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Contracting Basics
In the Selection & Contracting phase, the required services are determined and a
vendor is selected. Service levels are then established, and the initial agreement
is put into place. Establishing a solid RFP and negotiating a satisfactory contract
arrangement are key to developing a viable contract. A SLA can then be drawn
up to establish the terms under which the contracted service will be managed.
Developing an RFP
The RFP for services provides an important opportunity to evaluate requirements
and set a budget. Developing the RFP is a clarifying process in itself. It also
provides a starting point for the contracting process. If the RFP is not carefully
constructed, it will be more difficult to make modifications later.
Issuing an RFP draws a line around the requirements and sets dates to be used
in planning. It should provide clear instructions to vendors, help to ensure that
all issues are addressed, minimize misunderstandings, and aid in developing
unbiased criteria for judgment. Above all, however, the RFP provides important
guidelines for vendors as to the type of services, equipment, and personnel
that will be required, and this is important as a starting point in setting price and
service guarantees.
RFPs also help to reduce misunderstandings and unrealistic expectations, as well
as clarify pricing options. This is good for the company issuing the RFP. For the
vendor, it levels the playing field and saves time. Vendors who cannot meet the
requirements will simply not be encouraged to respond.
Creating the RFP should be viewed as a process. In evaluating the requirements,
it is important to consider all service types, management, and support that
might need to be included. The process must include input from all departments
that are likely to use or be affected by the required services, and it needs to be
approved by financial and legal departments.
Points of Negotiation
Contracts have a number of critical negotiation points that need to be
considered to obtain the best possible deal. The major points to look at are:
- Cost. The cost of the contract is the most obvious negotiating point, and it
is dependant upon a variety of factors that are subject to adjustment. The
primary factor affecting cost is level of service.
- Services provided. The specific services provided are also subject to
negotiation. The supplier will generally have a suite of services available.
Standard offerings can be trimmed if extended features are not likely to
be used, reducing costs.
- SLA. Negotiation of the SLA is perhaps the most important area to
consider. The SLA defines the level of service to be provided. Service levels
may be determined according to a number of different metrics, all of
which are subject to adjustment.
- Penalties. Penalties are subject to negotiation. Penalties are generally
incurred when SLAs are not met or if the contract must be terminated.
For the SLA, it is important that penalties remain commensurate with costs
to the enterprise. They should not be so small that the supplier can easily
"budget" poor performance into the service, yet they should not be so
high that they damage the supplier's capability to provide service.
- Exit criteria. The criteria under which the contract can be terminated "for
cause" are subject to negotiation. It is important to build these into the
contract.
Developing The SLA
The SLA is an agreement between the provider and the customer detailing the
levels of service to be provided and specifying the metrics that will be used to
measure them.
To permit adequate management, the SLA must first be developed and
implemented in a manner that makes management possible. This includes
making certain that both sides are in agreement as to expectations and quality
standards, and that a management structure, with roles and responsibilities, has
been put into place.
The first step to building a manageable SLA is to gather information. Both the
client and the supplier need to do this, so that they have a sound basis from
which to negotiate. The client needs to review actual service needs and priorities,
and carefully match requirements to real business process needs. The client
should also fully investigate the provider's past service record, and understand its
particular strengths and weaknesses. The service provider needs to examine its
own service history to determine service levels that it can realistically provide.
It is also important that both sides come to a full agreement on the SLA and
establish management and communications processes. Effects may be across
a wide number of areas in the client organization, and representatives of these
areas should be involved at least in initial discussions. It is important to develop
communications so that a satisfactory interface between the two companies
can be established.
The SLA should be developed through negotiation and discussion. The
development process should include feedback from all affected parties. It is
important that the agreement should then be reviewed and finalized in a way
that all parties understand what is expected, and are in agreement. The SLA also
needs to establish adequate metrics for measuring service levels.
Determining Metrics
Metrics are the actual items that are selected for measurement to yield
information on whether service-level specifications are being met. Guidelines for
developing appropriate metrics are:
- Use a metric that contains at least three measures, determined according
to the desired result.
- Determine the most important attributes of the process to measure,
according to the business objective.
- Determine the precision of the measures to be used, based on context.
Metrics must be relevant and provide appropriate indications of whether servicelevel
specifications are being met. They also need to be measurable without
ambiguity, and agreed upon with the service provider as a measure of contract
obligations.
Once established, metrics demand regular measurement. The schedule and
means of measurement depend upon the type of service being monitored,
the type of SLA in place, and the set of metrics that has been agreed upon.
Measurements should not be subject to interpretation, and should provide
adequate prior warning of any faults in the service or process being measured.
Metrics can vary widely, depending upon the service provided and the required
result. They can be either quantitative or qualitative, though qualitative metrics
must have a measurable component. Typical metrics include:
- Availability, such as response time.
- Capacity, or volume handled before performance degradation.
- Reliability, or number of outages over time, and how long it takes to
recover.
- Efficiency, or increase in output or performance using the same resources.
- Maintenance, or time to respond to or resolve problems.
- Repetitive process rates, including error rates.
- Delivery, or timeliness and conformity to specifications.
- Response, such as for call answering (e.g. wait time, percentage of calls
resolved on first contact, user satisfaction, specific sales goals).
- Process improvement, such as in Human Resources (e.g. turnover,
improvements in performance reviews).
- Strategic impact, or impact on overall business objectives.
Next: Provision and Management Basics
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