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How Benchmarking Can Improve IT Outsourcing Deals

As IT outsourcing has evolved so have IT outsourcing customers' benchmarking needs. As a result, a new approach to benchmarking is necessary. Kathy Rudy, partner with outsourcing consultancy ISG, discusses pros and cons of benchmarking for transformation and how to do it right.

Traditionally, IT services customers have approached periodic benchmarking of their outsourcing deals as a hammer to tamp down on vendor pricing. But as outsourcing itself has evolved so, too, have outsourcing customers' benchmarking needs.

"Customers are upping the ante on the providers and pushing the envelope on benchmarking suppliers," says Kathy Rudy, partner with outsourcing consultancy Information Services Group (ISG). IT leaders don't just want to know that their costs are in line with the market. Increasingly, they may want to see where they stand in areas of innovation, agility, standardization and quality.
That requires a new approach to benchmarking, says Rudy, one that's approached not as a way to tighten the screws on the way things have always been done, but as a method for establishing new and better ways of operating.
How is benchmarking of an outsourcing deal typically approached?
Kathy Rudy, Partner, ISG: Clauses have historically often been used to focus on discrete service towers. While this is useful in terms of making adjustments to pricing within individual functional areas, this perspective is limited, as it doesn't take a holistic view of the enterprise.
Also, at the end of a contract term, companies will sometimes seek a benchmark without formally executing the clause to determine if the price is market competitive. This way they can use the results either as a renegotiation tool or to provide evidence to management that they don't need to go out for a full competitive bid. The potential downside of this approach is that it can be shortsighted and may not provide the full range of benefits; specifically, running scenarios for future state, working on stronger governance, understanding different sourcing strategies, and so forth.
What about the changing nature of today's outsourcing relationships calls for a more nuanced approach to benchmarking?
Rudy: Increasingly, outsourcing relationships involve driving transformational change within the client operation. So, rather than simply ensuring that the pricing a supplier provides is in line with the market, clients are looking to their outsourcing partners to build new operating models. Rather than saying, "How do I compare with the top ten percent of companies?" clients want to know, "What's the optimal future state I can achieve?"
Clients want benchmarks that not only validate that they are getting value for services today, but that the service bundles are in line with emerging trends. They're asking if other companies are buying outsourced and retained service bundles in different packages, and if they're missing a competitive advantage by not understanding where the market is headed.