SLA Pitfalls--And How To Avoid Them

As businesses increasingly look for ways to cut costs, many executives are considering whether this is the right time to outsource more functions. But companies may be flying blind if they sign an outsourcing contract without a carefully thought-out service-level agreement. With that in mind, InformationWeek recently asked Tom Mangan, partner and leader of Andersen's CIO Advisory Services, to point out some SLA pitfalls--and ways to avoid them.

One of the most common mistakes made when outsourcing is having an incomplete SLA--or not having one at all: "It happens more so than you care to imagine," Mangan says. Once a company is involved in an outsourcing agreement, there's no way to determine quality of service without an SLA. And it's not just the small companies that make this mistake. "I've seen large deals of $30 million to $40 million where there were no service-level agreements--or very cursory ones." Remember, service providers are trying to run a business, says Mangan. "When their bottom line is threatened--especially if they're a publicly held company and they're under pressure from the street--then they're going to make business decisions. And the only thing they're going to be held accountable for is what the service-level agreement says."

Always provide detailed descriptions of minimum and major infractions of the SLA: A minor infraction could be an outage that doesn't cause a business disruption, or it could be failing backups. If the outsourcer has a certain number of minor fractions, that would equal a major infraction. If a vendor's major infractions start to add up during a quarter, that could be a breach of contract, Mangan says. A minor infraction could mean the customer can withhold 5% to 10% of the invoice price for that month, while a major infraction could result in a customer withholding 20%.

Don't forget the transitioning clause: Many companies neglect to include this critical clause, Mangan says. The transitioning clause kicks in when there's a breach of contract, and the client decides to work with a different outsourcer. "The transition costs to do that are part of the breach of contract, where the existing outsourcer has to fund transitional costs so the client doesn't suffer overlapping costs during that transition."

Without a transitioning clause, it may be cost-prohibitive to switch outsourcers. "They get into a situation where they're not satisfied, but they find they will have to start paying twice." It's akin to ramping up a project, Mangan says. "Usually, several hundred thousand dollars are set back in the transition clause to cover that cost."

Three words: Negotiate, negotiate, and renegotiate. "Everybody's in a downturn with business cycles, so all vendors are trying to make whatever deals they can," Mangan says. "We've seen some of the best opportunities right now, either to renegotiate or negotiate." To determine whether you're really getting a good deal from outsourcers, a thorough understanding of internal IT costs is critical. "The outsourcer has to be able to beat you on efficiency and economies of scale. Outsourcers will look at a project and cherry-pick it, and take what they can. Then the client is stuck with managing things they didn't realize they were left with."