Service-level agreements (SLAs) and statements of work (SOWs) are unique to service contracts and their detailed development is critical to realizing the full value of a procured service. With this level of complexity, Procurement's involvement in services contracting is critical. In addition, tight collaboration with business units to understand their specific needs is an absolute requirement to creating detailed, effective and measurable service agreements. By integrating purchasing best practices with the detailed needs of the business unit, more accurate and defined scope and agreement can be created. Excluding Procurement generally leads to negative consequences, such as escalating costs and poor relationship definition, plus all of the typical drawbacks of this "maverick-type" spend. (See Fig. 1.)
The business unit is the service expert, ultimately defining the need, specifying the required skills and understanding the proper metrics and milestones necessary for detailing the overall service. Procurement complements this knowledge with the sourcing, negotiation and supplier management proficiency necessary for complete services contract execution. By facilitating internal collaboration during scope and SLA development, companies can shorten sourcing cycle times, reduce revisioning, help ensure receipt of the proper service levels, and help to create a more valuable relationship with the service provider — leading to lower costs in service fees, renegotiations and internal processes.
Furthermore, communication between the buying company and service provider is critical to ensuring successful results. By collaboratively developing specifications, SOWs and SLAs, both the buyer and service provider can agree on the expected outcomes and remove any ambiguity from the agreement before it is executed.
Enhancing Contract Visibility and Control
Given all of these complexities, it's easy to see how the details can get lost in the shuffle without the right tools for managing service contracts at an enterprise-wide level. As a result, many businesses are turning toward contract management (CM) solutions to help control all costs associated with the procurement of both services and goods, as well as to drive optimal supplier performance and compliance. And if the CM system is flexible and cross-functional, your Procurement organization can ease the complexity of service contract execution, enable enterprise-wide visibility into service agreements and supplier performance, and proactively manage all service contract components to ensure that you actually get what you pay for.
Successful services procurement is highly dependent upon the language of the entire service agreement, in addition to the contract itself. SLAs provide the measurable aspects of performance, such as network availability, response time, or accuracy. SOWs outline the specific services to be performed, with descriptions, deliverables and responsibilities. Each component requires extreme detail to minimize subjective interpretation and eliminate ambiguity and potential disagreements, but to be successful you must have visibility into these details.
After the contract is signed, evaluation of the service requires visibility into and enforcement of the agreed-upon performance metrics, such as profit sharing or cost reductions. Specific metrics that reflect a service provider's performance, such as network up-time of 99.7 percent, are deep within the agreement, not in an enterprise resource planning (ERP) system. Additionally, service-level termination events and performance credit events are contract details that ERP systems haven't been designed to leverage.
A CM solution can be used to leverage this deep agreement data and integrate with ERP systems to provide a full view of services agreements and allow accurate, detailed supplier management to realize the value of service relationships.
- With milestone and commitment management, contract managers can manage specific milestones and obligations as part of the contractual agreement, such as event and task completion dates, variable pricing arrangements, quality requirements and supplier responsibilities.
- With automatic notifications, based on the intelligent understanding of business terms, the CM solution will automatically send notifications and escalations to enforce milestones, commitments, and deadlines, avoiding penalties or late fees, or ensuring rebates and performance credits.
- For the transactional aspects of service relationships, ERP integration with the CM application provides automated compliance tracking to ensure proper pricing and timing around specific deliverables and any associated discounts or penalties, and ensuring that deliverables are completed before payment is made.
- An effective CM solution simplifies service provider management with easy-to-create supplier scorecards, which leverage agreement information to create detailed, agreement-based performance reports. Furthermore, an enterprise-wide solution will enable business units to enter accomplishments, metrics and results directly into the scorecard, leveraging the subjective expertise of the business unit or end user.