Introduction

Total Quality Management

Total Quality Management (TQM) is a subject that has been studied widely, across a number of management disciplines and from a number of different perspectives.  The history of the concept has been told before – in the 1940s, World War II had ended, leaving the US as the world’s manufacturing superpower.  Japan had been defeated and its industry was struggling to recover.  There, in Japan, management thought leaders or “gurus”, particularly Joseph Juran and W. Edwards Deming, found a receptive audience for their ideas.  Their work, together with the work of authors such as Feigenbaum, Ishikawa and Crosby, is credited by most literature as being the foundation of the TQM movement (Benjamin and McAndrew, 2005).

The concept of TQM evolved through the ideas and writings of those management authors and others.  Each author had their own emphasis and sought to define TQM in different ways (or, in some cases, by using their own terminology, but with analogous meaning).  The ideas of these authors also influenced the meaning and concept of “quality” as it is expressed in the criteria used to award various Quality Awards, such as the Deming Prize, the European Quality Award or the Malcolm Baldridge National Quality Award.  These awards are only granted to organisations that go through a rigorous and demanding application procedure, designed to recognise excellence in achieving “company-wide quality control” and pursuing quality improvements.  Likewise, the concept of TQM has also found expression in “quality standards” such as BS7850-1 and ISO9000 which have been widely adopted by organisations around the world (Slack et al., 2009).

It is beyond the scope of this article to review or describe each author’s opinions, each Quality Award and each quality standard, in the detail that is required to understand fully the source and evolution of each constituent idea of Total Quality Management.  Instead, it is sufficient to extract certain recurring themes of TQM which might be relevant to an understanding of Service Level Agreements. 

TQM has a strong focus on identifying and measuring customer requirements so that “quality” can be defined in such a way as to satisfy, or even “delight”, the customer.  Rather than relying on vigorous inspection to get to this quality outcome, TQM emphasises “prevention rather than cure” – solving the causes of the underlying quality problem, rather than trying harder to find the resulting defects.  TQM also seeks to instil within the organisation a culture of continuous improvement of products, processes and services and taking action when standards are not met.  More specifically, and very relevantly for our purposes, TQM makes reference to the importance of partnership with suppliers to pursue quality objectives together.  Finally, it is often said that TQM requires a management-led, top-down commitment to quality.

Supply Chain

TQM, as a management philosophy, emphasises the need to improve quality throughout the organisation.  However, organisations rarely exist or operate in isolation.  Products and services are generally supplied to consumers as the final stage of a supply chain or supply network.  An organisation that acts as a supplier to an end-customer is, at the same time, a customer to other organisations from whom it is supplied with goods or services.  This can be taken further and different parts of the same organisation can be seen as either customers of, or suppliers to, other parts of the organisation. 

At the heart of operations management theory is the concept that an organisation’s activity can be explained by an input-transformation-output model (Foster et al., 2011).  This implies that the quality of an organisation’s output can only ever be as strong as the quality of its inputs.  Likewise, such a model emphasises the need to look beyond internal operations and focus on the organisation’s external linkages with other organisations in the supply chain – termed by Foster et al. as “externalisation”.

Slack et al. define supply chain management as:

the management of relationships and flows between the ‘string’ of operations and processes that produce value in the form of products and services to the ultimate consumer. 

(Slack et al., 2009)

Adding to this definition, Slack et al. identifies five separate performance objectives for a supply chain – quality, speed, dependability, flexibility and cost. As we will see, Service Levels Agreements are a tool which assists in the “management of relationships” in the supply chain (between supplier and customer); in particular by defining which objectives will be pursued by the parties in the relationship.

Service Level Agreements

One important tool used in the supply chain, where services are being provided from one organisation to another (and sometimes from one part of an organisation to another part), is the Service Level Agreement (SLA).  A growing reliance on the use of SLAs has been identified and has been linked in particular to the increase of the use of outsourcing relationships (Beaumont, 2006).  Whereas physical goods are tangible and their quality can be easily inspected and objectively measured, services are intangible and so often can be more subjective, nebulous and therefore difficult to assess.  Nevertheless, the provision of a quality service to a customer can be a critical part of that customer’s ability to provide a quality product or service to its own customer.  An SLA is one tool that can be used to define services, measure results and improve service quality.

This paper therefore seeks to evaluate the utility and relevance of Service Level Agreements in the contemporary business environment, with a focus on supply chain activities.  In particular, service level agreements will be analysed from a Total Quality Management (TQM) perspective. 

