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Insights
Benchmarking: Bane or Benefit?

Customer Voice
Benchmarking: A "Sanity Check"

Supplier Voice
Benchmarking and the Vendor

Analyst Voice
The When and Why of Benchmarking

Legal Voice
Benchmarking Begins with the Contract

When companies make the decision to outsource -- or they have already outsourced -- they often ask the question, "Why benchmark?"  They are confident that outsourcing will save them money, or they know they are already paying less for outsourcing than their internal operations cost So what is the value of benchmarking?

The answer lies in the client/vendor dynamics that exist throughout the outsourcing lifecycle and the influence each party has over the relationship at different stages.Benchmarking can serve as the arbiter for outsourcing, ensuring a fair deal for both parties What is a fair deal?  An outsourcing client should not expect to pay more or less for top-quality service than they would if their costs for internal IT operations were best of breed.

After all, outsourcers can apply their vast resources and economies of scale The mistake many clients make is to think they are receiving a fair deal simply because an outsourcer's costs are lower than the client's current costs, not their potential best-of-breed costs.

Step-by-Step

Each of the five stages of an outsourcing relationship offers opportunities to use benchmarking to ensure a fair outsourcing deal throughout the lifecycle:

1. Investigation

This is the stage where benchmarking has its highest payoff A clear understanding of your current IT operations relative to best of breed -- and your potential for improvement -- will arm you with knowledge either to negotiate a fair deal or to close the gap between your current performance levels and that of top-performing companies.

Typically outsourcers propose 15 percent to 20 percent less than your current cost If you are not operating as efficiently as possible, that could leave a great deal of money on the table A common industry myth is that all data centers are within 20 percent of each other in terms of costs. However, COMPASS analysis shows variances as high as 200 percent In some areas -- such as desktop management, application development, and maintenance and networks -- these variances are even greater.

Another benefit of benchmarking at the investigation stage is that it provides a baseline of current costs and service levels You can use this information to compare apples-to-apples against performance improvements delivered by the outsourcer and against industry trends throughout the relationship.

Finally, if you are not sure about outsourcing, benchmarking is an economical method to assess the benefits The process of investigating sourcing options can take many months and cost well over $1 million Benchmarking delivers similar results at a fraction of the cost.

2. Tendering

At this stage, you can incorporate the knowledge gained from benchmarking into an RFP to set optimum performance targets for your organization This helps identify the serious contenders for your business and spells out that world-class performance is expected -- and will be measured.

3. Negotiation

During negotiation, benchmarking knowledge is critical to setting the right expectations for cost, performance, and service levels Your negotiation position is reinforced by external validation of your requirements.

Benchmarking also facilitates "fast tracking" or sole source considerations. Fast tracking simply means the client has decided to outsource, usually with very little investigation and no tendering, and wants to move through the negotiation process quickly To do so-- and not risk signing poor deals -- fast trackers can use benchmark data as their guide.

In a sole source situation, ensuring a competitive supply can be difficult. Here, the vendor holds the balance of power in the negotiation Benchmarking can level the playing field, serving as a surrogate for the competitive process to ensure you receive a fair deal.

4. Implementation

During implementation, benchmarking can be used for contract refinement Beyond this stage, benchmarking is typically not involved, as the course has been properly set.

5. Relationship Management

Benchmarking is most commonly employed in relationship management Several organizations, including the Gartner Group, have been quoted as saying that about 70 percent of all outsourcing deals are renegotiated within two years of being signed Usually dissatisfaction over pricing and service levels are the main drivers for renegotiation Benchmarking plays a key role in renegotiations, since clients need access to industry performance parameters in order to make a case with the outsourcing vendor.

In many cases, the requirement for benchmarking is drafted into the final terms of an agreement. These terms are a much more powerful method of ensuring a competitive supply of services than the traditional "most favored nation" clause COMPASS, in conjunction with a leading legal firm, has drafted a standard benchmarking clause We will provide a copy on request.

Benchmarking is employed in many different ways and to various ends throughout the outsourcing lifecycle. It can be a powerful negotiating tool to help achieve your outsourcing objectives Whether your goals are as simple as extracting additional pricing concessions from a vendor or as lofty as ensuring a fair deal for both parties and a building lasting relationship, benchmarking warrants consideration.

Publish Date: December 1997

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Copyright © 1997 - Everest Partners, L.P.

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