The Hidden Benefits of Benchmarking

By Chris Pattacini & Adam Strichman
ProBenchmark

Benchmarking outsourcing transactions is a time-tested approach for ensuring that outsourcing agreements remain competitive over time.  It ensures that vendors continue to deliver market aligned services at market competitive prices, but also offers much more. 
Having conducted many benchmarks over the last decade, our benchmarking team has seen a recurring pattern of accrued ancillary benefits that often provide greater returns than were originally expected.  These benefits do not come from the required investigations of comparable “market price”, but rather from examinations of other financial elements often overlooked during the day-to-day challenges of governing a complex outsourcing transaction.  Examples of these additional benefits include a case where the benchmark uncovered an inadvertent over-charging of CPU hours on an IBM mainframe (resulting in an immediate $19 million price credit), and another case where a poor pricing structure was causing unnecessary churn on both sides of the relationship.  In each of these cases, both parties worked together to address the problem, making the relationship stronger and more viable for each of them.

Complex Invoices
One area ripe for opportunity is the invoice itself.  As part of the benchmarking process, invoices are often examined to capture the full scope of services and price.  The benchmarker is usually the first objective party to actually review the invoices and compare them to the actual services delivered.  Errors are commonly uncovered with a simple question and a pointed finger asking,  “What is this?”   In most cases these errors are relatively small, but sometimes errors can be quite significant – exceeding 20% in extreme cases.  ProBenchmark estimates that greater than 80% of all transactions have errors on their invoices.  Furthermore, most of the errors we uncover are in favor of the vendor.  Here’s why:

• Outsourcing transactions are complex and the invoices are often long and complicated
• Despite a thorough contract, the “invoice preparer” was not present at negotiations and has only  a complex, verbose contract for guidance to determine which items are chargeable and which are not
• Vendors identify and correct many errors prior to releasing the invoice, but may not uncover all of them
• Vendors reasonably expect that clients will also validate the invoices prior to payment 
• Clients don’t often have the resources or experience to understand or validate the invoices, and by year three, the personnel reviewing invoices are often new to the deal.

These errors are not malicious, but usually accrue over time from a misinterpretation of what constitutes a “billable” item or from simple miscounts of resource units.
As an example, take the case of a large retailer with over 5000 MIPS of mainframe support.  This mainframe was charged based on CPU Application Hours, and included a complex (albeit common) normalization of actual CPU seconds to 9021-340 CPU hours.  This process is complex  and was made worse by over 14 separate mainframe machines running at multiple locations.  In the end, not only was the calculation mathematically incorrect, but it was also sprinkled with several non-billable usage categories and was being calculated by an administrative assistant based upon an outdated six year old spreadsheet.
Invoices containing mainframe application hours are one of the most common areas where errors hide.  Other typical errors include  mis-counting servers and processors and the continued billing of out-of-date SOW’s and addenda.
Over time, invoice complexity worsens as addenda and statements of work (SOW’s) compound the issue with additional line items and calculations.  ProBenchmark has seen monthly invoices with as many as 30 pages of detail.  A good benchmarking effort will not only confirm the bottom line price, but also identify invoicing errors and other opportunities to improve the invoicing approach.

Strange Pricing Structures
Benchmarking can also uncover non-standard and convoluted pricing schemes.  What may have worked at the start of the deal later becomes a hindrance as SOW’s and work orders are added to the agreement.  This complexity can cause strange behaviors by either party.  In addition to confirming that the invoice is correct, a good benchmark will uncover billing schemes that are no longer effective, or worse, detrimental to the relationship.
The most common example of this is what we call the “Prego” pricing structure (like the pasta sauce, “it’s in there”).  Under this scheme, in an effort to make the pricing simpler, many items are burdened into one simple usage rate, which appears to work well initially.  However, over time, this becomes a crutch for both parties, removing required visibility into items such as software spend or disaster recovery.  Business units lose the ability to conduct regular cost/benefit analyses of their spending.  In one case, the per-MIP rates for mainframe services included multiple software titles which most business units no longer used, but this fact was lost at the unit level.  The simple question, “Why does the rate include $4.28M in software which is used by only a handful of employees at one business unit?” led to a complete reworking of the price structure. 
These are just two examples of problems which are commonly uncovered.  They serve as additional reasons why organizations should consider conducting a benchmark: not only to ensure that the price is reasonable, but that the invoice is accurate, understandable and effective.  Similarly, benchmarks often uncover issues with SLA methodologies, relationship dynamics, and undocumented expectations which usually drive price.  All of these areas can release “hidden” benefits which clients were not expecting from a mere comparison to current market price points.

About the authors
Chris Pattacini and Adam Strichman are Directors at ProBenchmark, the provider of the industry’s only patent-pending, highly automated and repeatable toolset for benchmarking.    Learn more about ProBenchmark’s Online Market Assessment, Snapshot BenchMARQ™, and third party benchmarking services at www.probenchmark.com or contact inquiry@probenchmark.com

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