All businesses want the same things from a financialtransaction: high quality, low cost, excellent security, and thebest possible information to feed into forecasts. Their goal,across the board, is to make the processing of payables andreceivables as efficient and effective as possible. That's why manyorganizations are turning to business process outsourcing (BPO)providers. When outsourcing the processing of financialtransactions, however, businesses need to guard against potentialpitfalls that could result in disruption of internal processes,end-customer dissatisfaction, or even data-security breaches.

The best way for an organization entering into an outsourcingarrangement to protect itself is to request service-levelagreements (SLAs) from its outsourcing providers. An SLA is rootedin the concept of “warranty,” a common understanding aboutservices, priorities, and responsibilities. It's a promise that theBPO provider is going to give its customer what it is supposed toprovide.

SLAs can be baked into an organization's primary contract withits BPO provider. They can be an addendum to the contract, or theycan be separate legally binding contracts that specify consequencesfor failure to meet their targets. Even if it's not technicallycalled a “contract,” an SLA has the force of a contract if it hasall the components of a contract: offer and acceptance, capableparties, and considerations, as part of a legal enterprise.

Agreeing on the right metrics to include in an SLA requirescareful consideration. The goal is not to have hundreds ofdifferent agreements. The goal is to have the right targets toachieve the organization's specific business objectives. An SLAshould help the customer make sure its BPO provider has thetechnology, the processes, and the people behind the scenes thatwill enable it to meet expectations. It should also specify whathappens if those expectations are not met. The research is clear:When problems in an outsourcing relationship are investigatedproperly and resolved quickly, both parties benefit. (See the WallStreet Journal's “Makingthe Most of Customer Complaints” and “Don'tFix Customer Experience Problems, Prevent Them” from ForresterResearch.)

Think Specificity and Clarity

Each SLA should include a definition of the service theoutsourcer is providing, a performance measurement or metric, and aproblem resolution. By their nature, SLAs are output-based.

The key to a good SLA is its specificity. A service levelagreement that is appropriately specific can sharpen the provider'sfocus on what it has to produce that is crucial to the customerorganization, in order to ensure customer satisfaction. Thus, thecustomer organization should use the SLA process to think throughwhat aspects of the BPO services are most critical to its abilityto achieve its goals. SLAs should be developed using the “SMART”technique, which is to say they should be specific, measurable,attainable, realistic, and tangible.

Certain elements of an outsourcing relationship lend themselvesparticularly well to SLAs. In every BPO agreement, the followingcomponents should be spelled out in detail in SLAs:

Turnaround time. These SLAs establishthe acceptable length of time from the submission of a job to thejob's completion. For example, an SLA might specify the maximumlength of time expected to transpire from receipt of a remittancepayment to deposit of the funds and transmission of data to theoutsourcing customer. Providers may offer four-hour, six-hour, andeight-hour turnaround times, depending on the task.

System uptime.These SLAs have been around since the SLA concept came into voguein the mid-1980s. The idea has migrated from IT outsourcing to thebusiness process outsourcing industry. At BancTec, for instance, weguarantee 99.9999 percent (“six nines”) uptime for the systemsthrough which we provide clients access to see exception items,archived items, and additional rework, as well as to do qualitychecks.

First-call resolution. These SLAsspecify the percentage of calls coming in from internal or externalcustomers of the outsourcing client that the BPO provider willresolve without the use of a callback. An organization hiring anoutsourcing provider to manage A/R will want to ensure that a highpercentage of calls made by its invoiced customers are resolvedimmediately. Thus, it will want to set a specific SLA for itsfirst-call resolution (FCR) percentage.

Mean time to recovery. If there issome sort of outage, what is the average time that it takes to befully back up and running? This is another SLA that comes out ofthe IT world and has become important in BPO. For example,measuring turnaround times and mean time to return started in theworld of IT. However, the concepts extend to business processservices, and to business process outsourcing, as well as IToutsourcing.

Quality. Quality comes in many, manyforms—and literally, like beauty, quality is in the eye of thebeholder. The definition of quality performance provided by anoutsourcer generally revolves around the concept of “rework.” Ifthe client must rework anything at all that the outsourcer issupposed to provide, then the outsourced process has experienced aquality breakdown. Beware, however, that many organizations havedifficulty defining what “quality” really means. If this is thecase with your outsourcing provider, you may have troublecommunicating your definitions of quality work. That said, anyoutsourcer that will not provide quality guarantees for its“wheelhouse” processing is not worth another breath ofconversation.

Keying accuracy. BPO providers do alot of data capture, data scraping, and physical data keying onbehalf of clients. BancTec has strict accuracy measures for thedata that it takes off of different fields of documents, as well asfor the turnaround times to get that data to clients. Thus, BancTecSLAs specify the standard for accuracy (itself a quality metric),along with details of how data accuracy gets measured in ourprocesses. An SLA needs to clearly spell out the definition of“accuracy” and the definition of “error.”

Understanding the Pain Points

There's an axiom in business process outsourcing: If yououtsource a bad process, it's still a bad process. When a companywants to outsource a process that's previously been managedinhouse, the first thing it should do is analyze whether itscurrent process is optimal for achieving the outcomes it desires.Analyzing the efficiency and effectiveness of the internal processmay reveal pain points that need to be resolved before the companyembarks on finding a BPO provider. For example, from aservice-level perspective in accounts payable, it drives managementcrazy when a company has received invoices that need to be paid butnobody knows where they are physically located, who approved them,or what their current status is in the organizational workflow. Thecompany needs to determine where lapses exist in the A/P processthat are allowing payables to go missing, and it needs to figureout how to eliminate those lapses. Once it's established how it canmake its internal process more effective, it can draft SLA targetsthat will ensure its future outsourcing provider continues theimprovement.

