Measuring Service Levels in Evolving Pricing Constructs
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The document discusses how service level agreements are evolving from conventional models focused on individual services to outcome-based agreements measured by overall business outcomes. It introduces CAST software as a tool for objectively measuring key performance indicators like reliability, maintainability, and security risk at the application level to establish benchmarks and monitor performance over time in support of outcome-based pricing constructs. The document argues that standard software quality measurement creates visibility and leads to cost reduction and improved business agility.
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Measuring Service Levels in Evolving Pricing Constructs
- 1. © 2015 Information Services Group, Inc. All Rights Reserved. Proprietary and Confidential. No part of this document may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval devices or systems, without prior written permission from Information Services Group, Inc. Bob Krohn, Partner, ISG 28 July 2015 Outcome-Based Pricing, Business Process as a Service, and their effect on Service Level Methodology Managing Service Providers for Today’s Digital Business
- 2. © 2015 Information Services Group, Inc. All Rights Reserved 2 Challenges that we are seeing in the market Where are you in your contract lifecycle? And what are your questions? Contract Year 1 Contract Year 2 Contract Year 3 Contract Year 4 Contract Year 5 Transition, relationship, change management Services and service levels Pricing Service integration, governance and asset management Renewal/Termination Service levels were OK before but we need better now . . . How do I obtain flexibility in scale that matches my business requirements? How do we effectively migrate to outcome-based pricing ? How do SLAs change with outcome-based pricing?
- 3. © 2015 Information Services Group, Inc. All Rights Reserved 3 Poll question Which one of these question relates to you? Feel free to choose more than one response! 1. How do I obtain flexibility in scale that matches my business requirements? 2. Service levels were OK before but we need better now . . . 3. How do SLAs change with outcome-based pricing? 4. How do we effectively migrate to outcome-based pricing?
- 4. © 2015 Information Services Group, Inc. All Rights Reserved 4 The Evolution of Outcome-Based Pricing S F C Requires end-to-end control Output-based pricing Outcome- based pricing Seldom in Application Management Only in projects AND . . . The model is still rare!
- 5. © 2015 Information Services Group, Inc. All Rights Reserved 5 Pricing Constructs Prevalence of Outcome-Based Pricing Models Service line Current pricing model Prevalence of outcome-based pricing Other emerging pricing models Application Development Fixed Fees and Time and Material Negligible for ADM only contracts Insignificant, overwhelmingly fixed fees and Time & Material Application Maintenance Fixed Fees A small percentage of contracts have a gain-sharing component Ticket-based application based maintenance is rising but prevalence is still in low single digits ADM/BPO (BPaaS) Combination of Conventional Models – Fixed fees, Time & Material and FTE-based A small percentage of contracts have gain-sharing component linked to business outcomes Transaction-based pricing with the service provider managing most of the underlying apps and business processes
- 6. © 2015 Information Services Group, Inc. All Rights Reserved 6 BPaaS Service Level Methodology With the introduction of BPaaS pricing constructs, the associated Service Level Methodology will evolve, too. BPaaS Service Level Agreements: Service Level Agreement used to define the business’s performance and reliability expectations for the end-to-end processes used to operate and manage core business functions. These SLAs are expressed in business terms and measured in business outcomes. Example: Percentage of health care claims processed without error in predefined time period
- 7. © 2015 Information Services Group, Inc. All Rights Reserved 7 Key Success & Inhibiting Factors for BPaaS Service Levels Factors Supporting BPaaS Service Levels Strong service integration function Obligations shared among providers Clear measurements Achievable Financially reasonable Factors Inhibiting BPaaS Service Levels Ineffective service integration function Disproportional obligations among providers Unclear/subjective measurements Not achievable Unreasonable financial credits
