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Delivering Real Service

Monday, February 6, 2012
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We're often asked to evaluate existing outsourcing relationships.

In determining some of the client's issues in the relationship, we often come across ineffective service-level reporting.

This is not to say the client is not getting service-level reports. Rather, the concerns are about what is being measured, whether the service levels reflect what is important to the client and whether the service-level penalties are substantive enough to correct performance.

The importance of service levels has been undermined by the continuing reduction of the "amount at risk," i.e., the amount of the monthly or quarterly invoice that is subject to loss if there are substantive service-level defaults.

In the early days of HR outsourcing, that amount could be 25 percent of total invoice and, in one or two cases, was even higher.

In the last five years, the providers have steadily reduced the amounts to smaller risk amounts, and amounts at risk of less than 15 percent are common.

Another area of concern has been the creation of subcategories of HR sub-processes that further reduce the service-level credit that will apply for each service-level default. By allocating a total of 5 percent of the invoice amount for payroll performance, and then establishing three or four service levels for parts of payroll, no single service level is worth more than 2 percent or 3 percent of the invoice.

That is more than just a conceptual problem.

Properly structured service levels should identify performance issues, incentivize the provider to conduct a root-cause analysis and then cure the problem.

When service-level defaults are "miniaturized," the provider can decide to pay the service-level credit on each invoice and never fix the problem, because it is cheaper to pay the penalty.

That particular risk to the client can be lessened by inserting a provision in the master services agreement enabling the client to terminate the MSA if the same service-level default is triggered a certain number of times in a certain time frame. Most clients, however, don't want to suspend the performance of a provider and then move to another provider.

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So, there is a built-in incentive to bury small service-level defaults and to accept that such small matters will occur.

A constant theme in reviewing service-level structure lately has been that the service levels are not motivating the right kinds of behaviors.

Providers are reporting with voluminous monthly dashboards and reports on all types of performance, but often not on those things that matter to executives responsible for service delivery for employees and customers.

When service levels erode, only very small penalties are levied, thus curing the issue rather than stirring much-needed discussion about it. The industry needs to move back to service levels that indicate true "storm warnings" in a relationship and incentivize both parties to fully address the problem as quickly as possible.

Lowell Williams is a director in KPMG's Shared Services and Outsourcing Advisory group, based in New York. He can be reached at lcwilliams@KPMG.com.

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