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Benchmarking in Outsourcing:

Keys to Driving Long-Term Value

Copyright 2011, Alsbridge, Inc., All Rights Reserved.


The information in this paper is proprietary and confidential property of Alsbridge, Inc. and may not be
republished, redistributed, or modified in any way. The contents of this paper are intended solely for the
recipient. To request permission for republishing or redistribution, contact Alsbridge at info@alsbridge.com
or call us at 214-696-6410.

Benchmarking in outsourcing: the basics


Benchmarking in outsourcing has experienced
significant change in its relatively brief history,
evolving from a single-focused pricing comparison
(that some would say was used solely to beat up on
providers) into a richer, broader array of tools that
both buyers and providers can use to improve the
process, the relationship, and ultimately the
outcomes. Selecting the right benchmarking tools is
vital, but the benefits are almost infinite.
The original intent of benchmarking in outsourcing,
and still one of its many uses, was predominantly to
identify and manage price drift over the course of a
contract, particularly in longer contracts. Still in
current agreements, a benchmarking clause enables
the parties to measure the levels of services and
their associated costs at pre-agreed intervals during
the course of a contract. This kind of benchmarking
in outsourcing is relatively common in IT
outsourcing agreements where the market is
comparatively mature, the processes definable and
the metrics are comparable. But the practice of
building benchmarking agreements into contracts
and simply into ongoing practice is becoming
more common in other types of BPO agreements,
such as F&A, as well.
In the context of this paper, benchmarking covers
a spectrum of activity, from an informal, buyerdriven market assessment to a formal, contracted,
externally driven market benchmark. Specifically,
different types of benchmarks include:

Third Party Benchmark This kind of benchmark


is generally built into the outsourcing contract
and uses a third-party benchmarking vendor
that both the buyer and outsourcing provider
agree on. As a result, the work is completed for
both parties. This assessment follows a specific
methodology defined in the benchmark clause
usually involving the selection of peer
companies and making adjustments to each
peer to take into account characteristics of the
buyer environment.

Snapshot benchmark The snapshot benchmark


is a rapid assessment of market competitiveness
of a contract, enabling quick decisions. This
benchmark is typically done by a third-party
benchmarking vendor either for a buyer or an
outsourcing provider, or both, as the basis for a
price or service adjustment.
Ongoing monitoring This process tracks market
prices and terms on a very frequent (monthly or
quarterly) basis. The real time nature of this
monitoring enables the buyer to keep contract
pricing in alignment at all times, and helps to
reduce the amount of negotiation required
during contract renegotiation. (This assessment
works best in mature markets with definable
processes and comparable metrics, such as IT or
sales outsourcing.)

With the variety of options available today,


benchmarks go beyond simply uncovering
misaligned pricing and services. In response to the
ever-changing outsourcing market outcome-based
pricing, cloud computing, SaaS products, emerging
global service delivery locations, and more
prospective and current buyers of outsourcing
services are finding benchmarking vital not only to
managing pricing, but also to improving their
relationships with their providers, identifying best
practices, engaging in continuous improvement,
and driving innovation.

Why benchmark?
Put simply, things change prices, practices, even
politics. And all of these changes can impact your
outsourcing contract, whether youre a buyer or
provider of outsourcing services. For example,
Alsbridge ProBenchmark market data shows a 6%
8% annual market decline in the price of F&A
services in the marketplace prior to 2011, and we
have every reason to expect that decline will
continue. That change could have significant impact
across a five-year contract!
Several forces drive these changes and greatly
impact the provision of services, whether they are
IT, F&A, sales, HR, or any other:

_________________________________________________________________________________________
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410

Technology improvements changes in


technology, from software developments to
cloud computing, affect employee productivity
across the entire organization on an ongoing
basis. Over time, these changes can have a
significant impact not only on the cost to
provide services but also on the process,
operations, and relationship aspects of the
contract.
Economic forces the volatile global economy,
exchange rate variations, inflation and economic
growth drive changes in pricing, as well as
services provided.
Globalization globalization continues to
provide alternatives beyond labor arbitrage,
including cost management and risk mitigation.

