1. business and industrial

FSS Process Perspective
April 7, 2009
Creating Simple, Effective Service Level Agreements
Management Issue
For Current Members of Hackett Process Advisory Programs
Adapted from a Hackett FSS Process Advisory Program webcast presented by Andrew
Muras, BAE Systems Technology Solutions & Services Division, January 2009
recreated pms
BAE Systems Technology Solutions &
Services Division, Inc. provides professional technical and management services
to commercial businesses, Department
of Defense and civilian federal, state and
local government agencies. BAE Systems
is a leading global defense, security and
aerospace company delivering a full range
of products and services for air, land and
naval forces, as well as advanced electronics, security, information technology
solutions and customer support services.
With approximately 105,000 employees
worldwide, BAE Systems’ sales exceeded
£18.5 billion (US $34.4 billion) in 2008.
ANDREW MURAS
Senior Manager
BAE Systems Technology Solutions &
Services Division
Mr. Muras specializes in developing and
teaching performance management,
and business solutions for both industry
and government organizations. His
professional experience covers all shared
services functions, including finance and
accounting, information technology,
purchasing, HR and payroll, mailroom,
administration and facilities.
Executive Summary
While nearly 70% of shared services organizations (SSO) responding to
The Hackett Group’s 2008 Finance Shared Services survey use service level
agreements (SLA), only about a quarter rate them as “highly effective.”
Organizations can increase the effectiveness of their SLAs by viewing them as
a holistic approach to client communications, complete with a process map,
timeline, KPIs and strategies for continuous improvement. Further, SSOs can
use billing methods selected for inclusion in the SLA to influence customer
behavior and better the financial performance of the SSO and thus the company as a whole. By approaching SLAs and associated billing methods as a
dynamic process, rather than a static set of documents, they can be tracked,
managed and, ultimately, improved.
Background: Current View of Service Level Agreements
Service level agreements (SLA) are primarily used to ensure that shared services
organizations (SSO) meet their performance goals, and that the business units (customers) live up to their responsibilities in turn. When properly used, SLAs communicate vital information to customers, help improve processes, document costs, and
provide a comparison between expected and delivered business unit performance.
SLAs enable SSOs, and their customers, to address shortcomings in processes
or other issues, putting both parties in a better position for future negotiations.
Shared services leaders believe they understand the company’s business needs
and are able to incorporate its requirements and desired service levels into process improvement initiatives. By clearly articulating these goals through an SLA,
the organization creates an opportunity to align more closely with the business
units. In turn, customers participating in the development of an SLA learn how
to determine their own service needs and better understand how specific services
add value to their activities.
While 70% of Hackett’s Finance Shared Services Process Advisory Program
members use SLAs, only 26% report them as being “highly effective” and 44%
consider them only “somewhat effective” (Fig. 1).
Organizations that don’t use SLAs, or ignore established performance measures,
risk facing unreasonable customer expectations and service levels that do not
© 2009 The Hackett Group, Inc.; All Rights Reserved
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FIG. 1 Effectiveness of service level
agreements, 2008
Not effective
or no plans
Considering or
implementing
In place,
somewhat
effective
8%
22%
44%
26%
In place,
highly effective
Source: 2008 Finance Shared Services Member Profiles,
The Hackett Group
balance cost with desired service requirements. They are also vulnerable to
excessive exception processing and, with no issue identification and resolution
process, will find themselves mired in a persistent and escalating series of problems. Those organizations that have not yet developed SLAs are encouraged to
set aside time to plan and implement agreements. Those that have implemented
SLAs should reassess the value and outcomes to ensure the needs of both parties
are being met effectively.
Creating a Simple, Ongoing SLA Process
Andrew Muras, Senior Manager, BAE Systems Technology Solutions & Services
Division believes the key to making SLAs work is for shared services leaders to
orient them toward simplicity.
“SLAs are agreements that show customers what the SSO is providing in terms of
timing, quality and cost,” he says. “The question is, ‘How do we start making this
simple thing actually work and become effective?’” The answer: Learn to view
SLAs differently.
