An SLA has always been about specifying the expected service performance. It outlines specific metrics by which a service is measured and demands penalties — and in some cases, remedies — if the agreed-upon service levels fall short. But what’s been missing in business process services (BPS) SLAs all these years is one of the most critical metrics: the business outcome.

While I’m sure that some semblance of SLAs dates back centuries, it was the telecommunications market that ushered in the modern SLA. This was followed by major outsourcing firms such as GE that, in the early 2000s, baked into service level terms as critical elements in Six Sigma performance and certification models.

Many of these SLAs had what’s referred to as the “watermelon effect”: From the outside, the relationship is all green (good), but on the inside, the customer is red (or unhappy).

While the concept sounds squishy, it has played an important part in analyzing risks when setting contracts. Providers would determine what is referred to as a pool percentage — essentially an aggregation of what could go wrong, or red, across a number of different projects — that would result in a nonperformance payback to the customer. While many of these percentages were small, when combined they represented real money and an equivalent financial pain point. Providers also started to weight the payout pool percentages based on the significance of the client and the business impact of a service level failure.

Needless to say, this glass-half-empty payout model did little for motivation. No surprise then, that providers began negotiating over-delivery pools known as clawbacks to hedge their bets, recover losses, and thus make the watermelon green on the outside and the inside.

But even the green-and-red watermelon agreements have generally ignored the alignment between service levels and the business outcomes they’re designed to drive. Now, digital technologies that include automation and business processes delivered as a service are creating new opportunities to include critical business outcome metrics and morph SLAs into service level outcome agreements (SLOAs).

Navigating SLAs that include business outcomes may seem difficult. Here are ways to avoid potential pitfalls:

  1. Leaders should agree on the outcomes important to the business. This might sound obvious, but anyone who has ever been holed up in a corporate goal-setting meeting knows this can be a very challenging exercise, given the variety of stakeholders with both compatible and conflicting goals.
  2. Align complex processes. You’ve got IT operations; you’ve got human resource services; you have the office of the chief financial officer. All of them have typical SLAs consisting of many individual processes and applications that are in turn dependent on infrastructures. Is there a balance between the economies of scale across these infrastructures, or are these processes at technological and organizational loggerheads?
  3. Determine how to measure business outcomes. Once the business outcome is defined, you’ll then have to agree on what “good, better and best” look like, and how you’ll analyze and measure those. What will be the standard measuring stick between service provider and customer? Will it be a Net Promoter Score, Customer Satisfaction (CSAT) score or a new innovation metric? While the client-facing scores are critical, many organizations ignore internal measuring tools that can drive those outside-in scores. These might include key performance indicators (KPIs), but more frequently stretch into other areas such as employee satisfaction and retention in highly competitive segments where intellectual capital is key.
  4. Decide who owns innovation outcomes. Have honest conversations with your service provider about the role of innovation and transformation. The evolution of SLAs being driven by business objectives raises customer questions about how innovation will be incorporated and tracked in an outsourcing environment. Are we ready to include “innovation as a service” in the scope of an SLA?

The last point is key. Providers should expect the innovation conversation as a logical extension of the service and business outcomes equation. After all, if a provider is extracting most of your key business processes from your internal service unit structure, how could you not expect the provider to offer an innovation layer to keep operations contemporary? In some ways, SLAs also should embed future-proofing from rapid technology and market shifts as a result of the digital transformation trends virtually every enterprise is planning to undergo.

There are a few more points to be made regarding SLAs and providers. The industry evolved from business process outsourcing (BPO) to BPS and now, more and more, to business process as a service (BPaaS). SLAs therefore need to evolve accordingly. As the evolution progresses, to realize the benefits in key business metrics, you need to treat the provider as a partner, and not as a vendor. Finally, innovation needs to be funded. You can’t expect innovation as the outcome if the focus and SLAs are only about compliance.

The transformation of the SLA from a basic, binary success/failure metric to a more complex alignment with complicated business processes, and perhaps even to an innovation incubator, reinforces the critical value of a 21st century BPS mentality. It’s time for the SLOA.