Attrition Rate SLA? Devil in the details

One of the most annoying aspects of outsourcing is Supplier FTE turnover. Especially with offshore firms in countries experiencing enormous growth and internal opportunity (India, for example), staff turnover can be a serious issue.

Crafting an SLA for attrition is a great way to monitor account consistency.

The actual calculation is fairly straightforward. I recommend rolling 12-month measurement windows, with some adjustment made in the beginning of the agreement so that the SLA can be implemented at Month 6 rather than waiting for a full 12 months of data.

The challenge is that, in practice, the Supplier wants to factor out some circumstances that, at best, may result in a misunderstanding between Client and Suppier regarding Attrition Rate; at worst enable outright manipulation of the Attrition Rate. Specifically, each party needs to decide how certain classifications of FTE will be included in the calculation:

- FTE who are partially re-assigned or support additional accounts
- FTE who are promoted or serving different roles in the account
- FTE who are terminated involuntarily
- FTE who take extended leave or absence (medical leave, maternity leave, vacation, sabbatical).

The devil is in the details on this one. Agreeing on what is in and what is out of the calculation can be a lifely negotiation, and has far reaching effects on managing the agreement.

ITIL SLAs for Incident Management

Ever wonder what a reasonable SLA is for Incident Management? If you have a powerful Service Desk who can rapidly triage calls, SLAs become routine. There are additional SLAs, but here’s a good start for ITIL-like Service Desks. Note that ITIL v3 removes Request Management from Incident Management, so it’s now possible to design SLAs for diminishing numbers of Incidents

• Severity Level 1 Incidents Resolved Within 4 Hours
• Severity Level 2 Incidents Resolved Within 8 Hours
• Severity Level 1 and 2 Incidents Responded to Within 30-minutes
• Severity Level 3 Incidents Resolved Within Applicable Time Frame
• Problems Resolved Within Applicable Time Frame

Believe it or not, those basic SLAs cover the vast majority of Incidents. Under ITIL, the multitude of SLAs are categorized into just a few, thus preserving penalty dollars for other metrics (like availability). Common definitions of Severity Levels

Severity 1 Incident
A Incident shall be categorized as a “Severity 1 Incident” if the Incident is characterized by the following attributes: the Incident (a) renders a business critical System, Service, Software, Equipment or network component un-Available, substantially un-Available or seriously impacts normal business operations, in each case prohibiting the execution of productive work, and (b) affects either (i) a group or groups of people, or (ii) a single individual performing a critical business function.

Severity 2 Incident
A Incident shall be categorized as a “Severity 2 Incident” if the Incident is characterized by the following attributes: the Incident (a) does not render a business critical System, Service, Software, Equipment or network component un-Available or substantially un-Available, but a function or functions are not Available, substantially Available or functioning as they should, in each case prohibiting the execution of productive work, and (b) affects either (i) a group or groups of people, or (ii) a single individual performing a critical business function.

Severity 3 Incident
A Incident shall be categorized as a “Severity 3 Incident” if the Incident is characterized by the following attributes: the Incident causes a group or individual to experience a Incident with accessing or using a System, Service, Software, Equipment or network component or a key feature thereof and a reasonable workaround is not available, but does not prohibit the execution of productive work.

Severity 4 Incident
A Incident shall be categorized as a “Severity 4 Incident” if the Incident is characterized by the following attributes: the Incident may require an extended Resolution Time, but does not prohibit the execution of productive work and a reasonable workaround is available.

Multi-Sourcing for mid-term price reductions.

Outsourcing is all about the contract and contractual discipline (governance). But after the agreement is negotiated, clients still complain of value leakage and, given the long contract periods, risk of pricing that lags market performance over time. Sure, benchmarking is supposed to compensate, but benchmarking mechanisms can be cumbersome to exercise and slow to respond. And benckmarking tends to adjust for seriously out of date pricing, not tactical shifts in the market. Companies with sufficient scale can actually develop a competitive sourcing environment - a strategic technique called Multi Sourcing.

What's multi-sourcing? Instead of hiring a single large outsourcer (like EDS) to do an entire scope of services, large clients have the buying power to break apart contracts into smaller scopes of service. For example, I recently had a client who awarded LAN services to one Service Provider, and WAN to a different Service Provider, though either SP could have provided the combined scope, the client felt a competitive price point could be achieved without additional scope.
The client held business units out of scope and when it came time to add them into the mix of Services, approached both Service Providers to bid Services. In each case, the Service Provider was providing new Scope (e.g. the LAN SP was bidding on WAN Services, and vice-verse). The result was extremely powerful: not only was the new business unit assured of extremely competitive pricing, but the new price points, if lower than existing pricing (they were), could be leveraged for mid-term price reductions with the existing provider.

