“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
4.Response or problem resolution time
5.Project actual turnaround time versus estimated turnaround time
6.Defect rates and resolution
8.Cost per transaction or time period
9.Pro-active problem resolution
10.Time to fix
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