13WP Alsbridge Benchmarking in Outsourcing Agreements

7/21/2019 13WP Alsbridge Benchmarking in Outsourcing Agreements

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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 [email protected]

or call us at 214-696-6410.
mailto:[email protected]:[email protected]:[email protected]


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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 theprocess, 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 practiceis 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, buyer-

driven market assessment to a formal, contracted,

externally driven market benchmark. Specifically,

different types of benchmarks include:

Third Party BenchmarkThis kind of benchmark

is generally built into the outsourcing contract

and uses a third-party benchmarking vendor

that both the buyer and outsourcing provideragree 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 benchmarkThe 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 monitoringThis process tracks marketprices 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 marketoutcome-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 changeprices, 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&Aservices 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: [email protected] or (214) 696-6410

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Technology improvementschanges 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 thecontract.

Economic forcesthe volatile global economy,

exchange rate variations, inflation and economic

growth drive changes in pricing, as well as

services provided.

Globalizationglobalization 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 intervalsevery

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 placeless often in non-IT outsourcing areas.

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 practicesRegardlessof 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 signingBenchmarking

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 andoutsourcing provider.

3. Mid-contract Existingdeals 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 marketnot 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.



17%

29%

29%

3%

22%Every year

Every two years

Every three years

Every five years

Never

SOURCE: Alsbridge webinar How to Beat Your IT Budget 2011


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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 marketconditions, 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.

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 onlyfour 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/costalignment 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 benchmarksensure

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 benchmarksaddresshow 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 benchmarksinvolve the

performance of the outsourcing relationship

related to cultural, operational and strategic

alignment.

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:

Quick hit decisionsAs 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 anongoing 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 optionsSome 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.



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Balancing global service portfoliosLarge 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 contractsSecond and third

generation relationships that are operating with

well-defined governance structures continue tobenefit 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.

Benefits

Cost savingsThe 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

signing15% to 20%, and even much more in some

instances.

A recent Alsbridge poll of buyers of IT outsourcingbuyers indicated the following savings typically

identified from a benchmark.

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 improvementBenchmarking

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.

Logic- and fact-driven negotiationsAlthough 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 accuracyBenchmarking 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 canand often doesidentify

mismatches in invoice and delivery;

Alsbridge ProBenchmark estimates that

more than 80% of all transactions have

errors in their invoices. These errors

generally occur because transactions

are complex, and invoices as a result

are long and complicated; many people

are involved during different parts of



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27%

46%

8% 5%

14%

1% - 10% 10% - 25% 25% - 50% >50% Already below

market

SOURCE: Alsbridge webinar Q3 IT Pricing Trends


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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 timeof 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 justificationOrganizations use

the results of benchmarking to justify time and

expense of functionsparticularly 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 benchmarkingeffort must be carefully considered, well-planned

and effectively executed in order to produce a

meaningful, actionable outcome.

Context is requiredA 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 inputsEvery 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 benchmarkThere 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 renegotiation-

related 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 timeIn some functional areas,

benchmarking has advanced to the point that they

can, and should, be used prior to contract

discussionsto establish a baseline performance,

before provider selection, during the contract andas 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.



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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 wellbefore starting the projectWell-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 exercisewhich 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 bitmore.

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.


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13WP Alsbridge Benchmarking in Outsourcing Agreements

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