How/when to use benchmarking


Although benchmarking is becoming more common
and accepted, its still far from ubiquitous. In a
recent poll, Alsbridge found that nearly a quarter of
respondents were not making use of benchmarks at
all, and another third were taking advantage of
them at comparatively infrequent intervals every
three-plus years. Furthermore, this poll was taken
in IT outsourcing, where benchmarking is more
common than other outsourcing areas; so we can
reasonably assume benchmarking is taking place
less often in non-IT outsourcing areas.

22%

17%
Every year
Every two years

3%

Every three years


29%
29%

Every five years


Never

SOURCE: Alsbridge webinar How to Beat Your IT Budget 2011

The result is that more than half of buyers of


outsourcing services (and perhaps even providers)
are missing out on significant opportunities to gain
insight into the key points of contract value:

financial terms, contract terms, operational terms,


and the outsourcing relationship.
Benchmarks can be used in a wide variety of
circumstances surrounding an outsourcing contract
including:
1. Initial baseline of current practices Regardless
of the function or processes being outsourced, it
is vital that both the buyer and the provider
clearly understand the buyer organizations
current practices in order to effectively evaluate
the transition effort, timing, and cost. A
benchmark can help to assess those practices,
providing a validated, up-to-date picture of
current practices, which can smooth
negotiations and, more importantly, improve
the likelihood of successful transition to the
outsourced program.
2. Prior to contract signing Benchmarking
information can provide insights to both the
process of building the business case for
outsourcing and the provider selection process,
in terms of pricing and contractual terms
(service levels, transition costs, and deal
components). Access to benchmark data
enables the buyer to negotiate from a position
of knowledge and strengthens the negotiation
process overall for both the buyer and
outsourcing provider.
3. Mid-contract Existing deals use benchmarking
either on an ongoing basis and/or when the
buyer invokes a contractual benchmarking
clause. In either of these situations,
benchmarking provides an opportunity for both
parties (although admittedly more likely the
buyer) to ensure the deal is competitive with
other deals in the market not only on a price
basis, but also in terms of keeping current on
market practices and innovations, and ongoing
process improvement. The benefit to both
parties is a potentially smoother, shorter
renegotiation process, as the mid-contract
benchmark drives greater alignment during the
contract.

_________________________________________________________________________________________
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410

4. Prior to contract extension and/or


renegotiation Leaving plenty of time to make
use of its work and to make informed decisions
on renegotiation (Alsbridge recommends up to
30 months prior to contract expiration, but
certainly no less than 18 months), buyers can
use benchmarks to understand how their
contracts compare to current market
conditions, again, not only on price, but also on
current market terms and practices. Using this
information, buyers can decide whether to
recompete, renegotiate, or repatriate.

Latest Trends

New lower cost, faster benchmarking processes are


enabling people to benchmark on an ongoing basis
rather than waiting for one large benchmark prior
to renegotiating. This is particularly true in mature
markets with more definable processes and
comparable metrics, such as IT and sales
outsourcing.

As a result of the development of faster, somewhat


easier, and more effective benchmark strategies,
buyers and providers are finding new uses for the
information generated from them:

These newer benchmarks:

Are automated and easier, requiring less time to


do and producing more reliable results;
Enable comparisons across a much wider range
of inputs; original benchmarks included only
four to six comparison companies, but newer
systems enable benchmarking across a
considerably larger number;
Focus time more on using the data than
collecting it, again because the data collection is
considerably less onerous than in the past, and
because experience has enabled experts to
refine analysis and provide keener insights.

Benchmarks have moved well beyond price/cost


alignment and financial arrangements to evaluate
issues such as contemporary contract terms,
relationship building, and continuous improvement,
among others. Specifically, benchmarking projects
can include the following kinds of benchmarks:

Contractual performance benchmarks ensure


that contractual performance is delivered
appropriately. These benchmarks may include
areas such as contract flexibility, governance,
pricing structure for the scope of services, and
legal and business clauses to ensure market
competitiveness.
Operational performance benchmarks address
how contract performance meets the demands
of frequent changes in business and industry.
These benchmarks look at whether innovation
in service delivery is driving competitive
advantage for the buyer.
Relationship benchmarks involve the
performance of the outsourcing relationship
related to cultural, operational and strategic
alignment.

