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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

Think benchmarking, and most people think of the benefits all being on the customer's side. However, the procedure also can benefit the vendor. In today's market, providing customers with the ability to validate that the pricing they're getting is and will remain market competitive also gives them the confidence to sign a long-term contract. Customers know that the cost of technology has been dropping, but how fast it's going to continue to drop is unpredictable. Without benchmarking or some other mechanism to stay aligned with the market, they would want to stick with shorter term deals.

Benchmarking also may be what motivates a customer driven by costs to consider outsourcing and to be willing to do the deal. A number of our customers at Affiliated Computer Services Inc. (ACS) may have done benchmarking prior to contacting us, but we usually don't know about it.

Comparing Apples to Apples

While benchmarking can be beneficial, vendors generally are leery of benchmarking contract provisions because of a concern that the benchmarker won't consider all of the important factors and come up with an apples-to-apples comparison. To the vendor, there are several key factors that should be considered.

• The investment that the vendor had to make to enter into the outsourcing deal -- Those investments could be assuming unfavorable lease commitments, acquiring the customers' equipment at book value (which frequently is much higher than market value) or the one-time costs associated with software transfer fees.
• The level of commitment that the customer is willing to make -- If the customer wants to have a contract with no minimum charges, completely variable pricing and no commitment to providing a given stream of income over a specified period, that has ramifications on the pricing. The outsourcer's ability to make long-term capital investments in infrastructure to drive the absolute lowest unit cost is limited.  This degree of flexibility and relative lack of commitment has real value to the customer, but this value is very difficult for a benchmarker to quantify.
• The functions that are in scope versus those that are out of scope -- ACS, for example, typically does not take applications responsibility. Our customers, for the most part, retain their own applications and continue to do their applications development and maintenance. If a customer is running out-of-date, inefficient applications, benchmarking those costs against a shop where modern, efficient applications are used would not be fair. That would not be an "apples to apples" comparison.

There are two reasonable scenarios for the timing of a benchmark. An annual procedure is acceptable, but there's really no reason to do the first one for at least two years. The competitive bid process is a de facto benchmark. By going through that process, the customer knows that they've established the best market price. Since the vendor has to make long-term financial commitments in the beginning, little in the cost structure can be changed in the first two years.

An exception to that is a situation where the workload changes significantly during the first two years. If the workload increases, the customer may want a benchmark to gauge the appropriate unit price at that volume. If the workload decreases, the vendor may want a benchmark for the same reason.

One real failing of benchmarking, from a vendor's point of view, is too much emphasis on raw costs without any measure of the effectiveness and value of the IT organization or IT services. The outsourcer may be 10 percent higher in cost but deliver 50 percent more value to the customer's business. Benchmarking doesn't do a good job of articulating what the customer gets out of the dollars spent on outsourcing.

The benefits of benchmarking vary from situation to situation. The biggest benefit to an outsourcer is psychological. It says to a customer that a vendor is willing to open up to a third party and let them assess what is being done and how well and how cost effectively it is being done. That gives the customer more confidence and lets them know that the vendor is willing to deal with them on an up-and-up basis.

The applicability of benchmarking should be kept on that general level. Benchmarking is a tool, but it's not the right tool for every job.  Benchmarking is a relatively blunt instrument, and you don't want to use it to do microsurgery on an outsourcing contract.  Trying to use the procedure to establish specific costs or service levels becomes almost impossible, because every deal is different and every environment is unique.

Publish Date: December 1997

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Copyright © 1997 - Everest Partners, L.P.

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