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Service Level Agreements are often expected to operate in a situation where a single department:

1. receives services from an external service provider; and
2. provides services to an internal customer.

It is often assumed that the same set of Service Level Agreements can be applied in both situations. There are some good reasons why this should not be so, based on the difference in the relationship that a customer will have with its internal and external service providers.

Relationship differences

Finance

The first difference is financial.
Often, internal service providers are not paid at all. There is an appropriation from the customer department and a budget for the provider department. No real money changes hands at all.
As a result, the customer department may be unaware of any price being paid to the provider department.

Competition

The concept of having one part of an organization provide services to another part can work well when the service provider is operating in a real, competitive service market.
This means that the provider department has won the business on a competitive basis.
Often, this is not the case. Many internal service providers operate using the same financial and administrative infrastructure as their internal customers. The provision of this infrastructure may not always be included in the price that the internal customer pays.

Improvement

It may that one reason for appointing an external service provider is the provider's ability to continue to improve. The concept of "world class capability" can be demonstrated by a number of multinational service providers, who can often develop innovative services for their extensive customer base.
By using an internal service provider, the only improvements will be through ongoing education of existing staff and the recruitment of new staff. The impetus to make improvements to retain an extensive customer base will not apply.

Pressure

Pressures can be brought to bear on an external service provider. This can often be associated with one of the previous three characteristics, through a customer affecting the profitability of a service provider, in a competitive market that requires continual improvement.
Pressures on internal service providers are more relaxed. Indeed, where the internal service provider is supported through a central fund, there may be no effective means for a customer to apply any pressure at all.

The external model

Before transforming the internal service provider to fit the same model as an external service provider, we need to understand whether the adoption of the external model will be useful.

Consider, therefore, the following questions.

Can the service be provided by external service providers?
Could you obtain competitive bids for the services?
Is cost a factor?
Is world class capability or continuous improvement a factor?

We shall now at each of these in turn.

Provision

In some instances, it would be difficult for services to be provided by an external service provider. Some of these instances are:

• secretarial services, where each member of secretarial staff is required to support a manager or a team;
• research services, especially for new products or market sectors.

Where an organization has an extensive library service, with research being conducted by the library staff, the ability to use an external service provider may become even more reduced.

Competition

Sometimes, it is not practical to obtain truly competitive bids for a service, when one of the bidders is an internal service provider. This can be particularly true of services that are provided on an "ad hoc" basis, such as some secretarial or research services.
The comparison with IT is interesting. It may be imagined that many of the services provided by IT outsourcers and facilities managers are "ad hoc". Someone's need for the help desk may not be predictable. In fact, although IT services may appear to be provided on an "ad hoc" basis, they are actually provided continuously: the help desk is operating whether or not anyone needs help. With some secretarial services, there may be a true "ad hoc" element:

• Secretaries may become conference organizers, sending out invitations, arranging for food and beverages, and checking on conference materials and facilities.
• Secretaries may become travel organizers, booking accommodation at the Parkroyal under someone's Pacific Privilege number and discount vouchers, booking travel on Ansett with someone's Golden Wing number, and arranging car hire with Avis under their Preferred Renter number.

If you attempted to set this all up with Service Level Agreements, you might have to formalize many tasks that are not currently formalized. You might have to draw up procedures for storing people's membership details in a standard format, especially allowing for preferences when two programmes are available.

Cost

If cost is the major factor in deciding whether to use an internal or an external service provider, then the internal service provider will win the bid.
Unfortunately, the logic here becomes cyclic. External service providers base their prices on their costs and their margins. Their costs include all of the costs of running their business. Internal service providers may not know the true costs of providing the services that they provide, because they are internal. It is most unusual for a business unit within a single corporate entity to know all the costs of sustaining it. That's a corporate issue, which is usually resolved across all business units. Even if figures are available, these are often notional costs rather than true costs.

Continuous improvement

If "continuous improvement" or "world class capability" is the major criterion for deciding between an internal and an external service provider, then the external service provider should always win.
Unless you issue a tender to external service providers, your internal service providers do not need to be competitive. Some major aspects of competitiveness in outsourcing are:

• developing new services to provide additional benefits to customers,
• improving existing services through increased capability and efficiency, and
• reducing service prices.

It is appropriate for service providers to reduce service prices because of:

• the number of customers using those services, and
• the additional services being sold to each customer.

These are not areas in which internal service providers are likely to be competitive.