- 8. © 2015 Information Services Group, Inc. All Rights Reserved 8 BPaaS Service Levels – Key Points of Measure Map the Processes Identify the Dependencies Identify Failure Points Define SMART SLAs / KPIs / OLMs Link SLAs / KPIs / OLMs to E2E SLAs Business Outcome Billing Timeliness Process #1 Process #1 Application Database & Middleware Operating System Compute Storage Network OUTCOMES ► Success and accuracy PROCESSES & APPLICATIONS ► Straight Through Processing – Number of re- keying steps, queue pauses processes ► Availability (incl. Change Mgmt.) LOGICAL INFRASTRUCTURE ► Query and procedure call level response ► Service session response PHYSICAL INFRASTRUCTURE ► Availability (incl. Change Mgmt.) ► Utilization & Capacity ► Throughput (Input/Output)
- 9. © 2015 Information Services Group, Inc. All Rights Reserved 9 Introduction to CAST and its role in measuring Service Levels in the Evolving Pricing Constructs
- 10. CAST Confidential Software is Eating the Business Process 10 Map the Processes Identify the Dependencies Identify Failure Points DefineSMART SLAs / KPIs / OLMs Link SLAs / KPIs / OLMs to E2E SLAs Business Outcome Billing Timeliness Process #1 Process #1 Application Database & Middleware Operating System Compute Storage Network OUTCOMES ► Success and accuracy PROCESSES& APPLICATIONS ► Straight Through Processing – Number of re- keying steps, queue pauses processes ► Availability (incl. Change Mgmt.) LOGICAL INFRASTRUCTURE ► Query and procedure call level response ► Service session response PHYSICAL INFRASTRUCTURE ► Availability (incl. Change Mgmt.) ► Utilization & Capacity ► Throughput (Input/Output) Bad software cripples Good processes, yet companies measure everything but the software. PRODUCT MEASURES PROCESS MEASURES Time & Duration Effort & Budget Function & Scope Quality Risk SECURITY RISK PERFORMANCE RISKS ROBUSTNESS – RISK OF OUTAGES MAINTAINABILITY INCIDENTS DEFECTRATES SYSTEMAVAILABILITY PROJECTTRACKING SCHEDULING TIME TRACKING BUDGET REPORTING EARNED VALUE FUNCTIONALTESTING USER ACCEPTANCE TESTS USABILITY
- 11. CAST Confidential Industry standard measures of good software 11 Description Prevent Transferability Determines how easily a new team or team member can be productive when assigned to work on the application SME Dependency, ramp up delays Delivery inefficiency, reduced output Time-to-market delays Changeability Determines how easily and quickly an application can be modified Correction and evolution delays Late delivery of new features Inability to resume services Robustness Determines the risk of failures or defects that could occur in production Operational downtime Application outage Inability to test source code updates Performance Efficiency Determines the risk of performance issues of an application Application Degradation Response time degradation Denial of Service, Logic issues Security Determines the risk of security breaches for an application Damaging Business & Operations Security failures Maintainability (SEI) Determines the cost and difficulty/ease to maintain an application Drifts on maintenance costs
- 12. CAST Confidential 1. Identify outcomes that are critical to the business / business process 2. Map to KPIs / Risk Indices 3. Measure to establish baseline / benchmark against industry 4. Monitor overtime – before software is released into production End User productivity Customers satisfaction Brand equity Uptime / Availability Cycle Time Time-to-market Business agility SECURITY Risk of Failures in Production Risk of Performance Issues Risk of Security Breaches Ease of Modifying and Learning RELIABILITY PERFORMANCE MAINTAINABILITY Constructing Outcome-Based Measures
- 13. CAST Confidential 13 Standard, objective measurement creates visibility Scorecard Service Providers Outsourcer TQI Robustness Performance Security Transferability Changeability TCS 2.59 3.16 2.34 3.01 1.99 2.44 CTS 2.81 2.78 2.78 3.12 2.34 3.03 Wipro 2.59 1.67 3.54 2.98 1.76 2.99 IBM 3.06 3.12 3.11 2.79 3.11 3.15 Amdocs 2.83 2.56 2.88 3.03 2.56 3.11 Infosys 2.90 3.76 2.89 2.97 2.55 2.33 VENDOR VENDOR VENDOR Monitor Performance Overtime VENDOR
