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North American companies believe service level agreements (SLAs) need teeth. A June 2004 study by Oblicore found 64 percent of respondents to its monitoring survey have "major or moderate financial consequences" if the supplier doesn't meet its contractual service levels.

Hal Steger, Senior Vice President of World Marketing for Oblicore, believes this is a surprisingly high number. Oblicore continually monitors SLA behavior since it sells enterprise software to help large companies manage their SLAs and outsourcing contracts by providing real-time performance visibility.

Steger attributes this change to education and maturity. He believes industry analysts and outsourcing consultants are counseling their clients to put penalty clauses into their outsourcing contracts. Also, companies with more outsourcing experience realize the important of monitoring their SLAs and have put the infrastructure in place to do that. Moreover, respondents said it became more difficult for them to service their own customers when their outsourcer failed to meet an SLA.

In addition, the study, entitled "Best Practices and Trends in Service Level Management and IT Outsourcing Compliance," found there are more SLAs to meet. Seven percent said they had more than 1,000 SLAs. These were large companies--75 percent had revenues over $1 billion. Yet 28 percent had more than 50 SLAs.

This trend will continue next year. Over half the Oblicore respondents (56 percent) reported they were adding SLAs in the next 12 months. Steger points out this number came from companies of all sizes, not just the largest respondents. The increasing number of SLAs is making monitoring more complicated.

Room for Improvement

Three-quarters of the respondents said it was "very important" to improve the management of their outsourcing contracts. Forty-five percent reported they already had projects underway to do that. "When it comes to monitoring, companies are putting their money where their mouth is," says Steger.

On the other end of the spectrum, many outsourcing buyers are doing a poor job of monitoring. The study found 43 percent do no reporting at all and another 16 percent only monitor their SLAs once a quarter. "Fifty-nine percent is too high. It's surprising such a large number is not up to snuff," sighs Steger.

The study found 70 percent of the respondents still use manual methods or spread sheets for SLA monitoring. Forty-four percent said they had no idea how much they spent managing SLAs.

Companies who have an active monitoring program reported different statistics. Thirteen percent said they monitor their SLAs in real time. Eleven percent do it on a daily bases while 21 percent take a look at SLAs weekly. "The more frequently you do reporting, the more benefits you'll get from your outsourcing relationship," posits Steger. And of course, automation makes that easier.

The survey asked respondents to list the benefits they received from monitoring their SLAs. Three rose to the top:

• Customer satisfaction
• Increased efficiency
• Performance visibility

Finally, 76 percent of the respondents said outsourcing was "very important or something important" to their companies. If companies are going to achieve the results they expect from outsourcing, they will have to monitor their relationships closely. While many buyers understand this, too many still have to get the message.

Oblicore conducted the June survey after receiving some surprising responses in its first survey a year before. The 2003 results discovered 78 percent of companies used SLAs for IT services but only a fraction could easily measure SLA compliance.

How the survey was done: Oblicore emailed 5,000 surveys to North American IT professionals and received a 6.4 percent response in June 2004. Three hundred and twenty professionals answered the 30-question questionnaire posted on Oblicore's Web site. Twenty-five percent work for companies with annual revenues more than $1 billion. Sixty-eight percent of the respondents outsource IT. More than half the respondents were from industries that are heavy outsourcing users: banking, consulting, and healthcare.

Lessons from the Outsourcing Journal:

• An Oblicore study found 65 percent of SLAs now include financial penalties. Companies today understand the power of SLAs and are increasingly establishing, enforcing, and monitoring them in their contracts.
• Companies want their suppliers to perform because they report it becomes more difficult to service their own customers when they don't.
• The number of SLAs is growing and will continue to grow next year. Some big companies have 1,000 SLAs. This growing number makes the monitoring job more complex.
• There's room for improvement. Fifty-nine percent of the respondents report that are not monitoring their SLAs closely enough. Forty-four percent have no idea how much their SLA reporting actually costs them. If companies are going to achieve the results they expect from outsourcing, they will have to monitor their SLA numbers.

Publish Date: September 2004

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