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

ExEcutivE Summary
While nearly 70% of shared services organizations (SSO) responding to The Hackett Groups 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.

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.

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 companys 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 Hacketts 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 dont use SLAs, or ignore established performance measures, risk facing unreasonable customer expectations and service levels that do not
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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.

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FIG. 1 Effectiveness of service level agreements, 2008

Not effective or no plans Considering or implementing 8% 22% 44% 26% In place, somewhat effective

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 its 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.

In place, highly effective

Source: 2008 Finance Shared Services Member Proles, The Hackett Group

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 customers 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 Murass 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.

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FIG. 2 Example of how to develop client and customer expectations by function SSC function
Payroll

Clients
BU managers and executive team

Customers
Employees

Customer expectations
1. 2. 3. 4. 5. 6. Accuracy Timeliness Responsiveness Accessibility Low-cost transactions Regular and continual communication of services

Client expectations
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 1. 2. 3. 4. 5. 6. 7. Counsel Problem resolution Adherence to policies Coaching Intervention Salary and rate schedules Timely response

Same

Employee relations and human resources

BU managers and executive team

Executive team and employees, ShR, oEoA, AhR, legal, unions

1. 2. 3. 4. 5. 6. 7. 8. 9.

Problem resolution Admin. processes Timely response Database info mgt. Cost-efficient services Coaching Information Employee development 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 Accuracy, timeliness, accessibility, assist with navigating policies and procedures, banner, financial expertise, identify positive and negative trends, forecast reports and analysis

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 Same

Procurement

Planning and constrution and maintenance (executive team indirectly)

Executive team, planning and construction and maintenance, corporate dept., property accounting

Source: BAE Systems Technology Solutions & Services Division

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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 clients 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.

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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 No

Update ABC models

Assemble and review results

Changes?

No

Assemble chargeback documentation

Yes

Assemble SLA metrics data

Develop SLA documents

Managers agree

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 companys 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.

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FIG. 4 Example of a monthly timeline maintained by key account manager 1 2

Client mtg.

3
Client mtg.

4
Third week Conduct quarterly review 1

5
Client mtg.

6
Client mtg.

7
Third week Conduct quarterly review 2

8
Client mtg. Updated ABC models/prices and chargebacks

9
Client mtg. Planning chargeback data

10
Third week Conduct quarterly review 3 Begin SLA discussions

11
Client mtg.

12
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. Its 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%

31% 21% 13% 0% Not used To a minimal extent

32% 33% 17%

To a moderate extent

To a major extent WORLD-CLASS

PEER GROUP
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 cant 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 dont have a choice in how they use a service will just breed discontent.
1

Service-Based Pricing Improves Customer Behavior and Shared Services Performance for Aker Solutions, Hackett Finance Shared Services Process Perspective, February 2009.

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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 doesnt make sense. Typically, if I dont understand what youre 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% 35% 28% 17% 6% We do not charge Cost allocation Benchmark or market rate PEER GROUP
Source: 2008 Finance Shared Services Performance Study, The Hackett Group

60
29% 19% 14%

50

40

30

20
Menu pricing

10

0
WORLD-CLASS

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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 dont 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 SSOs 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 youre 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.

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rELatEd hackEtt rESEarch About The Hackett Group

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 Hacketts 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. 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.

Marriott Business Services: Strategies for Maximizing Value While Taking Shared Services to the Next Level, October 2008 Your Shared Services Organization Is Only as Strong as You Make It, August 2008 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

Senior Director and Program Leader, Finance Shared Services Process Advisory Program, The Hackett Group

Penny Weller, PhD, CMA

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.

The Hackett Group

Email: [email protected] Toll-free: 866-442-2538 www.thehackettgroup.com Atlanta London Frankfurt Paris Amsterdam Hyderabad Sydney

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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