After the Go-live: Ten focus areas for effective Shared Service delivery - Part 2 - Monitor Compliance with Service Level Agreement (SLA)

Note: This is the second post in a series focusing on the continuous improvement of Shared Services.  You can find Part 1 here.

2.  Monitor Compliance with the Service Level Agreement (SLA)

In every shared services project there are those in the organization, particularly in the business units, that doubt the promised benefits will materialize and that the service center is truly capable of providing the level of service the business units enjoyed when they had their own support services.  Don’t prove them right.  Once the service center goes live it’s time to hit the ground running and live up to the promises made.  This means living by the service level agreement and constantly monitoring the Center’s performance against the service level metrics.

Monitoring a Service Level Agreement is not without its challenges.  One challenge is that the actual agreement can be interpreted differently by different parties.  What may be clear as day to you may actually mean something different to the other party.  That's why is extremely important to develop the SLA in as a partnership between the Finance organization, the Business Units it serves and any other relevant stakeholders in the organization.  The SLA should very clearly spell out the performance metrics that will be measured, how often they'll be measured, by whom they'll be measured and how often they'll be reported.  The SLA should also define how disputes around these issues and the overall performance of the Shared Service Organization are resolved.

Another challenge often encountered by SSOs is the actual collection of data.  Don't define performance metrics in the SLA if it's virtually impossible to collect the data at the level of granularity defined.  If you have to hire a group of people to do nothing buy collect and report on the performance metrics in the SLA then something is wrong.  Remember, this is an operating agreement between units in a business; it isn't a legal agreement that enables you to sue someone if they don't live up to your expectations.  Keep the metrics defined focused on service levels, cost and response times.  And put in place procedures to collect that data at the intervals defined in the SLA and report on it as promised.

Define the intervals at which the entire SLA is re-evaluated.  No agreement lasts forever.  As the SSO and the Business Units learn more about working together it's inevitable that some aspects of the SLA will need to be changed.  Use the governance process to revisit the SLA and make changes as necessary.

Finally, use the data collected as part of the SLA process to evaluate the performance of the SSO in light of continuous improvement efforts.  Are you better today than you were a year ago?  If not, why not?  Even if the SSO is meeting the promised levels as defined in the SLA, the SSO should be looking ahead to even higher levels of performance.  What processes can be optimized to improve service delivery and reduce cost?  What new technology can be introduced to support the efforts of the SSO?  How can the SSO improve response times and customer satisfaction?

Developing a Shared Service pricing model that drives behavior

One of the challenges for companies moving to a Shared Service model is to decide how they want to price those services.  How a company chooses to recover its expenses will in large part determine the behavior of the business units who use those services.

I currently have a client that is moving a variety of Finance functions and activities to a Shared Service model.  As part of that discussion we're considering the various pricing models.  They have expressed reluctance to move to an activity-based model up front, fearing that it may to too radical a change for their corporate culture.  I believe it's a mistake not to consider the pricing model as an integral part of the Shared Service design.

When I was a Controller in private industry, I worked for a company that had its Finance & Accounting function centralized at Corporate, but were not part of a Shared Service Organization.  To be fair, this was a long time ago before the concept of Shared Services was really proven.  The problem was that we had a "buffet" pricing model - pay one price and you can go back for as much as you want.  As a result, we were getting endless requests from the business units because it didn't cost them anything to make special requests. 

A Shared Serivces pricing model should properly allocate costs back to those users who generate the most activity.  One pricing model that would accomplish this is a model that provides a core set of services, such as management reporting, for a basic price.  Activities that vary by volume and complexity, such as Accounts Payable or customized reports, would be priced based on volume and time required. 

To be sure, this model is not as simple as a flat rate pricing or one based simply on the FTE's in the business unit, but it is a model that will help generate the right behaviors.  Those business units that are content with the basic services can pay accordingly.  Those business units that generate more activity or have more "one-off" requests can decide if the extra cost is worth it.  By pricing the services of the Shared Service Organization based on volume and complexity, it requires the business units to use its resources and those of the SSO wisely.

Holding outsourcers accountable for service delivery

Over at LinkedIn.com there's a conversation about holding outsourcing service providers accountable for delivering in accordance with the criteria established in the Service Level Agreement (SLA).  While there are differences, there are some similarities with captive service units in terms of maintaining accountability.  Some things that can be done include:

1. Clearly establish expectations up front.  While outsourced service providers should be considered partners, it isn't at the same level as a captive service unit.  Agreements are much more formal and should be treated as such during the negotiation period.
2. The service provider should provide regular reports with metrics showing compliance with the service agreement.  Depending on the report this could be daily or weekly.  This information should be monitored regularly as part of the governance structure as the client company.
3. Establish a formal reporting mechanism at least monthly.  In addition to daily or weekly feedback, there should be a formal report at least monthly that shows all of the key metrics and how the service provider measured up to the SLA.

When the client company expects regular, written information from the service provider showing the actual performance against the Service Level Agreement, they let the provider know that their performance matters and that it's being monitored.  From the client side, it's essential to obtaining the value from the outsourcing relationship that was identified in the business case.  It doesn't have to be confrontational, it's about two partners living up to their responsibilities.

Business unit accountability: Establish clear expectations up front

Setting expectations early on is critical for a successful transition of Finance processes from the Business Units to a Shared Service Center.  These expectations should be spelled out in a Service Level Agreement (SLA).  The SLA is not necessarily a legal agreement between the Business Units and the SSC, but rather a written understanding of the rights and responsibilities of each party.  The goals of the SLA are as follows:

1. Set expectations between the Business Units and the Shared Service Center
2. Enable performance monitoring
3. Provide a pricing mechanism for services
4. Provide an escalation path for issues
5. Allow parties to modify as needs change

Listed below are the major components of a Service Level Agreement: 

1. Processes and services provided
2. Key performance commitments
3. Key process and performance measures
4. Transaction volumes and process activity 
5. Service pricing and billing approach 
6. Dispute resolution and escalation clause
7. Roles and responsibilities of each party during transition
8. Roles and responsibilities of each party ongoing
9. Provision for scope changes and renewal

By creating a Service Level Agreement that clearly spells out the rights and responsibilities of each party, the Business Units can remain engaged with the processes rather than turning them over and absolving themselves of any responsibility.  The challenge is making the agreement specific and firm enough to provide clarity but flexible enough that it can be modified as the needs and capabilities of the parties changes over time.