A closer look at Service Level Agreements

Service Level Agreements have been defined as:

Formal definitions of the dimensions of service and the relationship between suppliers and the organisation.

(Slack et al., 2009)

Similarly, another definition has been given that adds another element:

A service level agreement (SLA) is a contract that defines services that the vendor will provide to the client and specifies ‘meta-data’: information about the agreement itself.

(Beaumont, 2006; emphasis added).

On a simple level, an SLA can therefore be seen to be a contract, agreement or other documented expression of intent between the “service-provider” (or other terminology may be used, such as “vendor”, “supplier” or “contractor”) and the “consumer” of that service (or “customer”, “user”, or “purchaser”) in which document a service is defined or codified. 

Such agreements have been described as formal (Karten, 2004; Slack et al., 2009) or informal (Parish, 1997), a discrepancy which might be explained by the context in which the agreement is being deployed.  Furthermore, the SLA can be put in place between discrete organisations (i.e. legally distinct corporate entities) or can be used as an internal tool, between departments or divisions of the same organisation.

SLAs have also been described as the instrument by which Service Level Management (SLM) is enforced (Sturm et al., 2000).  In an IT context, Service Level Management has been defined as the:

Disciplined, proactive methodology and procedures used to ensure that adequate levels of service are delivered to all IT users in accordance with business priorities and at acceptable cost.

(Sturm et al., 2000)

It is submitted that this definition can easily be widened to encompass the provision of services not just to IT users, but to any party who forms the customer half of a supplier-to-customer service relationship.  This definition is useful, in that it emphasises business priorities and acceptable cost – consistent with a customer-based or customer-orientated view of quality.

In fact, a large proportion of the literature on SLM does appear to derive from, or to be based on the experience of, the IT sector.  This is consistent with the fact that SLM is an “essential” or “fundamental” aspect of outsourcing (Beaumont, 2006).  There has been a particular growth of the outsourcing phenomenon in the IT sector, where the advance of technology has allowed what was previously an in-house business operation to be conducted by an external service provider, often, but not necessarily, at a geographically remote, and usually lower cost, location. 

However, the principles of SLM can be applied to any service relationship and not just those which form part of an outsourcing relationship (in the sense of previously in-house business operation having been externalised).  For example, this author has practical experience of the use of SLAs in a traditional food sector supply chain context, in which service levels are defined around correct and accurate invoicing, “delivery in full on time” (DIFOT) where the agreement also defines what is “in full” and “on time” and health and safety key performance indicators (KPIs) such as “vehicle accident rates per location”.

The role of Service Level Agreements in pursuing Total Quality Management in the Supply Chain

Defining what is quality

The fundamental role of an SLA is to define what services will be provided by the supplier to the customer.  The SLA is therefore an expression of what the parties regard to be a quality service – if quality is “a consistent conformance to customers’ expectations” (Slack et al., 2009), then the SLA defines those customer expectations.

Quality can be defined differently – one classification has been proposed as set out in Figure 1:

Quality Characteristics
Functionality	How well the product or service does its job, including its performance and features.
Appearance	The sensory characteristics of the product or service: its aesthetic appeal, look, feel, sound and smell.
Reliability	The consistency of the product’s or service’s performance over time, or the average time for which it performs within its tolerated band of performance.
Durability	The total useful life of the product or service, assuming occasional repair or modification.
Recovery	The ease with which problems with the product or service can be rectified or resolved.
Contact	The nature of the person-to-person contact which might take place.

The process of negotiating an SLA requires the customer’s expectation of service to be made explicit in an agreed specification, aligned with the specification that the supplier is willing to provide for the price.  As such, SLAs assist suppliers in gaining a better understanding of customer needs (Parish, 1997).  Adopting a ServQual approach to service quality, or a “gap model of quality” analysis (Zeithaml, 1988; Slack et al., 2009), SLAs have a role in defining service quality and so narrow the gap between the customer’s expectation of service and the supplier’s specification of quality. 

The SLA criteria will reveal to the supplier those quality characteristics that the customer prioritises most (Desai, 2010).  Any pattern of incentives and bonuses or penalties will act as a signal to the supplier as to where to focus its resources, time and energy.

In fact, the discipline of agreeing service levels may have an educative function for the customer itself – requiring the customer to consider the trade-off of costs and benefits in selecting the service level it requires to achieve quality in its operations (Beaumont, 2006 citing Sturm et al).  The exercise may also lead the customer to scrutinise its own procedures to see if they require updating in light of new technology or changed market practice.

