We’ve all used KPIs and SLAs before (or at least talked about them). They are part of our everyday vocabulary. In fact, many of us have used them to the point where we have forgotten what they even stand for. (Hint: Key Performance Indicators and Service Level Agreements… not that you needed reminding). Sure, we understand that when we discuss KPIs and SLAs, we are discussing vendor performance, but for many of us, that is where our understanding comes to an end.
SLAs define expectations
Service Level Agreements are expectations that are set between a client and a vendor. Usually, these are specified in the initial statement of work. They are essentially agreements about the level of service that can be expected to be delivered. For example, when you hire somebody to work on your house, you set up certain expectations about the quality of work, the schedule, and the estimated costs. Depending on the type of contract you set up, these agreements may or may not be binding. Setting these expectations upfront allows both parties to start the relationship knowing what is expected of them and what they can reasonably expect from the other party.
KPIs measure performance
Key Performance Indicators are the measures that are defined between a client and a vendor (or sometimes, simply imposed upon the vendor by the client) that must be met to measure how well the vendor is doing. Think of it like a report card that indicates how you are performing in key areas. These are objective measurements that will highlight areas where vendors are under-performing. A KPI for the handyman working on our house could be that he finishes on jobs on time according to the schedule you have defined. This is something that is easily measured and reported on (did he finish on time, or not?) and can be used to assess how well of a job he is doing.
Where it gets confusing is that sometimes there is an overlap between KPIs and SLAs. Indeed, most KPIs start out as SLAs. When you begin an engagement, you define the SLAs that are important to you. Then, you define KPIs to help you measure how well you are doing. KPIs measure how well you are meeting expectations.
Not as common as you may think
In theory, it is reasonable to think that KPIs and SLAs are a common business tool. In reality, though, you may be surprised about how infrequently they are actually used. Nimdzi consultants work with clients on the buyer and vendor side daily. We found that defining and tracking key metrics was a common topic of our consulting engagements. This surprised us, so in order to understand this better, we conducted a survey. Buyers and vendors alike were asked if they currently have defined SLAs and/or KPIs for their key business relationships.
The results of the survey show that over one-third of vendor-client relationships do not have any formal agreements in place for measuring performance. About 22 percent of respondents were not sure whether they had any KPIs or SLAs in place. If nobody knows about the KPIs, then a strong argument could be made that they are not being used effectively. This means that only 40% were actively using metrics to either set expectations through service level agreements or to measure current and past performance through key performance indicators.
The importance of meaningful metrics
Whether you are negotiating SLAs into a new contract or reporting KPIs during a quarterly business review, reporting meaningful data is crucial. Data helps us make better-informed business decisions and avoid costly mistakes. But everything comes with a cost. Although much can be automated, there is always some effort involved with tracking and reporting data.
Make sure to define meaningful metrics that you want to track. Avoid “vanity metrics” whose only purpose is to show off how much data you have. Those only lead to information overload. This is why KPIs are called KEY Performance Indicators. They should, as the name suggests, indicate key information about your performance, and ideally provide some insight into how that performance could be improved.
Put your data to work today
If you are not already tracking and reporting on key data, you can check out our Insight Report on running Quarterly Business Reviews and creating simple real-time data dashboards. As always, you can reach out to the experienced team at Nimdzi if you have any questions about how you can start putting your data to work today.
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