How organizations think about their SLAs is a fundamental question because
thinking drives behavior. “Viewing the agreement as a document or a transaction
typically translates in the mind into lots of pages, lots of signatures and something that is put on shelf where it’s more static than dynamic,” he says. However,
approaching an SLA as a process, especially a communication process, allows
organizations to turn a static document into an ongoing practice that can be
improved, managed and tracked in partnership with the customer.
Step one: Develop expectations and requirements
Fig. 2 is an example of how companies might organize functions, clients, customers and expectations. Clients (those who pay the bills) and customers (those
who receive the services) sometimes have different expectations and should be
listed separately.
“Bring a record of what the SSO is already providing and then, following discussions with clients and customers, review their expectations, comparing any
differences,” says Muras. Be aware of the value business units put on individual
expectations as well. “One of the main points here is to understand what customers want, in addition to what they expect.”
In meetings with business units, the SSO leader articulates the customer’s expectations and their value, determines output and how the service will be priced,
and decides on a reasonable number of metrics for tracking success. One of
Muras’s client organizations defined an average of three to four services per functional area. “This is not a bad number,” he observes. “Avoid giving pages worth
of services for a functional area. The larger or more complicated the SLA, the less
effective it will be.”
© 2009 The Hackett Group, Inc.; All Rights Reserved
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FIG. 2 Example of how to develop client and customer expectations by function
SSC function
Clients
Customers
Customer expectations
Client expectations
Payroll
BU managers
and executive
team
Employees
1. Accuracy
2. Timeliness
3. Responsiveness
4. Accessibility
5. Low-cost transactions
6. Regular and continual
communication of services
Same
Finance
BU managers
and executive
team
BU managers
and employees
1. Budget status: Straightforward budget analysis
solution
2. Timely reporting:
Monthly or on demand
3. Accuracy: Relevant and
reflects reality
4. Analysis and decision
support: Ability to
explain and project
5. Risk management
Same
Employee
relations and
human
resources
BU managers
and executive
team
Executive team
and employees,
shr, oeoa,
ahr, legal,
unions
1. Counsel
2. Problem resolution
3. Adherence to policies
4. Coaching
5. Intervention
6. Salary and rate schedules
7. Timely response
1. Problem resolution
2. Admin. processes
3. Timely response
4. Database info mgt.
5. Cost-efficient services
6. Coaching
7. Information
8. Employee development
9. Timely response
Information
technology
services
BU managers,
administration/
corporate, SSC
Employees,
corporate
depts, utilities,
government
agencies
1. Reliable and timely
computers, telephones,
periphals, software
2. Data and information: Access and actual
requests
3. Process automation
4. Self-service
5. Communicated with
regarding the status of
their work orders
6. Websites/templates/content management
7. Upgrades
8. Methodology
1. Guidance/advice/
creative problem
solving
2. What are they paying
for?
3. Customer service face
time
4. Cheap, fast, easy
5. Vision for technology
6. Websites
7. Information security
8. Efficient and effective
business applications
9. Methodology
Procurement
Planning and
constrution and
maintenance
(executive team
indirectly)
Executive
team, planning
and construction and
maintenance,
corporate
dept., property
accounting
Accuracy, timeliness,
accessibility, assist
with navigating policies
and procedures, banner,
financial expertise, identify positive and negative
trends, forecast reports and
analysis
Same
Source: BAE Systems Technology Solutions & Services Division
© 2009 The Hackett Group, Inc.; All Rights Reserved
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In a case study example presented by Muras, representatives from business units
and the SSO listed the following items for inclusion in an SLA, in order of priority:
1. Customer buy-in
2. Clear agreement on service expectations from the SSO and the business units
3. Services that business units want to buy
4. Which agreements are mandatory and why
5. Framework for measurement and evaluation
6. Framework for costs/chargebacks, including pricing explanations
7. Method for developing a relationship between the SSO and client/customer
8. Key account manager contact
9. Signature block (business unit manager and SSO manager)
10. Appendix, including details on SSO and business unit customer requirements
The following is a list of requirements typically included in the SLA process. Each
component should be created with maximum simplicity in mind.