Continuously improving service quality

The agreed criteria for defining quality and the objective measures of performance form the basis for future improvement (Parish, 1997).  Monitoring of the service provision (possibly for the calculation of bonuses or penalties) also provides data which gives insight into areas for improvement.  SLAs often contain a mechanism for performance review meetings and urge service levels to be revised upwards to reflect the implementation of better quality practices within the organisation and across the linkage between organisations, thus adding to continuous improvement.

Top-down management commitment

Parish also identifies a softer benefit, in that where SLAs are authorised by senior level management, there is a commitment to the agreed quality service levels and the deployment of corrective action if those levels are not reached – consistent with top-down management in TQM.  The involvement of the supplier’s personnel in the process also serves to raise quality awareness and customer orientation (Parish, 1997).

Problems with Service Level Agreements

It therefore appears clear, from the preceding section, that the functions served by SLAs accord with, and have a role to play in, the pursuit of Total Quality Management objectives.

However, having established that SLAs have a relevant role to play in advancing a TQM agenda, between organisations in a modern supply chain, it is important to consider the disadvantages of SLAs and the ways in which SLAs may be improperly used.  These factors have the ability to undermine the utility or effectiveness of SLAs in achieving the organisation’s quality objectives.

Business as usual

Beaumont observes that there may be “euphoria” on completion of a contract, quickly followed by “disillusion” when parties then have a different interpretation or ignore the spirit of the agreement (Beaumont, 2006).  This is consistent with the author’s own experience of dealing with managers tasked with negotiating a contract with a customer.  Frequently the message is: “this is the contract we have to sign to win the tender and satisfy the customer, but this is not how they and we will deal with this issue in practice”.  

The risk is that the SLA and day-to-day practice become divergent.  One author describes this risk as being the SLA being replaced by an “unofficial understanding” between the parties (Desai, 2010).  In such cases, the SLA can cease to be a tool to measure service and improve quality.  Instead, it sits “in the bottom drawer” until such time that one party wants to change the nature of, or even to terminate, the relationship (perhaps due to cost pressures or a change in the personnel who hold the knowledge of the “understanding”).  The SLA then becomes a weapon to be deployed by the party seeking change, by threatening to insist on full performance, by seeking recompense for the divergent performance or by claiming for breach of contract. 

This risk can be mitigated through an acknowledgement by both parties, at the contract formation stage, that both parties intend the SLA to be a long-term investment in improving quality – on both sides – and therefore it is worthwhile investing time in ensuring that the SLA reflects how both parties intend to operate the relationship. 

Likewise, to get the most value out of the investment in an SLA, it is important that there is active use and management of the SLA during its currency. This could include making use of performance review meetings, monitoring performance criteria and revising where appropriate and agreeing and implementing process improvements aimed to improve the service quality.  Effectively, it requires an understanding that completion of the SLA document marks the start of the service relationship and that implementation of the contract is more important than negotiating its terms.

Different tasks, different people

Building on the preceding paragraph, Beaumont also identifies another phenomenon which exasperates the problem – being that often “able” or more senior executives are involved in negotiating the agreement, but that they then move on to other responsibilities once the agreement has been signed (Beaumont, 2006).  Responsibility for the operation of the agreement is handed over to other managers, despite them not being aware of the tacit agreements or assumptions that were made during the negotiation process, or points that were fought over, that were regarded as crucial or as being concessions won or granted (Desai, 2010).  The new manager may take a literal view, not understand the document or even not make themselves aware of each party’s responsibilities. 

This problem could be resolved by involving in the negotiation of service levels and contract terms those managers who will have to operate and “live with” the agreement.  Where there must be a handover, another useful strategy (Desai, 2010) is to have a written summary or presentation prepared by the “negotiation” team to hand over effectively to the “implementation” team.

Service level management is a “cost of quality”

The negotiation, implementation, monitoring (including auditing and performance review meetings) and re-negotiation of service levels are both complex and a significant investment of management time (Parish).  This investment of time has obvious actual and opportunity costs.  These costs may make it initially unattractive to the organisation to invest in the process. 

One approach to measuring overall quality is the “costs of quality” model, whereby quality is assessed as a function of costs incurred – usually categorised as prevention costs, appraisal costs and internal and external failure costs (Slack et al., 2009).  For current purposes, prevention costs are the most relevant – these being costs which are incurred to try prevent the service failure happening in the first place.  It can be seen that the time invested in service level management can be categorised as a cost of quality, as the very purpose of the SLA is to ensure that the service provided to the customer satisfies the customer’s requirements.