Quick hit decisions As weve noted earlier, with


the alternatives available, buyers dont have to
exercise third-party benchmark clauses in order
to get and use valuable information. These
snapshot options are enabling buyers to
pinpoint and address specific issues on an
ongoing basis rather than waiting until they
become real problems, at the same time
avoiding both the cost and effort involved in
larger benchmarks.
Global sourcing options Some organizations are
using benchmarking to quickly assess global
sourcing alternatives. In some cases, business
leaders are required by their organizations to
evaluate reasonable opportunities to efficiently
source services, including cost benefits and
risks. In a volatile global economy, these
evaluations make good business sense, and
these speedier benchmarking alternatives can
provide the data necessary to make decisions
quickly.

_________________________________________________________________________________________
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410

Balancing global service portfolios Large global


organizations that source processes around the
world use benchmarking results to define and
assess the financial, physical and legal risks of
their global sourcing locations.
Managing mature contracts Second and third
generation relationships that are operating with
well-defined governance structures continue to
benefit from benchmarking output in validating
potential contract scope and service
adjustments. Organizations in these situations
also use benchmarking results internally to drive
fact-driven, meaningful conversations with
business unit stakeholders, business leaders and
boards regarding costs and services.

Speedier and simpler negotiations Outsourcing


programs that regularly (but reasonably)
benchmark pricing and terms over time stay near to
market-aligned pricing and terms at all times. As
such, there is considerably less distance to travel
during contract renegotiation than there would be
if pricing and terms stayed the same over the
course of the entire contract.
Ongoing process improvement Benchmarking
encourages the provider to drive improvements
over time in order to achieve ongoing cost and
contract terms, rather than pulling out all the stops
at renegotiating time. The buyer organization
realizes the benefits of constant process
improvement rather than at contracting intervals.

Benefits
Cost savings The first benefit everyone thinks of
when benchmarking an outsourcing contract, of
course, is cost savings. Cost savings are a vital
takeaway from the benchmarking process. In
Alsbridges experience, using benchmarking in a
competitive bid can impact pricing significantly from
the initial RFP response to the actual contract
signing 15% to 20%, and even much more in some
instances.
A recent Alsbridge poll of buyers of IT outsourcing
buyers indicated the following savings typically
identified from a benchmark.

46%

27%

1% - 10%

10% - 25%

8%

5%

25% - 50%

>50%

Logic- and fact-driven negotiations Although the


benchmarking process may seem one-sided in favor
of the buyer, it actually does provide the vendor
benefit as well. Benchmarking can help to bring a
logical, rather than emotional, element to
discussions and negotiations. Benchmarks can be as
much help to the provider as the buyer in
identifying usual and customary, fair and
reasonable pricing and contract terms.
Improved invoicing accuracy Benchmarking can
help to invoicing accuracy. In our experience,
conducting a benchmark can help to ensure that an
invoice is accurate, understandable and effective. In
the day-to-day process of creating,
reviewing and paying invoices, buyers
and providers cant always make time
to fully compare invoices to services
delivered. A focused benchmarking
effort can and often does identify
mismatches in invoice and delivery;
Alsbridge ProBenchmark estimates that
more than 80% of all transactions have
errors in their invoices. These errors
14%
generally occur because transactions
are complex, and invoices as a result
are long and complicated; many people
Already below
are involved during different parts of
market

SOURCE: Alsbridge webinar Q3 IT Pricing Trends

_________________________________________________________________________________________
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410

the negotiation and invoice preparation phases;


neither providers nor buyers have the resources (or
sometimes the experience) to scour every invoice in
minute detail.
Identification of contracting problems
Benchmarking can identify contractual elements
that, while they may have made sense at the time
of negotiation, have become ineffective or even
detrimental to the relationship. Over time, as SOWs
and work orders are layered onto the agreement,
what seemed reasonable at the start no longer
makes sense. Because it provides an opportunity to
step back and look at the entirety of the agreement,
benchmarking can identify issues that may be
driving price up, and benefit down.
Time and expense justification Organizations use
the results of benchmarking to justify time and
expense of functions particularly functions like IT
to the board and other business stakeholders, as
well as to demonstrate compliance with specific
regulatory guidelines.

