Monthly Reporting: IT Outsourcing SLAs & KPIs

Step-by-step guide for how to create monthly SLA & KPI reporting, including: applying earn backs, dead bands and pre-requisites.

Pre-requisites for SLA & KPI Reporting:

• SLAs and KPIs are defined including; definitions, data sources, targets established

• Dead Bands identified (if applicable)

• Due Diligence has been conducted

• Application Tiering has been applied (if necessary)

• Automated Reporting Tool created and tested (calculations and data loads)

Monthly Reporting Steps for IT Outsourcing SLAs:

1. Data Collection: extract from agreed upon source systems validate for accuracy.

2. Initial Run: populate Reporting Tool and inspect for abnormal and failed results

3. Exceptions: identify individual incidents that should be removed from calculation

4. Final Run: once exemptions are accounted for then the final SLA report is issued

5. Penalties Calculated: fees due are determined based on compliance against the targets

6. Earn backs Determined: if you engagement permits earn backs, determine applicability

7. Executive Report: a summary and details of findings are published to the vendors

8. Vendor Response: the vendor should produce a remediation plan (if required)

Understanding Exemptions in SLA Performance Management

Exemptions:  one of the core principles of an SLA framework is that the vendor can only be held accountable for something that they control. In the event that an outside party caused the vendor to miss the performance target, then that task would be excluded from the calculation. 

The exclusion requires the client to agree to the exclusion.  If the revised calculation results in a measurement that is equal to or higher than the minimum performance target, then the penalties do not apply.

The Impact of the Law of Small Numbers on SLA Penalties

Law of Small Numbers:  there is a principle in the SLA framework that a single miss should not trigger a financial penalty.  In our Severity 2 Resolution example above, you will see that the vendor missed 1 out of 10 incidents causing a 90% performance rating where the target was 95%.  In order for a single miss to not trigger this  performance measure, there needs to be at least 20 Severity 2 incidents in the month, i.e. 19 successful events against a total of 20 = 95% performance.

The typical approach to remedy this situation would be to carry over the results to the following month and aggregate the volume of the two months to reach the required volume of incidents for evaluation.

Exception:   some measures that are so important that a single miss can cause a financial penalty, for example application availability. 

How Earn Back Provisions Affect Vendor Penalty Recovery

​Earn Back:   in some agreements, the vendor has the right to earn back penalties that are incurred. The ability to earn back is based on the achievement or overachievement of performance targets in subsequent months.

It is worth noting that Earn Back provisions are no longer common in the competitive outsourcing marketplace.

For a full review of Performance Management (SLAs, KPIs and Balanced Scorecards) see: https://www.outsourcing-advisoryservices.com/slasandkpis