In the last article of this outsourcing series, I will be offering some tips based on my experience and identifying some definite traps for the unwary, in dealing with many of the key outsourcing agreement provisions not addressed in the previous articles. Because failure to properly address some of these issues may favor the service provider rather than the customer, some of the following suggestions may appear biased toward the customer, but the intent here is to illuminate the issues.

Service Levels

Parties often spend significant time negotiating minimum measurable service levels and the financial penalties for a service provider's failure to meet them. From the customer's perspective, I will note two traps for the unwary. First, you can have too many service levels, which dilute the focus of the parties and also reduce the financial penalties available for any one particular breach. The better practice is to have a more limited number of meaningful service levels. I often suggest to customers that they seek the “meta” service levels that cover as comprehensively as they can what the customer and its users actually value. Second, customers are regularly surprised by how small the penalties actually are for failure to meet the service levels. The reason for this surprise is that the service level schedules commonly used in the industry involve a series of formulas involving at-risk amounts, allocation percentages, pool percentages and other variables that, in my view, unnecessarily obscure the facts. A detailed explanation of service level credit calculations is beyond the scope of this article, but my bottom line advice to customers is to run the numbers so that you know (and can then intelligently negotiate) the actual dollar amounts that will be credited upon a service provider's failure to meet your critical service levels.