Over the past 15 months, the VAR community has experienced many changes - none with implications more profound than the increasing shift towards "service" business models: ISP, ASP, or the more generic xSP. Certainly, VARs need to think about providing services. Service margins are much greater than those obtained through product sales; and service is recurring revenue. By combining a service business with an agent sales model, the VAR can limit up-front financial investment. But there are also some risks to think about.
The biggest risk is setting up a service business that eats its own tail: becomes unmarketable, unprofitable, top-heavy, or exposes you to unpredictable liability. Avoiding this fate requires vision, expertise, and honest number crunching - resulting in a realistic, rigorous, and detailed business plan. The exteriorization of this business plan - if you will, the "API" you present to customers - is equally crucial: an effective service level agreement (SLA).
A contract, the SLA has an explicit legal purpose - to define, enumerate, and qualify services to be provided, and to dictate quality guidelines and methods used to certify compliance. The SLA will also state the normal term of the agreement, and articulate procedures for making good, resolving disputes, and (in a worst case) achieving a clean exit for one or both parties.
For legal reasons alone, an SLA should be an exercise in clarity. But in designing an SLA, more is at stake than simplifying negotiations or establishing rules of order and due process. You (and your technical, business, and legal advisors) should also treat the SLA an up-front opportunity to manage (even dictate) customer expectations.
Peter Mittler of Microset Systems Inc. (Scarborough, Ontario - 416-283-4949) feels that managing customer expectations from the outset is a key goal of his company's successful web-hosting business. "Our website is mission critical and we have experienced a 99.9% uptime over the past three years. But our agreement guarantees 99% uptime." By setting a reasonable quality metric, Microset leaves itself some wiggle-room.
The SLA is also a chance to educate customers about the details of the service you are providing. Frequently, customers seek an "outsourced" or xSP solution because they don't have the resources or expertise to manage an application in house - they want to stop thinking about technology. Your job (both in composing the SLA and in planning other methods and collateral for client service) is to help them think about technology, better: to structure and package your service so that your clients can engage with confidence - without developing sick headaches in the process.
When coupled with expectation management, education will help clients recognize and esteem your value-added approach, while understanding and accepting that, in an imperfect world, you can't deliver 100%, 100% of the time.
Clarity in an SLA will also help customers distinguish and segregate your direct responsibility for service availability from responsibility shared by your partners and vendors (e.g., manufacturers, carriers, subcontractors, and others over which you do not exercise complete control). Almost any type of service today involves one or more communications components - under control of a CLEC, carrier, "component ASP," or other entity. What happens if they fail to deliver?
On the subject of including an upstream disclaimer in the SLA, Ed Silberhorn, U.S. general counsel and corporate secretary for Mitel Inc. (Herndon, VA - 703-318-7020, www.mitel.com), cautions that "as a practical matter it is better to simply warn the customer about matters not within the control of the agent and disclaim responsibility for those aspects of the transaction. Most customers will accept the principle that one should not be responsible for that over which he has no authority - certainly anyone ever in the military will readily recognize the fairness of this point." Microset's Peter Mittler agreed: "I make it clear that Microset is not responsible for major power failures or upstream service problems."
Well and good - but this only works if customers are willing to buy a service that no single-point-of-contact can guarantee. In some (more strategic) xSP markets, this proposition may be a non-starter - even a deal-breaker. Until the xSP trend gains more momentum, some early market entrants are being forced to accept the whole burden of guaranteed availability, including willingness to pay penalties for non-availability. Indeed, say some customers, that's the whole point. Why outsource to an xSP, unless you have someone to blame and penalize when things don't work?
Naturally, this cuts both ways. While an xSP may assume more risk by providing a soup-to-nuts guarantee, it's also reasonable to assume that such a responsible entity can charge higher rates. Still, the trick here is to limit the downside. Ed Silberhorn says: "I would try to cap any per diem penalties to a percentage of the revenues received under the contract - 3% being typical. I would also advocate the principle that the agent should not be responsible for matters beyond its direct control, thus eliminating matters of force majeure and areas where the CLEC or carrier or both are at fault."
Microset's SLA does not contain any penalty provisions and Mittler is very cautions about changing their model SLA to include such qualifications. "Once you have a solid SLA, be very cautious about customer modifications. Legal reviews can reduce or wipe out profits." In Microset's case, he says, major rewrites or the risk of penalties are not justified for service agreements generating less than about $2,500 per year in revenue.
Human error, business-scaling lags, employee turnover - all these can inhibit an xSP from delivering prescribed service level. In this case, it's good to remember that a comprehensive SLA can be underwritten by (and may specify) an insurer. The Virtual Channel Group (Eden, NC - 336-623-7333, www.virtualchannel.net) is a manufacturers representative firm that manages VAR/vendor relationships. As a service to his clients, George Robertson, a principal in the company, researched the issue of VAR insurance and advises, "A VAR definitely needs to review their general liability policy and strongly consider an errors and omissions policy. This is of particular importance in the area of web and e-business."
You must research this area carefully, however, and get a clear explanation of what the policy covers and any possible loopholes. Particularly with e-business, many legal areas are very gray, since things like site problems and failures are still untested and have no established legal precedents. Even the new insurance polices for these areas may have problems due to the lack of legal precedent. I posed this question to Ed Silberhorn and he advised: "I agree - the main principle that must be stressed is that the VAR must not accept liability for consequential damages such as loss of profit and/or loss of use, because the risk becomes far greater than the reward. Eventually, the customer will balk at paying the higher prices that would put the risk/reward ratio back in balance."