Of course, there are disadvantages to multi-sourcing. After cost reductions, customers cite “one-throat-to-choke” as their reason for outsourcing. Multi-sourcing dilutes that benefit and creates potential fingerpointing conflicts.

Multisourcing also places added burden on governance, a source of value leakage that many clients struggle with in the best of circumstances.

1. Scale. You have to have enough business to spread around. Probably the largest example of moving from an outsourced to a multi-sourced environment is General Motors. At one time 20-years ago, GM literally owned EDS. A few years ago as the contract expired, GM made a strategic decision to break apart the single EDS relationship into almost 40 parts that were ultimately awarded to dozens of Service Providers, many of which with overlapping capabilities.

2. Contractual savviness. You have to know what you’re trying to do, and execute against that goal. Without vision and strategy, you’ll be left with SLA gaps that simply can’t be filled. You’ll also want to keep committed volumes at an absolute minimum – you’ll need that volume to create competitive situations down the road.

3. Growth. Somehow, you’ll need to have blocks of additional scope that can be competitively bid – this is how you’ll get mid-term price reductions. You can either withhold business up front, or be a growing enterprise with new chunks of business. You’ll also have to have contractual restraint mid-term and not just add business incrementally but strategically source it in attractive chunks.

Multi-sourcing is an aggressive sourcing strategy. It’s a bold maneuver to request mid-term pricing concessions from a negotiated agreement. But lets face it, often the warts in a contract aren’t apparent for a while, multi-sourcing is a way to solve those when they’re discovered. But – and this is a big ‘but,’ without an equally aggressive governance structure, a multi-source strategy may result in significant service gaps.

BOT gotchas (Build/Operate/Transfer)

A BOT (build operate transfer) model is where a Service Provider is engaged to build a facility, technology, or process; achieve operational stability ('sustain' mode), then transfer it to the Client for long term operations. It can be a relatively fast transition, or can be the outcome of a traditional Outsourcing agreement, perhaps 10-years in duration.

In addition to standard cost drivers inherent in any complex services deal (SLAs, cost of capital, etc), cost drivers for a Build Operate Transfer model:

1. Who will own the assets? Client will obviously pay for them in some fashion, but whose books will they be on during the life of the term? Will it be a standalone facility (e.g. future/current Captive), or the Service Provider facility that will be transferred at the end of the term?

2. Developed software/processes/IP - ownership and transfer costs/rights, much of it will be jointly produced.

3. Disengagement Plan - how exactly does the Service Provider disengage? What if the Client seeks to replace SP #1 with another SP? Right to hire personnel should be discussed.

4. Mid-term Termination rights - Service Provider stranded costs should be understood and outlined prior to agreement.

5. Personnel. Who will be operating the facility at each level? Does Service Provider only provide management and oversight? Engineering? How does the Client even maintain a presence that can be transitioned back to Client at end of Term?

6. Facilities upgrades. Who is responsible for monitoring systems? Upgrades?

7. Business addition/reduction - ARC/RRC structure will differ from traditional outsourcing deal to reflect asset ownership and risk profile. (ARC = Additional Resource Charge' RRC = Reduced Resource Charge. These are negotiated Unit Prices for incremental business).

Overall, Service Providers are probably less interested in this business model than in traditional annuity streams, though lately there is a detectable reluctance to assume high capital costs, so the timing may be right for structuring a BOT deal - if the client assumes much of the asset risk. I’d be especially wary of hidden hooks that increase the difficulty in transferring the work at the end of the Term.

Offshore Suppliers & Employee Churn

Q: What will be the impact of rising wages & attrition on Indian IT/ITES Outsourcing?

A: Clients are very wary of being in continuous start-up mode with a churning account team: its slow, resource intensive, and errodes service quality. Clients who are in their second round of outsourcing recognize this and tend to emphasize SLAs or Key Measurables measureing attrition and turnover rates.

On the other hand, Service Providers say "as long as we meet our SLAs, it shouldn't matter what our attrition rates are." While there's some merit in that, performance SLAs can be lagging indicators - they let you know how things went in the past. Lagging indicators are good measures, but leading indicators are useful too. For example, if we know that high turnover will eventually impact service, than it makes sense to measure turnover rates as a precursor to measuring SLAs. Attrition Rate SLAs are a leading indicator.

Of course, this approach only solves the problem for the single client, and condenses the problem for other, less savvy customers of the Service Provider. Much in the way IT wages in the US hit a saturation point in the late 1990's/early 2000's, market forces should stabilize wages in Inda --- eventually. In the meantime, look for Service Providers with ingenious retention programs. Even with rigorous due diligence, it can be very difficult to determine accurate attrition rates.

