“If you can’t measure
it, you can’t manage it.” – Peter Drucker
When
we think about what we will include in a Service level Agreement (SLA), we should
also consider what the Key Performance Indicators (KPIs) are that relate to the
service being delivered.
SLAs
are mostly developed for service contracts. They are, however, becoming
increasingly essential for contracts relating to the delivery of products,
particularly if the goods are to be delivered over a period on time. A relevant
example is the periodic delivery of gas or solvents to a manufacturing facility,
or the provision of goods to outlets in a retail chain.
All
contracts, in which there is a performance component, should have some form of
SLA and the associated KPIs, to ensure a baseline for delivery and measuring
performance. As employees are typically expected to work within a Performance
Development Plan (PDP) in which they are expected to meet or exceed certain
targets and milestones over a period of time, the same goes for project
management. Agreed performance metrics ensure that deliverables and milestones
are achieved.
What
should be included in an SLA?
According
to the International Association for Contract & Commercial Management
(IACCM) the purpose of an SLA is to describe the service level models that
monitor and manage performance of the supplier. Customers will want the SLA to
continuously measure and report the supplier’s performance.
The
IACCM cites the following examples of metrics, measurements and performance
tracking:
1.Number
of pieces
2.Run
rates
3.Uptime
4.Response
or problem resolution time
5.Project
actual turnaround time versus estimated turnaround time
6.Defect
rates and resolution
7.User
satisfaction
8.Cost
per transaction or time period
9.Pro-active
problem resolution
10.Time
to fix
11.Dispute
frequency
Basic
KPIs – as the key business metrics used to evaluate factors that are crucial to
the success of an contract – should at least represent the Five Rights of
Procurement (5 Rights):
1.
Right Time and Place
2.
Right Quality
3.
Right Quantity
4.
Right Source
5.
Right Price
The
5 Rights concept is based on the premise that purchasing is about trade-offs.
If we specify a lower grade or quality, this may result in a lower price. If we
buy more, we may access a lower price. The criteria listed are transactional in
character, and contemporary perspectives on procurement would add a variety of
other dimensions to be considered, such as risk, sustainability, total cost and
stakeholder engagement. Thus, SLAs and KPIs should not only take the 5 Rights
into consideration, but expand beyond these to ensure that the deliverables,
milestones and targets are achieved.
Keep KPIs simple and
make them SMART:
Specific – Be clear on what
the KPI measures. State exactly what you need to achieve.
Measurable - The KPI has to be
measurable. Include the quality and quantity
Achievable – KPIs that cannot be
achieved are meaningless. Nothing is more discouraging than striving for a goal
that you will never achieve.
Relevant – The KPI must give
more insight into the performance in view of the overall strategy. If a KPI is
not measuring a part of the strategy, acting on it doesn’t affect performance.
Time phased - It is important to
express the value of the KPI in time. Ensure that there is a start date, end
date and timescale.
For
each KPI, a level of performance should be defined, representing the minimum
level of service to be provided. The means of measuring these performances
should also defined, as well as the appropriate methods for calculating and
levying financial penalties for any possible failure to achieve the minimum
levels.
SLAs
should focus on the minimal, expected and agreed quality of a service that is
to be provided and KPIs should provide the desired operational efficiency,
objectives and goals to be achieved. It is important to measure both service
level compliance and key performance indicators in order to keep promises and
excel at service quality and delivery.
Ultimately
KPIs and SLAs ensure that the required solutions are provided in time, allowing
you to take the necessary preventive action timeously being, shifting from
reactive to proactive management.
Contributed by:
Andrew Hillman, Managing Director of Bespoke and Publishing Editor of Bespoke Procurement Bulletin
Article first appeared in Bespoke Procurement Bulletin: http://bespokesourcing.co.za/blog/17916-developing-smart-kpis-for-your-contract-slas-by-andrew-hillman
