Recently, a colleague shared with me that she and her team were disappointed with the meeting management company services that they were receiving. This large company had contracted with a third party company to manage their meetings and events. While they followed the standard procurement processes of going out to bid, evaluating and testing the supplier, and piloting several meetings, they failed to use a key procurement component: a Service Level Agreement with measurable Key Performance Indicators that, when compromised, could result in the trigger of a mutually agreed upon compensation. I was shocked. How could this organization not put important key procurement tools in place, the SLA and KPIs?
With organizations’ expectations high, suppliers are under scrutiny to deliver services without fail. Procurement is at the helm; Service Level Agreements (SLAs) are popping up as Exhibits in more and more contracts. An SLA formalizes arrangements between an organization and a supplier to deliver specific services, at specific levels, and at an agreed upon price. If the service is not met according to the agreement, the organization may be entitled to some form of compensation such as a payment or a credit.
The use of SLAs has increased with the involvement of procurement in travel and meetings. In many organizations, procurement professionals do not fully understand the complexities of buying hospitality services but have become quick studies. In the last few years, when meeting planners met with procurement professionals around the conference table, meeting planners shared their frustration that some suppliers failed to deliver the superior services they promised. Moreover, some suppliers overcharged, lacked promised skillsets, failed to work overtime, and flung the blame on the organization. Today's organizations are like that; often disorganized and frequently in reorganization. Still, the supplier must perform.
Procurement has led the charge to use SLAs to hold suppliers accountable for services and promises. But, some suppliers are not taking this extra layer of contractual agreement lightly. Some suppliers are pushing back claiming that their commitment to some services are at the mercy of numerous factors, such as the buyer’s participatory efforts in holding up their end of the bargain. For example, a meeting management supplier may be held accountable by an SLA to respond to meeting inquiries within four hours. When the SLA was created, the organization actualized about 400 meetings per year. Then, when the organization increased its volume to 600 meetings a year, the supplier failed to meet the four-hour turnaround time. As a result, the organization thought they could cash in on the agreed-upon SLA.
In this case, who is at fault? And therein lies one of the inherent challenges for the use of SLAs. Both the organization and meeting management supplier are at fault for not spelling out all key details of an SLA. Because our industry will begin to experience more use of SLAs as part of any contract, it is important to understand when to use them, how to construct them, and how to report on them.
The jury is out on how often to use SLAs. Some organizations are using SLAs for all suppliers (meeting management companies, hotels, ground transportation, production, etc.) while other organizations are very selective on the suppliers that require SLAs. When the business objective must be met and the supplier service is a critical supporting factor, it is time to put an SLA in place. Similar to the contract negotiation process, SLAs must be negotiated and jointly agreed upon. Because suppliers usually want the organization’s business, the SLA negotiations offer a win/win for both parties. Some suppliers are even grateful to support the organization’s SLAs so that they can show off their superior services and be rated at the same time. If a supplier surpasses SLA expectations, it may result in more business.
The first step in creating an SLA is to determine the performance categories. In one or more of the performance categories, a performance indicator will be written. Many organizations use categories such as:
- Compliance
- Economic Value
- Quality/Customer Service/Timeliness/Responsiveness
- Productivity/Operational Efficiency
The second step is to identify the percentage weight that each of the performance categories holds. For example, each of the four categories could carry a weight of 25% each to equal 100%. Organizations that are budget constrained and deem savings as the most important success factor may weigh the category titled “Economic Value” higher at 35% for example.
The third step is to identify the important factors that should be measured in the performance categories defined. A Key Performance Indicator (KPI) is a measurement of an operational goal and usually contractually significant. It is much easier to document, manage and report on 3-5 rather than 10-20 KPIs. The failure to achieve one or more of the KPIs may mean the escalation in the governance process and/or the trigger of a mutually agreed upon compensation. Once the KPIs are developed, each KPI should have a weight assigned to it so that it rolls up to the performance categories. It is common to have 1-3 KPIs; all weighted differently, that roll up to each performance category.
The fourth step is to identify the risk pool of compensation if the SLA is designed to incorporate a consequence for non-performance. For example, if the organization creates an SLA with a meeting management supplier and it fails one or more KPIs, what will the remedy be? After mutually negotiating the SLA with the KPIs, the organization and meeting management supplier may agree that a percentage, i.e. 10%, of the total estimated fees will be included in the risk pool and may be paid out in the form of a payment or credit as a remedy for failure to meet the KPI. The “At Risk” amount is the maximum amount of money the supplier has at risk for the period specified (e.g. each meeting, each month, each quarter, etc.).
The fifth step is to determine who and how the KPI results will be collected and reported. The organization or the supplier may be responsible for KPI reporting. Sometimes, each party has a role in reporting the KPIs.
Call me complex, call me nuts, call me too detailed…I write SLAs that are specific, win/win, and flexible. When I need to be simple, I write KPIs and remedies for my clients and leave it at that. When the scenario is more complex, I write Critical Performance Indicators (CPIs), Key Performance Indicators (KPIs) and General Performance Indicators (GPIs) so that the organization has different levels of service guarantees based on their priorities, some of which have remedies attached.
SLAs and KPIs are an important success measurement that meeting leaders and procurement departments may expect of suppliers. Suppliers have an opportunity to display superior performance and services while possibly gaining more business from the organizations that appreciate the supplier's willingness to be accountable through measurements.
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