Outsourcing Leadership Blog
Benchmarking: Look Before You Leap
on Wednesday, 24 June 2009 14:19
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Benchmarking
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I recently worked with a potential client whose five year infrastructure outsourcing contract was coming up for renewal in six months. They were struggling with whether to move ahead with pricing that their provider had offered them (with some negotiation of course) or whether to step back and examine what the going market rate was for the services being provided. The big question was really this: “How do you know you are getting a competitive price?” There are two ways to solve that: 1) Get a “competitive benchmark” for the specific services you are outsourcing, and/or 2) “Test the marketplace” with a fresh request for proposal. Either method will more than likely give you a better price than what the provider offered. I have actually seen clients do both. In the “competitive benchmark” scenario, you can leverage deep databases of deals that have been executed in the last 18 months and get a fairly indicative idea of the range (±10%) you should expect going forward. Of course, you need to do your due diligence on the benchmarker to ensure they have a proven methodology, access to data from around the globe, seasoned professionals (“been there, done that, got the T-shirt”) and are respected by service providers (this will help when you start to thumb wrestle over the pricing) and recognized in the top three in the industry. Why do they need all those qualifiers? Simply, if you are taking data to your board of directors, you better have the credibility to back up what you say. This process should take less than four weeks and cost you tens of thousands of dollars. The ROI is very high. In a “test the marketplace” approach, your expectations should be higher relating to the pricing accuracy due to a highly competitive real time charged scenario. In addition, you can improve your solution by asking a number of providers to leverage their creativity and innovation, which will stimulate new ways of delivering real business results. Many old contracts have lost their focus/pizzazz and suffer from value leakage. This approach will certainly take more time and money but can bring an abundance of additional benefits (e.g., innovation, new think, competitive pressure) that you would not get otherwise. Bottom line: You need to look (or decide in advance) before you leap forward to your answer. Only you can determine what you need most. But certainly, just going along with whatever the provider throws at you (even with some resistance) may impress your immediate management, but certainly not the CFO or board of directors who have fiduciary responsibility to the stockholders or private equity owners. Randy Vetter Director, Alsbridge, Inc.
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