• Timing: Determine how often updates and metrics will be delivered and
SLAs reviewed.
• Responsibility: Assign key account managers to act as a single point of contact for each client. Drawn from current leads, functional managers or others
in the organization, these individuals act as the eyes and ears of the customer,
and have a clear understanding of his processes, goals and operations. The
account manager conducts regular customer surveys and maintains a weekly
prioritized action list with the leadership team, with timely communication
of decisions between the SSO and the business units.
• Meetings: Decide if client meetings will be held in person, via email or a
combination. The SSO should defer to the client’s needs.
In addition, choose additional requirements that promise to make the process
easier to run. These include:
• Creating one SLA for the SSO: This unifies the organization, requires less
negotiation and fewer sign-offs.
• Packaging IT with other services: This can help simplify and reduce the total
number of service offerings.
• Grouping services by product area: Services for HR, procurement, finance
and IT are organized separately. Doing this offers more organizational flexibility and transparency to the business unit customer.
© 2009 The Hackett Group, Inc.; All Rights Reserved
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Step two: Create a process map
Approaching the SLA as a process includes creating a process map (Fig. 3). Muras
says these should be simple, perhaps using the design of an actual SLA as a template. In discussions with customers, work out what is going to happen, who will
be responsible and how decisions will be made to ensure the process is well understood. Process mapping, a well-developed process improvement tool, reinforces
the view of an SLA as a living process, enabling the team to look at the individual
components, such as cycle times or non-value-added activities, and find ways to
streamline them.
FIG. 3 SLA development process
No
Yes
Update ABC
models
Assemble and
review results
No
Changes?
No
Assemble
chargeback
documentation
Assemble SLA
metrics data
Develop SLA
documents
Managers
agree
Yes
Executive
Director
receives copy
ED agrees
Yes
Schedule
meetings with
division directors
(Key Acct. Mgrs)
Agree to Yes
estimates?
Update final model
data and SLA
Schedule final
sign-off with div.
director
No
Relook at ABC
data
Final copy of SLA
to Executive
Director
Source: BAE Systems Technology Solutions & Services Division
Step three: Establish a process timeline
Timelines organize and, in some ways, define processes. For example, says Muras,
depending on when the company’s fiscal year begins, organizations might decide
to start some activities at different points to make sure they are completed in time.
The timeline should also contain ample time to negotiate and approve the document/process; and include periodic updates with key stakeholders. The timeline
pulls together the various components and requirements of the SLA (Fig. 4).
Developing Service and Chargeback Data
While SLAs let business units and SSOs know whether services are meeting
expectations, demonstrating the actual cost of a service can be shown in the bill,
or chargeback (essentially, an allocation of charges by use) for that service.
© 2009 The Hackett Group, Inc.; All Rights Reserved
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FIG. 4 Example of a monthly timeline maintained by key account manager
1
2
3
Client mtg.
4
Client mtg.
5
Third week
Conduct
quarterly
review 1
6
Client mtg.
Client mtg.
7
8
9
10
11
12
Third
week
Conduct
quarterly
review 2
Client mtg.
Updated ABC
models/prices
and
chargebacks
Client mtg.
Planning
chargeback
data
Third week
Conduct quarterly review 3
Begin SLA
discussions
Client mtg.
Client mtg.
Final ABC model
(update resources
and quantities)
Signed SLAs
Chargebacks
completed
Source: BAE Systems Technology Solutions & Services Division
SSOs can use billing methods, such as menu pricing, to encourage customers
to use their services efficiently. Indeed, 53% of world-class companies encourage behaviors to a major extent, compared to 17% of the peer group (Fig. 5).
Organizations reward customer behavior through reduced prices when customers
use standard services or penalize through higher prices customers that demand
customized services. “It’s amazing how you can see changes and evolutions of
process improvements by either charging a penalty or rewarding through lower
costs,” says Muras.
