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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

In the race for continual improvement, more organizations are using benchmarking to provide an objective measurement and standard for performance. While benchmarking traditionally has not been closely associated with outsourcing, we also are seeing it used with increasing frequency in that arena.

Two primary facts are driving the use of benchmarking in outsourcing contracts. The first is that benchmarking provides an objective method for both the outsourcer and the supplier to set realistic pricing and service levels in the framework of a long-term relationship.

Secondly, benchmarking is being used more frequently as a tool for contract negotiations.  Clearly we view this as a double-edged sword.  The important thing to remember in this context is that both parties must use the information honestly and cooperatively.  The implication is that the supplier and outsourcer should approach their relationship with the goal of a win-win scenario.

Using benchmarking data to extract concessions from the supplier generally serves only to alienate the parties. Care is essential in selecting what is measured and with whom comparisons are made.  Each party has its own interests as the top priority. That's commonly reflected by the customer's desire to seek performance in the top 10 percent, while suppliers see performance in the top 25 percent as appropriate.

Customers have an obligation to understand and appreciate the investment required by the supplier, both in acquiring the business and in the initial start-up investment of time, money, and human resources.  It's tempting to load contracts and service levels with a huge matrix of performance standards.

Suppliers have an obligation to understand and appreciate the risks taken by the customer in entrusting them with the business and the customer's need for excellence in service and fairness in pricing.  Benchmarking offers an effective way for each party to access objective, reliable information that enhances the understanding and appreciation of these factors.

Several organizations -- including Compass, the Meta Group, and Real Decisions (Gartner) -- offer well-defined and established methods for measuring service level performance.  They have extensive databases which can provide valuable assistance in defining service levels and pricing.

Once the information is assembled, both parties have to decide what to do with it.  How should the data be applied to the specific circumstances?  In the heat of  deciding incentives, penalties, service levels, and other contract issues, it's easy to lose sight of the goal.  The key is to select the service levels and competitive benchmarks which contribute to the success of both parties.

At Everest, we have developed Outsourcing Management software that allows companies to define, track and benchmark their processes against those of other companies and then track the cost and performance of these processes over time.  Once a company has defined its processes and has established a cost and performance history, it can compare itself with other subsidiaries, locations or companies.  The software is particularly adept at allowing users to view a defined process from multiple perspectives simultaneously. Each view can be customized to include or exclude cost components. This dynamic flexibility allows users to refine each benchmark and ensure that the processes are as close as possible to their scope of operation without losing important cost information or maintaining duplicate databases.

We believe the successful application of performance data in the context of business objectives is far more important and significant than establishing financial consequences for performance shortfalls. We are enthusiastic supporters of the benchmarking process when it is used in this way. We view the data gained as important and valuable to have even before the parties sign their contract agreement.

Publish Date: December 1997

Copyright © 1997 - Everest Partners, L.P.

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