Review & Recover > Benchmarking
What does benchmarking entail?
This page covers when and how to benchmark as well as some alternatives to achieving the same goals. In the page "Contracting > Contract Terms", I have outlined what should be included in an outsourcing agreement for benchmarking.
Types of benchmarking and alternatives
Benchmarking is used to better understand whether the service is providing value for money. It isn't an easy process to carry out, but if your agreement allows for benchmarking and easier alternatives would not provide the answer then it can provide an absolute review of how your service compares with other current services.
Before describing benchmarking more fully, there are alternatives including:
- Compare pricing and service levels to market data: A number of outsourcing advisory and bench-marking companies collect data on pricing and service levels. They will offer to validate your pricing against their database. There are a couple of weaknesses to this approach. The data is likely to be made up primarily from RFP responses and hence not be final pricing numbers; and the database may ignore many of the normalisation factors shown below. This is a reasonable approach to get a better feel for competitiveness, but may not be sufficient for tough service provider discussions.
- Carry out bottom up costing: where you have reasonably detailed information on the activities in the service and the organisation supporting it, a model can be developed to provide the overall cost of the service, including estimates for technology, overheads and margin.
- Project changes from initial deal: Where it has been changes in services have led to a perceived uncompetitive service, then the initial pricing can be used as a base. A model can be developed to show the changes between first competitive response to an RFP, the negotiated pricing and subsequent changes.
When to benchmark
Where a full outsourcing exercise is to be carried out, it is usually instigated around the middle of the term. In the example of an outsourcing agreement with a 5 year term, carrying out a benchmarking review in the first 18 months will not have allowed the service to develop fully; benchmarking in the last 18 months will not allow much time for the benefits of any changes to be realised, although it may be a useful if you are considering extension of your agreement rather than going back to the market.
Typical Benchmarking Process
- Client initiates benchmark review.
- Client and service provider agree bench-marker.
- Benchmarker, client and service provider agree terms of reference and plan for review.
- Benchmarker arranges to obtain information from equivalent services.
- Benchmarker obtains benchmark information, through access to records, technical documentation, premises, systems, personnel as is necessary.
- Benchmarker analyses the services applying correction factors to provide a valid comparison.
- The report is reviewed by client and service provider who may request clarification and changes.
- The client and service provider meet and agree any actions to deal with the results of the benchmark conclusions.
Particular considerations in benchmarking
What contractual rights
Your service provider may be resistant to benchmarking, may be secretive about the operation of the service, and may wish to charge for any activities outside of the specifically defined service, so, before discussing the topic with your provider, you should check your contract.
- Are there specific provisions for benchmarking?
- What does the contract say about having access to full performance and costing information?
Selecting the scope for benchmarking
Ideally the benchmark will include the majority if not all of your services, however, it is critical to include only the scope of service that is quantifiable and for which there is data; and for which there will be equivalent services against which to compare. In selecting the scope review the normalisation factors below and exclude areas which would have to be excessively normalised.
When comparing pricing, the biggest challenge is that no two services are identical. The bigger differences must be normalised or indeed cause comparators to be excluded. Unfortunately, the more normalisation is required the less meaningful the comparison is likely to be. Typical normalisation factors are:
|Delivery location||The location has a fundamental impact on the cost of a service.|
|Language||Not only do different languages have different costs, the extent of use in the service and the quality of language used have an impact.|
|Key contract terms||There will be differences in risk, liability, payment terms, currency, and amortisation/financial engineering.|
|Scope of services||Firstly the scope to be compared must be aligned. Secondly, the overall scope including that not being directly compared should be taken into account.|
|Quality of service / SLAs||Differences in service levels have a significant affect on service provider costs.|
|Supplier Tier||There can be pricing differences due to the depth and breadth of capability. Is your service provider a first tier global provider covering most business Functions, or a regional specialist?|
|Contract Term||Once off costs are amortised across the whole contract period.|
|Deal size / bundling||is the deal multi-regional; how many FTEs; has the price impacted by bundled deals.|
|Inflation||Does the pricing information cover the same period and how is inflation dealt with?|
|Technology landscape||Need to take account of the amount of technology included as part of the service.|
Role of the bench-marker
The bench-marker is critical to the success of a review. They should have:
- Knowledge of the market for the type of services in order to be know where there will be equivalent services.
- Reputation and respect with both clients and service providers to allow them to convince other third parties to join the exercise.
- Sound knowledge of service costs and pricing models in order to carryout normalisation and make comparisons.
- Preferably a strong database of pricing information to provide another level of comparison and reality check.
These points must be validated before making your selection.