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The key to service success: Operating Level Agreements

Hsiu Mei Wong, Michael Latchford, and Ashley Forrester 
PA Consulting Group 
CIO Update
25 March 2008

OLAs are the missing ingredient to drive value from your service providers

Mature organizations have long recognized the importance of service level agreements (SLA) in driving up value from outsourcing but service quality often falls short of the mark. Turning the magnifying glass on an organization’s internal working practices through the use of operating level agreements (OLA) holds the answer.

A truly mature service delivery model will manage a business partner equally whether the organization is internally or externally facing.

Driving value
The majority of organizations have entered into some form of outsourcing arrangement and embraced common best practice to implement an SLA as part of the process. This agreement is externally facing, with the key objective being to drive the right behaviour of the service provider. However, many organizations still experience a gap in service quality with respect to the delivery from the service provider, resulting in customer expectations failing to be met.

In sifting through the root cause of sub-standard service delivery, the common point of failure is an organization’s own internal processes and ways of working. Many organizations are internally powerless to meet their own obligations and to provide the required handoffs to the service provider in a timely manner.

Driving value for the end customer requires all parties, both external and internal, to be aligned as part of an overall value chain. Most organizations have secured the external performance link by contracting to SLAs. The missing ingredient, however, is the equivalent set of internally facing agreements known as OLAs.

Well designed OLAs work in conjunction with the SLA, and support the end-to-end (e2e) business process. They are used to set clear expectations among internal business units regarding their responsibilities within the value chain. In our experience, organizations that are able to craft well designed, consistently applied OLAs that align internal business partners, and link to external service providers, experience significantly lower costs of service and improved output quality, via a measurable reduction of waste.

Where internal organizations have failed to devise OLAs, the business will find it difficult to deliver value, with diminished service quality a common symptom.

To optimize the potential benefits from outsourcing, and to achieve a true balance between internal and external service providers, organizations need to address the missing OLA ingredients. We have constructed a rigorous five pillar approach to embed a cohesive set of OLAs within an organization:

• Pillar One: Determine what “good” means
• Pillar Two: Identify the key parties in the chain
• Pillar Three: Establish consensus, and document the requirements
• Pillar Four: Recalibrate what “good” means
• Pillar Five: Embed ownership to service descriptors

Pillar One: Determine what “good” means
Expectations regarding service delivery can only be met by understanding the customer’s key business requirements and value drivers. For example, the business requirement may be to provide a consolidated sales report within five days of a month end close but the value driver is to reduce the ”close-to-report” cycle to provide the sales force with a significant business intelligence advantage in the market.

This requires a thorough understanding of the customer’s business model, value drivers, and the expectations, with priorities including palatable trade offs governing the approach necessary to meet those expectations during any stage of the outsourcing lifecycle.

To reach this point, the internal partnerships for the business and support departments (e.g., IT, Finance, and HR) and the vendor require transparency regarding the role they play in meeting the customer’s needs, the effect they have on each other, and their respective expectations of value contribution. These expectations must be validated (i.e., whether it really contributes value, or is just a nice to have), then ordered to align with the end goal.

When initiating an outsourcing arrangement, these expectations must be defined and agreed upon early on in the negotiation and procurement of services. This enables the establishment of the appropriate service levels and performance metrics, which in turn allows the service providers to properly bid in a manner that optimizes their ability to contribute to the value generation of the agreement.

Pillar Two: Identify the key parties in the chain
Before a solution can be set in place to meet the customer’s key business requirements, it is necessary that each of the parties to the process is defined, and that the pain points within and between each process are identified. Failing this, a rigorous and cohesive e2e business process will remain a mirage. Therefore, initial stakeholder engagement is required, followed by identification of all parties that contribute to the overall process, documentation of the end-to-end process, and the establishment of the visibility and accountability that defines how value is delivered, from initiation to delivery to the customer.

In many cases, open discussions can uncover the lack of clarity of internal partnerships with respect to role accountabilities and their contribution to the end-to-end process. Without clear visibility, processes often breakdown, deliverables are delayed, and quality becomes compromised. This results in heavily diminished value to the end user and the inability of the service provider to meet service expectations.

