SLAs: Key tool for customer relationship management?

SSON News and Analysis
Posted: 07/09/2012

Based on my experience, I believe a good service level agreement, backed up by solid performance metrics, a robust pricing mechanism and a strong customer management plan, results in a win-win partnership between the service center and the business. This combined approach is what I refer to as a service management framework.

Elements of the service management framework

  • Governance
  • Service Charging/Pricing
  • Service Level Agreements
  • Performance Metrics
  • Appropriate feedback mechanisms

Governance is the ability to enable, sponsor and enforce the right decision-making. It is a formal mechanism that drives the partnership between the shared services operations, its customers and the key stakeholders. Governance typically operates at the strategic level, and as such, ensures that the SSC operations are aligned with the stated vision and strategies. It provides visibility to stakeholders, and it provides a forum for decision-making (e.g., related to delivery model, locations, leveraging of infrastructure investments, synergies, etc). At the tactical level, governance "operationalizes" the strategy, establishes expectations on service provision, reviews service performance, and facilitates the resolution of issues. At the operational level, it resolves operational issues and drives continuous improvement.

Chargeback is a mechanism that defines the basis for charging for services to customers. It will be necessary to determine your operating model first. Are you a cost center or profit center? If a cost center, then your objective is to recover all costs. If you operate as a profit center, then the objective is to over-recover and make a profit that is normally fed back into the operation to fund continuous improvement projects. There are many alternatives to determining a chargeback method; some work on budget, budgeted volumes or actual transactions. You will also need to decide on your chargeback drivers, which determine how you allocate costs. A common approach is to operate on a full cost recovery model and to allocate costs to customers based on actual usage.

Pricing will normally be based on projected volumes and costs to deliver the services. However, some companies will also include a non-conformance pricing method. This involves charging the customer for any transactions that are "non-conforming," i.e., received in a non-standard way or outside cut off times. This approach is often used where significant behavioral changes are required. In addition, there are also SSCs that pay a missed KPI penalty, which means a credit is processed to the respective customer on a monthly basis for any missed key performance indicators. This kind of pricing strategy requires transparent pricing and regular communication with the customer as to why they are being charged for non-standard transactions, for example, or for the SSC to understand why penalties have been incurred.

The other type of pricing often seen is non-participative pricing. This is usually found in situations where the SSC has a mandate from the executive group. It means that under certain conditions a customer must use the services provided by the SSC. If they do not, they will be charged as if they do, regardless of who provides the service. This charge acts as an encouragement to use the inhouse SSC, and not to procure required services elsewhere.

The service level agreement identifies the inputs that are required from the customer and allocates responsibility for service delivery between the SSC and the customer. It also defines the appropriate levels of service to meet customer needs. The rationale for the SLA is that it clarifies the relationship and expectations between SSC and customer and provides a framework for performance measurement and process improvement, increasing understanding and building joint accountability.

The key components of the SLA generally include the purpose and scope of service provided, governance model, operational hours and exceptional circumstances, performance measurement and reporting, non-conformance management, customer feedback, help desk, quality management and process improvement. The SLA also defines the general pricing approach and the escalation model.

Performance reporting integrates the four dimensions of incentive compensation reporting, balanced scorecard, process reporting and customer reporting (against SLA). It enables the SSC to measure and track organizational performance, operational performance, customer service delivery and individual performance.

The intent behind introducing key performance indicators is to ensure clarity and
accountability for the end-to-end processes. Movements in the KPIs can be used as lead and lag indicators to address service failures.

In some SSCs, account manager roles have been introduced to implement and operate the service management framework. This role acts as an intermediary between the customer and the SSC. In my experience, these roles have proven very valuable and enable a partnering approach to be implemented.

ABOUT THE AUTHOR
Michelle O’Connor has worked in shared services for the past nine years, holding roles in both financial and HR shared services. Companies worked for include BHP Billiton, Boral, OneSteel and Jones Lang LaSalle. O’Connor has been Secretary of the Australasian Benchmarking Association, a voluntary role, for the past three years and has been a member since 2003.

SSON News and Analysis
Posted: 07/09/2012

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