CSLs & KMs

Critical Service Levels (CSLs), which measure performance of functions that are most important to the business at the time the contract is signed (e.g.: Response Time, Resolution time, Schedule Adherence etc.) 

Key Measurements (KMs), which, while not as critical to the customer’s business, still represent performance regarding functions that are important to the customer’s business (e.g.: year on year service improvements, CMM level, Estimation Accuracy, customer satisfaction score etc.) 

The supplier is expected to provide a solution that is designed to meet all of the service levels (CSLs and KMs).  These service levels are typically designed to provide an objective measure of how well the services are being performed. 

 

Typically, each metric has both an Expected Performance Level and a Minimum Performance Level. The supplier’s solution should be designed to deliver at the Expected Performance Level most of the time.   

 

The only substantive difference between CSLs and KMs is that failure to meet a CSL can result in the supplier incurring a Service Level Credit. Typically, if the supplier (a) fails to meet the Expected Performance Level for a CSL 3 months in a row or (b) fails to meet the Minimum Performance Level for a CSL in any month, and the failure is not caused by events outside of the supplier’s control (e.g., failure of equipment or software supported by customer, unexpected spikes in ticket volumes above an agreed threshold, etc.), then the supplier incurs a Service Level Credit. If a supplier fails to meet the Minimum Performance Level for a CSL in a second consecutive month, the supplier would incur an escalated Service Level Credit.  If performance does not meet expectations, the client retains the right in the future to promote them to CSLs if/when deemed necessary to get the attention and focus of the provider. 

 

In this model, a Service Level Credit is calculated based on an Amount at Risk that is a percentage of the supplier’s monthly revenue for steady state services (i.e., typically projects or other spend with significant monthly variability is not included) and a weighting factor that is assigned to each CSL. 

 

Amount at Risk: The Amount at Risk is typically between 5-12% of the monthly revenue, and represents a cap on the amount of a supplier’s monthly revenue that is at risk for Service Level Credits. The lower end of the range is generally applied to services that are commodities, where the supplier’s margins are lower, and the upper end of the range is generally applied to services where the supplier has some specialization and, thus, higher margins. 

 

Weighting Factor: However, if there are too many SLAs, spreading 5-12% among; this can result in SL Credits that are not meaningful. The weighting factor is designed to address that issue. The weighting factor (known as the Pool Percentage) provides a multiplier that increases the credit associated with each SLA, because it is unlikely that a supplier will fail all (or even many) SLAs in a given month. The weighting factor is typically between 100–250 for deals of the current size and can go upto 400 for large deals. Allocation of weighting points to individual CSLs is usually subject to a cap ranging from 10-35 points, depending on the number of SLAs. 

 

Measurement Period: Typically, the measurement period for all service levels is monthly. The reason for this is that the calculation model is based on risking a portion of monthly revenue. Where a measurement is performed quarterly or even annually, allocating a portion of the monthly amount at risk to quarterly or annual measurements becomes mathematically more complex. 

 

Earn Back: The standard industry methodology also includes an opportunity for the supplier to earn back SL Credits through “good performance”. If a supplier performs below the Minimum Performance Level for a Critical SLA in one month, if the supplier meets or exceeds the Expected Performance Level for a period that is usually between 3-6 months, then the SL Credit is “earned back.” 

 

 “Burn-in” and Base lining: Some service levels can be effective on the Commencement Date, e.g., Attrition of Key Personnel, because they are not dependent on the customer’s environment. Other, more operationally and environmentally sensitive service levels can be subject to a base lining period and a “burn in” period, depending on the maturity of the customer’s environment.  Where a customer can demonstrate that the customer has been meeting a specified SLA for the previous 6-12 months (depending on the SLA, seasonality of the customer’s environment, etc.), the supplier will typically have a 3-6 month “burn in” period beginning on the Commencement Date. Where the customer cannot demonstrate that the customer has been meeting a specified SLA during such a period, the parties will typically agree to a 6-12 month base lining period beginning on the Commencement Date, which is sometimes followed by a 3-6 month “burn in” period once the appropriate level is agreed. 

 

Service level measurements when designed and implemented correctly will protect the investment made by the client, holds the vendor accountable, measurable and has the power to penalize and incentivize the services being delivered.