A lot has been written about the watermelon effect in outsourcing, the phenomenon that occurs when SLAs look good (green) on the outside, but on the inside they’re actually problematic (red). How can CIOs and other IT executives avoid this problem? What are the strategies that help companies understand and evaluate SLAs so they can reach more agreeable terms with suppliers? In this blog post we’ll explore the root causes of the watermelon effect and discuss strategies to help avoid problems.
Understanding the root cause of watermelon effect
The watermelon effect generally occurs for one reason: poorly-defined metrics. Companies often have contract relationships with SLAs that are tracked monthly with certain goals and penalties if those goals are missed. In many cases, suppliers meet the defined SLA targets but still aren’t able to meet business objectives. Reports might look good, but senior management is still getting negative feedback from customers and users. This can be career-threatening for CIOs. Companies are continuing to rely on using industry standard metrics to evaluate contracts, but it just isn’t working.
Measuring based on business value
In order to solve the watermelon effect, companies need to change the paradigm for SLA metrics. Rather than only considering traditional specifications like responsiveness to incidents, component availability, and service restoration, consider each element in terms of how it affects the business. This will allow companies to measure based on factors that have a real effect on business goals, allowing them to come to more effective agreements.
• Don’t just use industry standard metrics – Industry standard metrics are important, but they aren’t enough. It is important to develop metrics to suit each individual company’s unique business needs. But be sure newly-defined service levels are realistic and measurable. Identifying more relevant key performance indicators to spot trends is critical to successful supplier agreements and to the company.
• Stay proactive – All companies should regularly evaluate their SLAs to ensure they are helping identify trends, problem areas and accurately reflect business realities. When it’s time for new contract negotiations, this information can then be used to develop stronger SLAs.
• Implement governance structure – A strong governance structure for managing SLAs is important. By building dedicated frameworks for analyzing SLA performance, creating new metrics, and negotiating contracts, companies can help ensure that performance remains strong. This can normally be accomplished using existing contract management or service management staff.
• Examine contracts holistically – By including IT, business leaders, and other departments during contract development and negotiations, company collaboration can help ensure that agreements meet the needs of the whole company.
• Be more aggressive – Many companies are simply too passive when it comes to drafting contracts. All organizations should strive to fully understand what is being agreed upon and to ask for the provisions they need to meet business objectives. Clearly define each metric, the measurement data sources, tools, calculation, frequency and business priority weighting.
Negotiations with suppliers are a primary part of the IT organization’s role in a company and should be treated as such. It’s time to develop better ways to work with the business and address problems with SLAs. Smash the watermelon effect by defining and measuring SLAs based on their ability to meet business objectives – that is a true value of IT.
Learn more about Wavestone US’ Outsourcing Advisory services at http://www.wavestone.us/capabilities/outsourcing-advisory.
Have a Question? Just Ask
Whether you're looking for practical advice or just plain curious, our experienced principals are here to help. Check back weekly as we publish the most interesting questions and answers right here.