Benchmarking - are you getting value?

Benchmarking is not a black art, but it certainly remains a mysterious activity for many Australian organisations. This is a pity, because often millions of dollars are at stake- but how do you know unless you measure effectively?

Benchmarking clauses are now part of most outsourcing contracts, and in most cases benchmarks are enforced.

About 29 per cent of large companies outsource in order to save money - and these companies will certainly execute benchmarks to find out whether their aim has been achieved and delivered.

About 60 per cent of IT organisations are disappointed in the results of the benchmark - but still benchmark because clauses in their contract force them to do so.

Medium-sized outsourcing contracts have a value of about $30million to $50 million per annum. From experience, the first market price assessment will deliver a result of a 10 per cent variation to the contract price; in our example, this will result in a gain/loss of about $3million to $5 million per annum for either party.

Benchmarking is arguably the only means to assess the market competitiveness of the prices charged, and the quality of the services delivered to the client.

Although benchmarking has been around for some 20 years, knowledge about benchmarking, its methodology and its processes is very low. Most vendors as well as their clients do not have a firm grasp on how to tackle this crucial component of an outsourcing contract. It is vital to understand the:

* processes involved in benchmarking

* cost of benchmarks not only in purchasing the services but also the internal costs of managing the benchmark* efforts involved to perform a benchmark* drivers which influence the result* details of the outsourcing contract* peer group selection process which eventually determines the competitiveness of an outsourcing contract; and* benefits, pitfalls in performing benchmarking exercisesConsidering the example given above, how prepared are organisations for the annual ritual of executing the market-price-assessment? Considering the millions of dollars it may cost either party, what resources are made available to assess the market competitiveness of the outsourcing contract?

One would expect that staff is well trained for the task, metrics are in place, the main price drivers understood, the contract well interpreted, and . . . Well, typically, this is not the case. Generally speaking, most organisations, including the vendors are rather unprepared for this exercise - despite millions of dollars at risk!

Why? There are many reasons for this lethargic approach - the most likely reason is probably being in "denial mode".

What should organisations do to address the benchmarking issues? Firstly, benchmarking is not a black art (or rocket science) - although many people see it like that!

There are some very simple and basic - initial! - steps one can take:

* Develop an "event & task" list, which has to be followed throughout the benchmark - and do not deviate from the activities. Far too many times benchmarks were "politicised" and nothing was achieved. The event list describes all steps of the benchmarking processes, the responsibilities of all parties - including the benchmarker - and, last but not least, the deliverables of each step.

* Develop a set of "benchmarking rules", which are applied for each and every benchmark - and stick to these rules for the duration of the contract; or, if changes are required, both parties must agree to these changes. Rules that are changed every year don't make sense and don't deliver a credible result. The benchmarking rules outline activities such as the "peer group selection" process, the metrics for which an analysis has to be undertaken, and so on.

* Create a metrics program. Both parties should be prepared - well in advance - for which metrics have to be collected and which metrics will be benchmarked. They must also be aware of the consequences if certain metrics are not "benchmarkable". Unfortunately, this happens too often, and the consequences can be dire.

* Establish a benchmarking team. Organisations, and their management, often believe that benchmarking is a purely technical exercise, and therefore do not want to be involved in this activity - but a good benchmarker is much more than a technician. Benchmarking certainly requires detailed technical knowledge. However other, equally important skills are mandatory. For example, a high degree of financial background as well as a highly developed knowledge of the outsourcing contract is not only required but mandatory - these skills have to be provided and have to be available in each and every benchmarking activity. Benchmarks set precedents inasmuch as contract clauses are interpreted and commitments are made for future benchmarks.

Bottom line

Benchmarks are an important part of the outsourcing life. In many instances, benchmarks result in real price adjustments, making a big difference on the bottom line of either - or both - parties. Clients and vendors owe it their shareholders to act financially responsible and treat benchmarking as a "normal" part of an outsourcing arrangement - and achieve the optimal result.

*Eugene Talasch is the manager, Benchmarking Practice Asia Pacific for Meta Group Australasia. He can be reached at eugene.talasch@metagroup.com

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