

The Rework Level

The rework level gives the percentage of items inspected requiring rework and provides a measure of an organization’s operational efficiency at delivering the product as specified by the customer without further correction, alteration or revision.

The rate of customer complaints solved

Complaints allow an organization to know what is wrong with its products or services and how to improve them, highlight any weak links within the organization, and tell what is important to customers or give ideas for new products and services. Most customers do not complain and just take their business elsewhere. Therefore, adequate complaint handling, up to the solution of the problem and its communication to the public, might be crucial and there are three indicators that express the organization’s capability in this respect:

  1. The number of complaints received from customers divided by the total number of items delivered over the same period;
  2. The number of complaints solved divided by the total number of complaints received from customers;
  3. The total number of hours required to successfully resolve a customer complaint, from time of submitting the complaint until its resolution and closure divided by the total number of hours worked.

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Author: Luigi Muzii

Luigi Muzii