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The Benefits of Setting Service Level Agreements

By Mark Beairsto

When measuring operations performance in today’s competitive landscape, leading organizations align their balanced scorecards to what drives value in the eyes of its customers; Cost, Speed, Quality and Service.

Customers value shorter delivery times or faster service, so organizations measure the cycle time of a process. They value low prices, so businesses optimize the productivity or cost of their inputs. They value quality products and services, so managers measure error or defect rates. Finally, customers value dependable and consistent service, thus requiring businesses to measure and improve the reliability of their process.

An excellent way to measure service is by establishing Service Level Agreements. A Service Level Agreement (SLA) is a commitment a service provider makes to their customers, to meet a standard service performance. The Service Level is then a measurement of current performance in comparison to the set standard performance.

For example, Domino’s Pizza has established an SLA by committing to their customers that they will deliver your pizza within 30 minutes of your order time. They measure their Service Level as “Delivery on Time %” or percentage of orders that are delivered within 30 minutes. They publicize this Key Performance Indicator on their annual report.

Setting a reasonable SLA allows the business to manage the tradeoff between cost and speed. Once the SLA is established, managers can then optimize their cost structure and manage their capacity to meet the service level.

Not only does establishing SLAs allow you to track service performance within your process, but it also reduces the level of uncertainty the customer has with the process. Very rarely does one see people worried or constantly checking on their pizza orders. This is because they trust Domino’s has committed to their SLA.

This blog was written by Mark Beairsto, Consultant at Trindent Consulting. He has experience improving the efficiency and effectiveness of organizations in the healthcare, energy and financial services industries.