Keeping Supplier employees committed

It's a typical worry: how does an organization maintain it's responsiveness when they outsource? Can malaise and apathy be prevented? It's a valid concern, especially for high touch elements like help desk support, or call centers. While it can be challenging, there are ways to maintain (or even improve) service delivery and personal commitment to the end user.

While it always best to negotiate SLAs in a competitive environment, it's often possible to negotiate them mid-contract. Here's a good starting point for quality-of-service metrics:

1. Specific competency requirements. Could be language skills (Indian call center providers administer language fluency tests), or skills competency tests, with minimum requirements or tenure. Microsoft certifications are an excellent example.

2. Customer satisfaction surveys. Make sure they are generally trending in the right direction

3. Employee retention/turnover objectives; at least for key personnel

4. SLAs for response time, first-call resolution percentage, etc

5. Escalation procedures, perhaps with second-tier responses going to your in-sourced personnel.

6. Reference checks. Prior to signing the agreement, rigorous reference checks with similar clients and due diligence (including 'secret' calls as a customer) should be conducted.

US: Offshore provider for Europe?

As globalization matures, the face of who offshores to whom is shifting: increasingly the US's labor pool is viewed as low cost compared to other parts of the world, mostly due to the decline in value of the US dollar. For example, both Honda and BMW are opening manufacturing facilities in the US to leverage relatively inexpensive skilled labor rates, not simply to ease shipping and tariff costs (the traditional reasons). This is the same reason Ford gave for opening plants in Mexico years ago.

But U.S. labor arbitrage opportunities extend into white collar jobs to. The same US-based $300USD/hour consultant hired in 2000 for €250 is now €200 - a 20% cost reduction for arguably the best thought leadership in the world. Historically expensive places like Dubai have offshored their labor (blue and white collar) to the US and other willing work forces for years.

Outsourcing - or more specifically, offshoring - has led to some unscrupulous practices that smack of slavery (Nike got nailed a few years ago for sweatshop practices) so offshoring is ‘guilty by association.’ But in common practice, market forces balance wages with a willing workforce, at least over a long term. Chances are, American families drawing a Honda paycheck in Indiana have a similar perspective as Mexican families working for Ford in Jaurez.

SLA tips - Disaster Recovery

“I’m renegotiating a 3-year service contract for data center Disaster Recovery (DR) services. My current Service Provider offers the ability to exit the agreement if they fail to perform. What other SLAs should be in place?”

ANSWER: On the surface, this seems like the ultimate supplier promise: “If we don’t deliver, you can leave – no questions asked.” That’s perfect for major issues, but outsourcing relationships are more typically plagued by chronic small problems than catastrophic delivery failures. You will need some tactical tools in addition to the nuclear option of terminating the agreement.

Defined Service Level Agreements (SLAs) should encourage favorable behavior and align work priorities to business needs. SLAs should be meaningful, measurable, and evocable. In your example, even if the Service Provider’s SLAs are measuring the right metrics (RTO and RPO are among typical DR SLAs), there is no appropriate management mechanism to improve the environment. Your only redress is termination which can be difficult and expensive, a cure that’s worse than the disease…and the service provider knows it. And transitions are fraught with risk: imagine migrating to a new environment from a cranky service provider, especially if you decide to use a competitor.

Service providers have largely accepted defined SLAs, and in some instances even become vocal advocates. SLAs help their delivery teams manage customer expectations and prioritize resources. In some emerging fields like Business Process Outsourcing, providers occasionally use defined SLAs as a competitive differentiator to unseat incumbent suppliers, actively challenging prospective clients to measure and monitor service delivery.

While there are many standard candidates for SLA metrics like uptime, availability, and response time, it’s important to correlate them to meaningful business related metrics. And leading indicators are better than lagging indicators. For example, a traditional DR SLA would grant a financial credit if, pursuant to a declared disaster, the supplier fails to restore the client environment within an agreed upon period – a lagging indicator. A leading indicator would be SLAs for tests, DR plan updates, training, etc; all critical success factors to a successful restoration during an actual disaster. Where ever possible, find a predictor of success.

SLA remedies don’t have to be financial. If your supplier fails to restore your environment during a DR test, a re-test makes more sense than a bucket of cash. Or negotiate the right to exit the agreement if the supplier repeatedly fails the DR tests.

SLAs are an important monitor of your outsource relationship. They enable you to manage key service delivery elements because everyone has a vested interest in success. They can be difficult to negotiate but an extremely effective tool when applied creatively.