These need to be identified and addressed upfront to generate quick wins for the organization, and to prevent the perpetuation of poor practice. Taking a closer look into the overall e2e process will further highlight pain points in processes and sub-processes, and identify opportunities for change, improvement and cost savings.

Pillar Three: Establish consensus, and document the requirements
Key to the e2e flow of business processes is the creation of an environment that fosters internal business units working in partnership. Once this environment is in place, the business can set out to obtain awareness of how success is collectively defined.

Defining clear business needs and managing expectations, while capturing the necessary requirements, will bridge the divide between the output of one internal business unit versus another’s to the e2e process. Building this solid foundation allows the process to flow through from start to finish with a common understanding by the parties, and with a teamwork philosophy embraced.

The by-product of mutual consensus is a comprehensive and clear set of documented requirements to which all service providers will adhere regardless of their role within each intermediary process. This common ground, between internal business units, enables an organization to meet its own obligations, and to provide the required handoffs to the service provider in a timely manner. It also serves to prevent the value erosion promised by the outsourcing agreement, and thereby achieving a true balance between internal and external service providers.

Pillar Four: Recalibrate what “good” means
A deep understanding of the customer’s requirements is necessary to meet delivery expectations and to drive maximum value out of any outsourcing arrangement. However, it is insufficient to just define the initial client requirements. Business circumstances and requirements shift with time, and better knowledge of the various processes at play is an iterative process. Hence, an essential component of this process is the ability to re-assess what “good” means.

This can readily be done by painting the e2e picture, reconsidering the previously defined requirements, and returning to the stakeholders to gain buy-in and feedback (perhaps through a workshop with the parties together and engaged to garner support and obtain feedback).

The result is a cohesive set of internal service descriptors aligned to meet business requirements. This, in turn, enables the primary client to negotiate a tight set of service levels to drive the right behaviour from the external service provider. Many of the previous failings (e.g., poor process, delays to deliverables, and poor quality) can then be minimized, with improved services delivered to the end user.

Pillar Five: Embed ownership to service descriptors
To ensure sustained value is delivered to the end user, ownership must be embedded with the key stakeholders by defining the governance relationship, identifying the responsible and accountable parties in the escalation process, and actively reinforcing the service descriptors to the OLAs. Then, the business is positioned to embrace the e2e business process and continually drive up service delivery.

This done, each internal business partner has been placed in a position of responsibility to know what is required from them, how to achieve it, how to remediate if something goes wrong, and why the business requires it. Such an understanding across all the business providers drives value through the e2e process and effectively transforms the business relationship into a best practice model of service delivery.

Closing the gap in service quality may require organizations to look internally to address their own processes. Delivering value for the end use requires all internal and external parties to be aligned within the overall value chain. OLAs are the key to transforming an internally powerless organization (i.e., unable to meet its own obligations and to provide timely handoffs to the service provider) into a delivery focused and value centric organization. Properly implemented, OLAs can address service quality before it becomes an issue, and can empower the organization to achieve the full value from the its outsourcing arrangements to deliver sustained value to the end user.

Hsiu Mei Wong is a managing consultant in PA Consulting Group’s IT Consulting practice, specializing in strategic sourcing, business process improvement, risk management and organizational change management. She has extensive experience working with companies across the financial services and pharmaceutical industry.

Michael Latchford is a principal consultant in PA Consulting Group’s IT Consulting practice, specializing in delivering complex outsourcing solutions, and designing, negotiating and implementing sourcing strategies for onshore, near-shore and offshore agreements. Further, he has implemented change management projects transforming organizations enabling effective service management and service delivery.

Ashley Forrester is a consultant in PA Consulting Group’s IT Consulting practice, specializing in Service Management and implementing sourcing strategies from both the shared services and 3rd party perspectives. His delivery capabilities include technology integration, designing financial processes and controls, and developing Service Level Agreements (SLAs). 

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