Best Practices
In the wrong hands, benchmarking can be a difficult
process, even if all parties go into it with open eyes
and positive expectations. Every benchmarking
effort must be carefully considered, well-planned
and effectively executed in order to produce a
meaningful, actionable outcome.
Context is required A benchmark is one of many
data elements in a complex program. Benchmarking
data should not be used to the exclusion of other
valuable inputs.
Be prepared for the unexpected It isnt common,
but buyers can (and do) find theyre actually
underpaying, and then can be contractually
obligated to pay more. In any event, all parties
should go into a benchmarking exercise looking for
new insights and opportunities to improve service
and price performance in both the short and long
term.

Carefully consider all inputs Every outsourcing


program and relationship has myriad tangible and
intangible aspects to be measured. Absent careful
planning and consideration, its easy to miss vital
points. Focus first on those points around which you
can gather valid data. For those more difficult, less
tangible items, expert input can be invaluable if
identifying quantification techniques.
Use the right benchmark There are many types of
benchmarks, from ongoing monitoring to a full
contractual benchmark. It is essential to understand
the options available, consider how the benchmark
information will be used and match the appropriate
benchmark to the need. Where possible, try to
engage in smaller benchmarking programs or
market assessments over time that will enable your
contract to stay closer to true market rates and
current realities. Start any large renegotiationrelated benchmarking effort at least 18 to 30
months prior to end of contract to provide plenty of
time to collect and analyze data, understand root
causes and investigate and implement alternatives.
At the right time In some functional areas,
benchmarking has advanced to the point that they
can, and should, be used prior to contract
discussions to establish a baseline performance,
before provider selection, during the contract and
as part of contract extension/renegotiation or even
recontracting. These options, though, come with
benefits and limitations, so again its vital to select
the right benchmark process for the right situation.
Use the benchmark as a relationship builder
Buyers should not use benchmarking data
exclusively to drive down price; benchmarks can
and should be used to developing sustainable
relationships. It is just as much in the best interests
of the buyer to understand the providers need to
make a profit from the outsourcing contract or they
could suffer unintended consequences. Buyers
should expect excellent service, but also expect to
pay for that service.

_________________________________________________________________________________________
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410

Craft benchmarking efforts for maximum benefit


Good benchmarks do more than compare specific
prices or terms across similar contracts, such as
identifying specific points of pain and root causes of
relationship problems in addition to the more
obvious pricing and contract issues.
Carefully plan the benchmarking process well
before starting the project Well-written benchmark
plans and clauses spell out the benchmarking
methodology in detail. All parties should have a
common and well-defined understanding of the
benchmarking exercise which organization(s) will
be used to collect and analyze data, what
measurement methodologies will be used, the
types and sources of data collection, the
engagement requirements of all parties, the timing
as well as how results will be used. Benchmark
clauses and plans also should include an escalation
procedure to ensure that the process follows a
reasonable timeline and is completed on a timely
basis.

Engage in root cause analysis with results


Understand the root cause of the benchmark
results before acting on them. Overpaying for a
service relative to others in the market may be
worthwhile if the result is better service or
achieving better results. Alternatively, underpaying
isnt always good news if the buyer is missing out on
advantages that others are gaining by paying a bit
more.
Theres no question that any benchmarking effort
whether a snapshot or a full contractual assessment
takes real commitment in time, effort and
expense. At the same time, innovations in
benchmarking processes and options enable
organizations to tailor their programs to the
individual needs, generating more customized,
useful results. Employed carefully and properly, the
value generated by actionable benchmarks can
drive significant return in performance, cost
reduction, innovation, injection of industry best
practices and continuous process improvement.

_________________________________________________________________________________________
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410