November 2009

The Impact of Poor Performing Service Providers on a Credit Provider

Service level agreements are most often unrealistic and the credit provider does not have a method of measuring performance or progress on a timely basis. Credit providers must know why they are in need of a specific service, have realistic expectations of performance, have strong service level agreements and implement excellent tools to measure and proactively react to performance vs. their service level agreements.

Please find two examples below of the impact poor- or underperforming service providers can have on a credit provider:

• An IT Company did not repair the credit provider’s business computer within the agreed time according to the service level agreement. The credit provider’s workload will increase due to the computer that was not repaired within the agreed timeframe.
• A Debt Collector agency did not collect outstanding loan payments from consumers within the agreed time as stated in the service level agreement. The credit provider paid the commission to the Debt Collector Agency although not all the outstanding loan payments were collected which means that the turnaround time decreased as the loan payments will only be received later than the stipulated date in the service level agreement.

Cost Implications of Poor Performing Service Providers on a Credit Provider

Poor- or underperforming service providers have a negative impact on a credit provider’s company revenues and downtime. As with downtime, there is a negative impact on a credit provider’s business either through lost opportunities (customers or orders turned away), or through lost revenue. If a loss was due to downtime, a remedy would be immediately implemented, but for poor performance, without a strategy to identify and correct the decline, the impact on revenue might go unchecked indefinitely.

Over-delivering services does not immediately sound like a problem, but in actual fact it is. Over-delivering on committed service levels, perhaps defined within the service level agreement, almost always means that you are under-delivering somewhere else and/or you are spending too many human, technological or financial resources on that particular service. Over-delivering can be just as costly as under-delivering.

Thus, it is not only important to ensure that you are meeting your service obligations, but also that you are not substantially over-exceeding your service delivery commitments to the detriment of other services or wasteful budget resources.

It is important to be aware of certain constraints (e.g. increase in workload, electricity failure, delay in public transport, etc.) that will affect the performance or punctuality of service delivery when drafting a service level agreement.

CASE 1: POOR SERVICE DELIVERY

PC World supplies computers and information technology to organisations. They supply CreditCor, a credit provider, with personal computers and provide a networking service as well.

CreditCor experienced an electricity failure at 10:00am on a Tuesday morning. When the electricity came back on after 30 minutes, one of CreditCor’s computers did not function at all. They contacted PC World to attend to the problem within one hour as stated in their service level agreement as they had to continue to grant loans, but could not do that without the computer.

At 12:30pm a consultant from PC World entered CreditCor’s office to attend to the problem. He attended to the problem 2 hours later than he was suppose to. A CreditCor client who wanted to apply for a R3 000 loan was not happy about the situation at all. In fact, he told the loan officer at CreditCor that he will never make use of the company’s services again.

CreditCor’s loan officer, who earns a salary of R5 000 per month (R31.25 per hour), could not perform her daily duties and was 2 hours behind her scheduled duties for that day. CreditCor contacted PC World to arrange a meeting as services were not delivered according to the agreed standard that is stipulated in the service level agreement and had to address the issue.

Remedies for Breach of Contract

In the case of breach of contract by the service provider, a credit provider needs to act quickly and take actions which should have been specified in the service level agreement.

Depending on the degree of underperformance of the service provider, the parties to the service level agreement can decide and agree on different ways to address any performance issue whether it is through legal action or issuing warnings to the service provider.

Upon breach of contract the parties have two options:

• Either keep the contract alive by claiming specific performance and compensation for any damage caused by the breach; or
• Alternatively the contract may be terminated and claim compensation for any damage caused by the breach.

These are the legal options in the case of a breach of contract:

• Specific Performance

This means the court orders the guilty party to do what was promised according to the service level agreement. For example, the court orders an IT company (service provider) to finish repairing the credit provider’s computer. Sometimes the court will not order specific performance. This will happen in these cases:

• If it is impossible for the guilty party to do what was agreed on
• If paying money is a better way of compensating the innocent party
• If it would be unreasonable or unjust to make the guilty party carry out the service level agreement

If the court orders the guilty party to carry out the service level agreement, then the party must do this. If the party does not do what the court orders, he or she will be in “contempt of court.” The party could get a fine or a prison sentence.

• Interdict

Any party can get an interdict from the court against the other party who broke the service level agreement. An interdict is a court order which prevents the guilty party from doing something or orders the guilty person to do something.

• Damages

Instead of cancelling the agreement, the innocent party can decide to sue the other party for damages. This means that any party can claim money if he or she has lost out in any way because the service contract was broken.

• Cancellation and damages

One party can cancel an agreement if the other party has not carried out an important part of the service level agreement. Once the agreement is cancelled nobody has to carry it out. The innocent party can also sue for damages.

Implementing the Identified Remedies

Understanding what the parties want is an essential part of delivering excellent services and products. This is complicated because in some cases:

• The credit provider may only have a simple idea of what they want; or
• The credit providers are reliant on the expertise of the service providers to advise them.

The service level agreement must nominate the approach how requirements will be managed and how changes to the requirements during the course of the service relationship will be handled.

The identified courses of action should be implemented according to the legal obligations (e.g. the terms and conditions of the service level agreement, applicable legislation, capacity to enter into an agreement, etc.) and the credit provider’s organisational requirements.

When the credit provider prepares to negotiate, develop and manage a service level agreement with a service provider, it is very important that it follows the proper steps in preparing to negotiate, negotiating the price, drafting and developing service level agreements, and developing processes to manage the agreement in detail.

If the credit provider does not follow the proper steps, the service agreement may fail, the relationship with an important service provider will be strained, and most importantly the whole process will be needlessly expensive.

For more information, please contact Compuscan Academy at 021 888 6000 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Alternatively, visit the website at www.compuscanacademy.co.za