FIG. 5 Extent to which billing methods are used to encourage behaviors, 2008
53%
32% 33%
31%
21%
17%
13%
0%
Not used
To a minimal extent
To a moderate extent
To a major extent
PEER GROUP
WORLD-CLASS
Source: 2008 Finance Shared Services Performance Study, The Hackett Group
In fact, Aker Solutions, in a case study published earlier this year1, suggests that
billing be made to the level within the organization that can clearly impact the
behavior and outcome of the process. “If people can’t really influence an area,
they will be uninterested in changing their behavior,” says Tom Nicolaysen, Vice
President, Finance and Accounting for Aker Solutions. In other words, introducing differentiated pricing where the users don’t have a choice in how they use a
service will just breed discontent.
“Service-Based Pricing Improves Customer Behavior and Shared Services Performance for Aker Solutions,” Hackett
Finance Shared Services Process Perspective, February 2009.
1
© 2009 The Hackett Group, Inc.; All Rights Reserved
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Muras recommends keeping billing and pricing menus simple. Customers will
become baffled by too many offerings and a pricing catalog that doesn’t make
sense. “Typically, if I don’t understand what you’re producing or providing, I am
not going to buy, and that is true for internal customers,” he says.
Chargebacks are principally used as data to balance revenue and expense, and create internal economic discussions about the cost and quality of services. They also
help organizations monitor costs and benefits, and can be used to evaluate and
improve operational performance.
Options for chargebacks
SSOs generally either do not bill for services, or do so via cost allocations or service pricing (Fig. 6). All three approaches have advantages as well as disadvantages.
• No charge: The advantage to not charging for services is that services are
easy to administer, but this is outweighed by the lack of incentives for customers to help the SSO manage its costs.
• Cost allocations: Based on sales, number of employees and other factors, this method is simple to administer as no transactional data is
required, and the SSO recovers its full costs. However, there is still no
incentive for customers to manage costs or work more efficiently with
the service center.
• Service pricing: Also known as menu pricing, this option is based
on volume, transaction costs and/or menus. The method incentivizes
customers to choose more efficient processes for the benefit of both the
business unit and the SSO. It also helps determine the true profitability
of the business unit because it reflects the actual costs of operation. That
said, service pricing requires greater detail on services, costs and transaction volumes.
FIG. 6 SLA billing methods, 2008
52%
60
35%
50
29%
28%
19%
17%
40
30
14%
6%
We do not charge
Cost allocation
20
Benchmark or
market rate
PEER GROUP
10
Menu pricing
0
WORLD-CLASS
Source: 2008 Finance Shared Services Performance Study, The Hackett Group
© 2009 The Hackett Group, Inc.; All Rights Reserved
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Activity-Based Costing
Activity-based costing (ABC) is one way to determine prices and evaluate chargebacks. In fact, says Muras, many companies that don’t use ABC find their prices and
chargebacks are incorrect. To generate enough data for accurate pricing, organizations need to clearly understand their actual costs. One additional decision needed
is to determine whether the organization will charge via journal entry to the cost or
profit center or merely develop a paper or shadow charge.
Quantify the cost of each service the organization performs, including certifying
vendors, negotiating orders and issuing modifications. “Look for the total cost
and the unit cost for each time the activity or process is performed,” says Muras.
“Divide the cost by the number of times the activity was performed for each business unit, and apply that amount to each chargeback.”
Activity-based analysis yields information on the services, products and customers attached to each activity and gives the SSO cost data for use in making pricing
decisions. It also reveals best practice data, which can be shared with the more
costly business units as a basis for improving their processes and ultimately reducing the level of their chargebacks, says Muras.
In addition, these fairly simple ABC analyses reveal anomalies and associated
problems. These outcomes can be the basis for developing a business case to make
some processes mandatory, doing capacity analyses and identifying non-valueadded metrics. Finally, the information can be used to make cost comparisons with
outsourcers.
