Nigel Hughes, partner at ISG, describes why benchmarking is still relevant in IT outsourcing today despite other factors reducing prices.
Selecting a benchmark strategy
By Nigel Hughes
Technology innovation, improved price transparency and increased buyer choice have all contributed to a steady decline in market prices for IT services. Benchmarking has been a key tool in driving value into outsourcing contracts. Is it still relevant today?
To ensure the competitiveness of outsourced IT services over time, companies can either negotiate short-term contracts and frequently re-bid, or negotiate long-term contracts and benchmark prices on a regular basis.
While benchmarks can anticipate efficiencies in forward pricing, many service providers argue that benchmarking clauses in outsourcing contracts have outlived their usefulness and provide limited value. Indeed, compared to five years ago, relatively few contracts today include clauses mandating periodic reviews of pricing and service quality. Yet for many businesses, benchmark clauses that assess pricing in the context of competitive market standards remain essential to having an effective outsourcing strategy and have become increasingly important for the maintenance of a healthy relationship. Many top-performing global businesses employ benchmarks to ensure continuous competitiveness of in-sourced and outsourced operations, leading contracting practices and operational efficiency.
An organization that pursues benchmarks has two basic options to select from. One is to use the benchmark findings as a non-binding guide to facilitate further discussion. ISG has observed that this approach can work in certain scenarios; for example, when the client organization is confident that overall pricing is already competitive, and when alternative change strategies are being explored, such as transforming to a consumption based delivery model.
The other option is to make the results actionable and binding, so that pricing adjustments are required if the analysis reveals gaps. For organizations such as Boeing, clearly defined, binding and actionable terms are imperative to a successful benchmark initiative. Boeing - an ISG client - has been benchmarking since 1999. Recognizing that an agreement that was competitive when the contract was signed could quickly fall out of alignment with rapidly changing market standards, Boeing has conducted regular benchmark reviews of IT infrastructure outsourcing, BPO and IT application outsourcing contracts.
These analyses have consistently resulted in contractual price reductions, cost reductions through process improvements and/or implementation of improved practices. Even after benchmarking regularly for over a decade, Boeing estimates that recent studies have yielded an approximate 5:1 return in direct cost savings, with significant additional indirect benefits, including improved service level agreements and industry leading practices.
A new ISG white paper, guest-authored by Lawrence Kane, a senior IT leader at Boeing, makes the case for binding, non-negotiable benchmark clauses. From Boeing's perspective, an analysis that doesn't mandate corrective action isn't worth pursuing. Moreover, while some argue that binding benchmark clauses can cause friction and contention between the client and supplier, Kane's experience at Boeing has been the opposite; in his view, clearly defined terms set expectations for all parties and facilitate healthy long-term relationships.
Benchmarking has proven to be an effective management tool for many global organizations and is central to a culture of continuous improvement. In addition to analyzing current operational states, benchmarks play a critical role in quantifying the potential benefits of change and assessing the relative risks and benefits of alternative scenarios. For an in-depth examination of different scenarios where benchmarks can contribute to improved performance, take a look at this ISG white paper. "