- 14. CAST Confidential Product Measures Lead to Cost Reduction and Improved Agility 14 Study of maintenance effort across 20 customers shows tight correlation between maintenance fix tickets and CAST TQI Increase of CAST TQI by 0.24 = decrease in maintenance activity by 50% TechnicalQualityIndex(TQI) 2.2 2.4 2.6 2.8 3 3.2 3.4 3.6 0 50 100 150 200 Ticket Volume
- 15. CAST Confidential Contact Information Pete Pizzutillo p.pizzutillo@castsoftware.com www.castsoftware.com blog.castsoftware.com @OnQuality slideshare.net/castsoftware
Editor's Notes
- The current volume of chatter around outcome-based pricing is a phenomenon common to sourcing and enterprise IT – the conflation of terms, sometimes deliberate Output-based pricing is not the same as outcome-based pricing: Much of what is being called outcome-based pricing is actually output-based per transaction. An example is pricing by test script executed or per resolved ticket. Granted the term ‘output’ is often considered a ‘successful output’. It would probably be a stretch to accurately call such arrangements outcome-based pricing. Outcome-based pricing never happens in application development-only projects: Application development is too far removed from business outcomes for the outcome-based model to work. ISG does not find much evidence of emerging pricing models in application development & maintenance (ADM). The age old fixed fees of time and material models still account for the vast majority of application development contracts. Outcome-based pricing requires end-to-end control: Outcome-based pricing frequently involves both ADM and business process outsourcing (BPO). As would be obvious, business processes better link service provider managed tasks to business outcomes more so than ADM. Typically; the service provider manages both, a multitude of business processes and the underlying system. Naturally, establishing attribution would require control of significant swathes of the processes and systems influencing the outcome. In a few cases, ISG has seen the vendor providing business consulting as well, which goes further down the path of influencing outcomes. The model is still rare: Instances of true outcome-based pricing are rare, accounting for fewer than 10% of contracts involving ADM. This does not imply the number is stagnant or not registering a much higher proportion in the long term. Instead, the number of ADM contracts are low, even among top tier service providers who manage large end-to-end projects comprising both ADM and BPO.
- Factors Supporting BPaaS Service Levels Strong Service Integration Function A mature, functioning Service Integration layer established. Operating processes are clearly defined and fully supported with tools and automation. Obligations Shared Amongst Providers Where applicable, Each Provider (Internal & External) that supports part of the solution that achieves BPaaS SLAs is contractually obligated. Clear Measurements The BPaaS SLAs have clearly defined, repeatable, and non-judgmental measurements established. Achievable The BPaaS SLAs performance levels are achievable with the supporting systems and processes. Financially Reasonable The financial credits for missing the BPaaS SLAs are reasonable when compared to the potential business impact and investments. Factors Inhibiting BPaaS Service Levels Ineffective Service Integration Function A Service Integration layer is only partially implemented, or is otherwise ineffective. Operating processes are not clearly defined, implemented, and executed. Disproportional Obligations Among Providers Providers (Internal & External) are not equally and clearly contractually obligated to achieve the BPaaS SLAs Unclear or Subjective Measurements The BPaaS SLA measurements are not clearly defined, agreed to and repeatable. Not Achievable The BPaaS systems and operations cannot be reasonably expected to achieve the defined performance expectations. Unreasonable Financial Credits The financial credits are too high in comparison to potential business impacts and investments made in end-to-end supporting systems and processes.
- SLA’s should be business outcome focuses SLA’s should be objective, measureable, forward looking and automated SLA’s should be based on Industry Standards Metrics should be actionable: Stimulate conversations between buyer/seller Trigger additional investigations Trigger change in process or product
- Capgemini