Negotiating Service Level Agreements
The service level agreement (SLA) is a popular platform on which a company and their third party logistics (3PL) provider can build a mutually beneficial and harmonious working relationship.
On paper, SLA’s look like a great idea. Everyone knows where they stand. Everyone knows what’s expected of them. And everyone knows what they can expect if they fail to fulfill their side of the bargain.
But SLAs also have their potential pitfalls. Top of the list is that many are just too complex to the extent that key stakeholders can’t understand them. Or, as we’ve seen in many cases, technology can’t track and report service performance, or monitor established service metrics. And, too often, unrealistic objectives have been set by management and customers.
Not surprisingly, failure to develop realistic targets leads to uncertainty, confusion and unrealistic expectations. Perhaps not the best way to start a long-term relationship!
Regardless of the reasons, a poorly constructed or negotiated SLA exposes many companies to unnecessary commercial risk and in some instances, termination of an outsourcing arrangement. And with over 50% of outsourcing alliances ending within 3-5 years, now more than ever is the time to make the SLA work for you and your 3PL.
So how can we avoid these common pitfalls? First, let’s take a look at the key ingredients of an effective SLA. To be effective, an SLA must incorporate two sets of elements:
1. Service elements clarify services by communicating the services and conditions of service availability, service standards, ie. timeframes services will be provided, responsibilities of both parties, cost vs. service tradeoffs, and finally, escalation procedures.
2. Management elements focus on how service effectiveness will be tracked, reported and addressed, how service-related disagreements will be resolved, and how the parties will review and revise the agreement.
Here are 10 key questions to answer when formulating your SLA:
1. Which service levels do we measure?
2. By what KPI do we measure each service level?
3. How – by what process – do we apply that KPI?
4. Across what period of time do we measure performance?
5. How do we report performance?
6. What benchmarks and minimum performance standards do we require of the supplier?
7. How much variability for these standards do we build into our agreement?
8. Will the SLA include service level credits?
9. Will is a system of service level bonuses appropriate?
10. At what threshold should failure to comply result in termination of the agreement, and how do we determine that point?
Addressing these questions will go a long way to ensuring that your SLA opens the way to an actively collaborative, bilateral relationship with improved performance and accountability on both sides.
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