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Service level guarantees: incentivising performance

Summary

Background

1.1 Service Level Agreements (SLAs) form part of commercial contracts and set out a supplier’s commitment to provide services to an agreed quality, e.g. within a specified period. The associated Service Level Guarantees (SLGs) specify the level of compensation that the customer would be entitled to should the service not be provided at the quality specified in the SLA, e.g. if delivery of the service was late. Together they are therefore essential elements of any commercial contract as they provide the supplier with an incentive to deliver their service at an appropriate level of performance.

1.2 Communications Providers (CPs) consider that Openreach’s[^(-1-)] current SLAs and SLGs for Wholesale Line Rental (WLR), Local Loop Unbundling (LLU) and Ethernet services are ineffective because they do not provide Openreach with appropriate incentives to provision or repair services. They consider that, as a consequence, Openreach’s service performance has not always been satisfactory and that too often Openreach has failed to deliver in the timeframes set out within the SLAs.

1.3 CPs have recently been in discussion with Openreach to ensure that SLAs and SLGs are set appropriately to ensure that Openreach has the incentive to provision and repair services promptly. These negotiations were facilitated by an independent third party (the Office of the Telecommunications Adjudicator (OTA2)), but did not result in a mutually satisfactory outcome.

1.4 In September 2007, the CPs asked Ofcom to intervene and consider imposing additional regulation on BT. The negotiations facilitated by the OTA2 did, however, move matters forward and helped to crystallise the concerns of CPs in relation to SLAs and SLGs. As such, these discussions provided Ofcom with a sound basis on which to proceed.

Ofcom’s concerns regarding existing contract requirements

1.5 Ofcom considers that Openreach’s contracts for WLR, LLU and Ethernet services do not yet provide sufficient incentives for Openreach to maintain an appropriate level of performance. This has contributed to Openreach’s customers receiving neither adequate quality of service nor appropriate compensation for service failures, in particular timely provisions and repairs.

1.6 Ofcom is proposing to address this by amending the SLAs and SLGs in Openreach’s contracts.

1.7 Openreach is required to provide WLR, LLU and Ethernet services under SMP services conditions on cost-oriented and not unduly discriminatory terms. Openreach is also required by the Undertakings to ensure that CPs are not placed at a competitive disadvantage by supplying these products to downstream parts of BT and other CPs on an operationally and functionally equivalent basis.

1.8 Ofcom considers there to be two broad concerns with Openreach’s SLAs and SLGs:

either the processes for claiming compensation are cumbersome and onerous with the result that many Openreach customers regard it as inefficient to attempt to claim compensation; and / or
the levels of compensation are insufficient to either compensate the CP or incentivise Openreach to provide better service.

Competition concerns

1.9 Ofcom considers that CPs have found it difficult to negotiate appropriate SLAs and SLGs with Openreach because Openreach is the only national supplier of these WLR, LLU and Ethernet services. It is also apparent that Openreach does not have sufficient incentive to ensure that SLAs and SLGs are adequate. Therefore, Ofcom considers that it is necessary for it to amend Openreach’s SLAs and SLGs by directions under the appropriate SMP services conditions.

1.10 Additionally, Ofcom considers that a number of CPs may be placed at a competitive disadvantage compared with larger CPs, in particular BT Retail, given the complexity of the compensation process. Ofcom estimates that CPs have received compensation for WLR which amounts to less than one tenth of the amount that BT Retail has received per line. Ofcom considers that more likely than not this is due to economies of scale. That is, because the processes for claiming compensation are cumbersome and onerous, it is more efficient for a large CP, such as BT Retail, to claim compensation than for a smaller provider.

Ofcom’s proposal

1.11 The principles of Ofcom’s proposals are that Openreach should:

when agreed service levels are not met, make provision for compensation to be made based on a pre-estimate of an average CP’s loss;
ensure that CPs are entitled to make a claim for additional loss;
pay compensation on a per event basis;
ensure that there are no caps on compensation; and
ensure that compensation payments are made proactively.

1.12 In practice this would mean Openreach would be required to:

for WLR, make proactive payments for each service failure such as late provision and late fault repair, with compensation at the current level of one month’s line rental / day of delay;
for LLU, make proactive payments for each service failure such as late provision and late fault repair, with compensation at the current level of £8 / day of delay and £16 / day where a non-operational line is provided;
for Ethernet, make proactive payments (as currently) for each late provision at an increased level of one month’s line rental / day of delay to bring it into line with WLR and LLU and for each reported fault at an increased level of 15% of one month’s line rental for each hour of downtime to bring it into line with partial private circuit enhanced care; and
for all the above products, remove caps and other unnecessary restrictions on compensation payments.

Consultation

1.13 Ofcom is seeking comments on the proposals set out within this consultation document by 25 January 2008. Ofcom wishes to know whether stakeholders consider that the proposals set out herein are sufficient to give Openreach an appropriate financial incentive to provision and maintain service. Ofcom also wishes to know whether stakeholders consider that the proposals are a proportionate response to the perceived problem.

Future review

1.14 Ofcom considers that the proposals set out in this document will increase the incentive on Openreach to provide and repair service promptly. Ofcom will, nonetheless, carry out a periodic review to assess whether or not the SLGs have been effective in driving improved service performance and have not given Openreach perverse incentives which would allow it to avoid compensation payments by extending lead times.

1.15 If little or no improvement in service performance is confirmed or observed, Ofcom will review the level of compensation payments. Ofcom will also consider whether additional performance incentives are required as part of the broader Review of Openreach’s Financial Framework.

Footnotes:

1.- In September 2005, BT Group plc (‘BT’) gave a set of Enterprise Act Undertakings to Ofcom. The Undertakings included the creation of a new organisation, Openreach, which is separate from the rest of BT and provides wholesale products (such as WLR, LLU and Ethernet) used by other CPs to compete with BT’s retail business. Openreach has been referred to throughout this document, although all legal obligations are placed on BT. http://www.ofcom.org.uk/telecoms/btundertakings/btundertakings.pdf

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