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Cost and Efficiency Reviews

As part of the service levels provided by the supplier to the customer, a common requirement is that the supplier provide cost and efficiency reviews of the services being provided and for the supplier to make recommendations to the customer for reducing the cost of the services. These recommendations can include methods to efficiently utilize resources chargeable to the customer including:

■ tuning or optimizing the systems used to perform the services;

■ using and analyzing the results of predictive modeling, trend analysis, and monitoring tools;

■ analysis and isolation of application and infrastructure design, configuration, and implementation flaws;

■ recommending aligning technology processes, tools, skills, and organizational changes with the customer’s business requirements; and

■ employing new technologies in use by the supplier to replace existing technologies used by the supplier to provide the services, even if the use of such new technologies will result in a reduction in monthly revenues to the supplier under the agreement.

In addition to the requirement to provide cost and efficiency reviews, suppliers are commonly required to include in their annual recommendations employment of new technologies (generally those that are made available by the supplier to its other customers for a specified period of time) to replace existing technologies used by the supplier to provide the services to the customer. If the customer can demonstrate that employment of such new technologies would result in a reduction of the fees for the services and if the customer elects to implement such new technology in accordance with the agreement, then the customer would commonly be entitled to a credit off of any fees associated with the implementation of such new technologies by the supplier.

Continuous Improvements to Service Levels

While the parties will agree to certain service levels when an agreement is signed, service levels tend to improve over time, and a mechanism should be included in the agreement to ensure that the service levels can be updated to reflect the levels of service that are being provided by the supplier. For example, if a supplier is providing a service availability service level of 98%, but consistently for six or nine months the service availability has been 98.9% or more, the customer has a strong argument that the service level should be increased to reflect the actual level of service that is being provided by the supplier, not the service level initially agreed to by the parties. Tire agreement should describe a process for implementing new service levels based on supplier performance. For example, the parties could agree that a service level measurement standard could be adjusted to the average of the highest nine months of actual service level results achieved in any twelve-month period if such average exceeds the then-current agreed-upon service level. While suppliers are commonly willing to implement such a process, suppliers will frequently want to cap service level increases. For example, with an availability service level, a supplier might implement a cap of a high percentage availability. Or, for an availability service level, the parties could agree to a formula such that, for example, no service level will be increased more than 20% of the difference between 100% and the current service level.

Whatever the parameters, it is important for the parties to recognize that in most transactions that involve services levels, certain service levels are not meant to remain stagnant over the life of the contract. Instead, the parties should work together and implement processes to modify the service levels over time to reflect the actual levels of performance being provided by the supplier.

Termination for Failure to Meet Service Levels

While one or a few service level failures over time will result in a performance credit or other remedy available under the agreement, repeated service level failures can have a significant impact on the customer, and the value of the services provided can so significantly decline that the services no longer support the customer’s operation or have value to the customer. Perhaps, too, for the fees being paid by the customer, the diminished service being provided results in the customer paying inflated prices.

A termination right may arise if the supplier consistently fails to meet the service levels. For example, a termination right might be appropriate if the supplier fails to meet the same service level for three consecutive months or for three months in any six-month period. In agreements in which there are both critical service levels (which commonly have higher performance credits and remedy obligations and are typically reserved for the most important services being provided by the supplier) and key performance indicators (which often carry reduced or no performance credits and are typically reserved for more routine business processes that do not impact mission critical processes), termination rights for failure to meet the service levels may differ. For example, it might be appropriate for the customer to have a termination right if the supplier fails to meet a critical service level for three consecutive months, whereas it might be appropriate for a customer to have a termination right if the supplier fails to meet a key performance indicator for six consecutive months. Due to the difference in severity and impact resulting from missed critical service level and key performance indicators, the termination rights are likely to be more aggressive with critical service levels.

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