Strategic Implications
When bringing new clients on board for existing services where there are limitations in how much the service levels can be modified, Muras recommends
not charging for their first year – especially for the transition period. Another
approach is to agree to charge the transitioning business unit the same cost they
are currently either incurring or being charged.
Typically, when business units find their expectations do not match reality, the
problem may lie in the way charges are being communicated. Once clients understand the way charges are handled, they are generally open to considering the
SSO’s standard processes, and thus the objectives of the SSO and the customer
are mutually aligned.
“Keep it as light as possible and then work toward improvement,” says Muras.
“The same holds true for those times when you’re putting in new processes or
mandating the use of a process. To minimize the change management issues, you
may want to retain the cost for at least the first year.”
© 2009 The Hackett Group, Inc.; All Rights Reserved
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Related Hackett Research
About The
Hackett Group
“Marriott Business Services: Strategies for Maximizing Value While Taking
Shared Services to the Next Level,” October 2008
The Hackett Group, a global strategic advisory firm, is a leader in best
practice advisory, benchmarking, and
transformation consulting services,
including shared services, offshoring
and outsourcing advice. Utilizing best
practices and implementation insights
from more than 4,000 benchmarking
engagements, executives use Hackett’s
empirically based approach to quickly
define and prioritize initiatives to enable
world-class performance. Through
its REL brand, Hackett offers working
capital solutions focused on delivering
significant cash flow improvements.
Through its Hackett Technology Solutions group, Hackett offers business
application consulting services that
helps maximize returns on IT investments. Hackett has worked with 2,700
major corporations and government
agencies, including 97% of the Dow
Jones Industrials, 73% of the Fortune
100, 73% of the DAX 30 and 45% of
the FTSE 100.
“Your Shared Services Organization Is Only as Strong as You Make It,”
August 2008
Founded in 1991, The Hackett Group
was acquired by Answerthink, which
was renamed The Hackett Group in
2008. The Hackett Group has global
offices in the United States, Europe,
Australia and India and is publicly
traded on the NASDAQ as HCKT.
The Hackett Group
Email: [email protected]
Toll-free: 866-442-2538
www.thehackettgroup.com
Atlanta • London • Frankfurt
• Paris • Amsterdam
Hyderabad • Sydney
© 2009 The Hackett Group, Inc.; All Rights Reserved
“Network Rail: Shared Services Transformation Yields Cost Savings; Decreased
Headcount and Productivity Gains,” June 2008
“How to Build a Function-Level Balanced Scorecard,” October 2007
About the Advisors
Penny Weller, PhD, CMA
Senior Director and Program Leader, Finance Shared Services Process Advisory Program,
The Hackett Group
A Six Sigma Black Belt and certified master trainer, Dr. Weller has a
wealth of experience in shared services, accounting and finance. In her
current capacity, she responds to client inquiries, researches topical
shared services issues, and coordinates conference and client networking events. Before joining The Hackett Group, Dr. Weller was a senior executive
in shared services at Pfizer Inc. (formerly Pharmacia and Upjohn) for over 30
years. There, her management responsibilities included general ledger, inter-company, accounts receivable, property, consolidations, reporting, accounts payable,
travel and expense, cost and inventory. In addition to her shared services expertise
– including accounting and finance integrity and controls – Dr. Weller has managed multiple large-scale merger and system transitions, as well as initiatives in
process improvement, activity-based management, and balanced scorecard design
and implementation.
Roy Barden
Senior Business Advisor, European Finance Shared Services and Customer-to-Cash
Advisory Programs, The Hackett Group
Before joining The Hackett Group, Mr. Barden spent over 10 years
working as a director in management consulting firms, where he
specialized in leading change within the support functions of global
organizations, helping clients deliver both in-house and outsourced
shared services. Previously, Mr Barden spent 13 years in the finance functions
of multinational firms in the paper and chemical industries based in the UK
before becoming CFO of a multinational speciality chemical firm located in the
Netherlands.
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