Slack et al. note that the traditional cost of quality model seeks to find an optimum-quality level, trading off the cost of errors (internal and external failures) against the costs of quality (prevention and appraisal), but that TQM rejects the idea of an optimum-quality level and instead seeks to reduce all failure costs.  However, even under TQM, prevention costs remain high.  The cost of service level management is a part of the prevention costs aimed at “getting it right first time” (Slack et al.).  The benefit is that failure costs are systematically reduced and eliminated – reducing the total cost of quality for the organisation in the long term. 

Keeping it simple

One author, writing in an IT context, has described the tendency of organisations to “overcomplexify” service level agreements (Karten, 2004).  Examples are given:

• Managers not being able to settle an agreement as they get bogged down in detail.
• Documents are agreed but then not used as they are perceived as tedious, long, overly detailed, difficult to read or full of legalese.
• Managers seek to measure too many performance indicators or the wrong indicators.
• Different business units or teams adopt inconsistent processes and formats.

Any of these problems would each undermine the usefulness of SLAs as a quality tool within that organisation.

Lack of flexibility

Beaumont notes that there is a lack of flexibility inherent in signing a fixed-term contract (Beaumont, 2006).  It is true, that from a customer’s perspective, a fixed-term contract removes or limits the ability to go to another supplier for the same services during the currency of the contract.  However, a well planned and constructed SLA will have sufficient flexibility built into its terms to deal with foreseen changes in the relationship and will have provisions to deal with unforeseen developments.

It should also be noted that, in pursuing quality objectives, one of Deming’s 14 principles of Total Quality Management was:

End the practice of awarding business on the basis of price tag. Instead, minimize total cost.  Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.

(Deming, 1986)

Under this philosophy, any disadvantage through a lack of flexibility from a fixed-term contract should be outweighed by the advantage of being able to work with a single supplier to establish a deeper relationship, on a long-term basis, so as to minimise total cost.

Bureaucratization

Parish identifies a separate problem – that, after early success, service level agreements may be zealously adopted for numerous other processes throughout the business.  However, those processes may already be adequate to satisfy the needs of the customer (whether internal or external) and therefore adoption of an SLA incurs a disproportionate cost (Parish, 1997).

Inappropriate contract terms – transactional versus partnership relationships

One party may seek to use a template Service Level Agreement, designed to pursue quality objectives.  However, sometimes rights or clauses of the agreement contradict a focus on a long-term quality agenda.  For example, this author has seen SLA documents that urge upon the supplier a commitment to continuous improvement (perhaps through requiring service levels to be reviewed upwards during the contract term).  This would be consistent with TQM.  However, at the same time, an SLA may have provisions that are inconsistent – for example:

• Clauses which give a right for the customer to terminate the agreement “for convenience” on a certain notice (and not just because the supplier has failed to perform).
• Meet-the-market clauses – in which the supplier must commit to continuing to offer “best-in-market” pricing.

Both parties should be clear whether the purpose of the process to establish their Service Level Agreement is, on the one hand, a long-term mutual commitment to pursuing quality objectives (termed by Slack et al. as a “partnership” relationship), or on the other hand, a simple tender exercise in which the customer seeks to extract the best terms from the supplier (termed by Slack et al. as a market-based “transactional” relationship) (Slack et al., 2009).  

Each type of relationship has a place in a supply network but an SLA is best suited to the partnership approach.  An SLA is not appropriate where services are short duration or non-recurring (Desai, 2010). The parties must determine which relationship is appropriate for their current requirements and the provisions of the contract should reflect this mutual purpose accordingly.

Conclusion

The analysis of Service Level Agreements in this paper has shown what they are, but more importantly, why they have a greatly useful and relevant role to play for organisations in the contemporary business environment, by advancing quality improvements across linkages with other organisations in the supply chain. 

To maximise the potential for quality improvements, it is also necessary to be mindful of knowing where and when it is appropriate to deploy the SLA as a quality tool.  This requires recognition of the benefits that SLAs can bring to the organisation and its supply chain, but also of the costs associated with their use, particularly in terms of management time. 

Once the decision to use SLAs has been made, it is necessary to know how to use SLAs.  Building on the experience of other managers in using SLAs (and avoiding the various traps and pitfalls identified in this paper) will contribute to the usefulness of the SLA for any organisation that seeks to pursue its own journey towards achieving Total Quality Management.

References

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Benjamin Osayawe Ehigie, Elizabeth B. McAndrew, (2005). “Innovation, diffusion and adoption of total quality management (TQM)”, Management Decision, Vol. 43 Iss: 6, pp.925 – 940

Desai, Jimmy (2010). Service Level Agreements: A Legal and Practical Guide, IT Governance.

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