Today, most A/P process improvements revolve aroundimproving accuracy, timeliness, and analytics. For example, in thecase of A/P process improvements involving a missing invoice, theability to track and audit every transaction ensures not only thattransactions are processed, but also that the information in eachtransaction can be harvested and utilized for things likeprompt-payment discounts (if available), supplier analysis, andprocurement decision support. Workflow is inherent in A/P processimprovement, and audit and automated tracking are inherent inworkflow. Mature workflow applications have statisticalprocess-control tracking, which emphasizes early detection andprevention of problems. From there, the data is used to modelbetter workflows, reducing handoffs and unnecessary work steps,which are generally the sources of error or missing items.

One example is an open-items report that shows the differencesbetween purchase orders, bills of lading, and invoices received.Any items remaining open after bills of lading and POs arereconciled would automatically indicate that the invoice was notreceived. The open-items report, tied out by the vendor invoiceturnaround time report, would then alert managers that an expectedinvoice was not in the shop. If that invoice might haveprompt-payment discounts, tightening down the process with theright analytics would proactively ensure the discounts are takenand save the company money.

Drawing up specific SLAs around A/P workflow can also help acompany capitalize on opportunities for deductions. There are tworeasons that companies take deductions: either they didn't receivewhat the vendor said it delivered, or they qualified for a discountfor paying early. Companies like to take early-pay deductionsbecause it's a good use of working capital, but they can't take thededuction if they don't know where the bill is as the deadline fordeductions approaches. An SLA might address this issue as well—forexample, setting a target for the proportion of eligible invoiceson which the company receives prompt payment discounts (PPDs) orearly payment discounts (EPDs). If I were a buyer of invoice prepand processing services, I would want an SLA that required myoutsourcing provider to guarantee that 100 percent of PPD invoiceswill be captured accurately.

Finally, there's analytics. Some companies don't have theability, even in their enterprise resource planning (ERP) systems,to run specific analytics on spending or on line-item detail andinvoices. Instead of deploying an analytics software packagein-house, they might seek a BPO provider that can provide theinsights they need.

A good analyticsoriented BPO provider can supply intelligentmail barcode updates. These updates tell the end customer when mailhas been received at its destination point, where the bill went,and when return mail has been sent (when paying something back).With this, a company can start to do predictive analytics on howlong the buyer's customer is sitting on the payment and thus assistthe end customer in its working capital decisions. Also, predictiveanalytics on the A/P side can help the buyer predict whichsuppliers are open to taking additional discounts if they get paidfaster.

You can see how some pain points become discussion points, thenneeds, then SLAs to improve overall service. The sidebarTypical A/P SLAs, on page 2, shows what a companyoutsourcing its payables might expect from its BPO provider.

Monitoring SLA Performance

Whether or not it's part of the BPO contract, an SLA has to becodified. It has to be an actual document. Conventional wisdomsuggests that an SLA agreement should consist of five parts:

1. A description of what has to be provided—i.e., a servicedescription.
2. The metrics that need to be accomplished.
3. Severity levels: It might clarify that a “Severity Level 1”incident is extremely serious and that failure to achieve the SLAin this area would have a substantial impact to the business.“Level 2” might be an incident that is significant but not serious.“Level 3” might be a breach of the service level that has a smallimpact, and “Level 4” might be negligible to the business.Sometimes this takes the form of a severity table inserted into thedocument.
4. A remedy if the SLA is missed; the extent of the remedy willdepend on the SLA's severity level. For example, if a BPO providerhas turnaround-time SLAs, and its outsourcing customer needs itsdaily A/R file at 8 p.m. in order to handle its daily postings,failing to meet the turnaround-time SLA would be very serious. Whathappens if the provider breaches the SLA and 100 percent of the A/Rfile isn't ready by 8 p.m.? Some companies include a penalty in theagreement. The penalty for the initial breach is usually a servicecredit per occurrence, but the SLA may impose more severe penaltiesif the same problem were to occur with a certain, specifiedfrequency.
5. Incentives. Enlightened companies, if they're going to putconsequences for breaches into their SLAs, will also includeincentives to encourage their outsourcing providers to go above andbeyond. Outsourcing customers need to seek ways to creativelybalance rewards and penalties because a good partnership with a BPOprovider offers intangible benefits. One approach is to give theBPO provider “credits” when it does particularly well for theclient. Then, if the provider were ever to breach an SLA, it shouldhave lots of cookies in the jar, so to speak.

Regardless of how SLAs are structured, their key role is toprovide clarity to customers and outsourcing providers alike onwhat everyone should expect, in order to ensure that there'sagreement up front about each organization's roles andresponsibilities. In this way, an SLA facilitates a successful BPOrelationship.

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Michael Alfonsi, CTP, CRM, WPT, is a vicepresident at BancTec, a globalleader in business process outsourcing. He is also managingdirector of the company's financial transactions portfolio. Hisinsights are based on 25 years of experience in finance, sharedservice center management, and treasury consultingservices.