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By Howard Davies, Director,
ProBenchmark
A sourcing benchmark can seem like an easy answer to improving the price performance of your outsourced operations. By finding out the market price of your services, you should be able to simply change your pricing to reflect the market, right? Wrong!
A sourcing benchmark needs to investigate the causes of any price differences to market, rather than just show the price difference itself. Without an analysis of causes, it is nearly impossible to make any changes to the price of your services because there could be multiple issues at stake. Will the provider agree to the change? What will that change do to the pricing mechanism? How will the price change impact the service? What effects will it have on the client/provider relationship?
To be effective in these circumstances, a sourcing benchmark needs to uncover the drivers of any price difference, such as volume changes, asset refresh rates, residual transformation charges, etc. These price drivers will determine the ability of either party to derive price benefits from the agreement. For example, if one client organization has decided to retain two email solutions, versus a lower priced agreement with only has one email solution, it would drive price increases for the client
organization. If, however, the client accepts the benefit of consolidating to one platform, the parties can agree on the benefits from a pricing point-of-view and ensure the change occurs and the price is altered accordingly.
Another driver of price change is the contract itself. There may be breakpoints in the contract at which time a price negotiation can take place, either linked to a sourcing benchmark clause or to a change in requirements. This is the obvious time to use a benchmark to determine the target for any price negotiation. However, there may be other ways to effect price change related to volume and service levels. For example, a benchmark can reveal the effect of volume changes on unit pricing so it may be possible to alter IT volumes (by changing application functionality or the relationship between business volumes and IT volumes) to the degree necessary to hit a price breakpoint in the contract charging mechanism. In a similar way it may be possible to decrease or relax certain service targets so that those services can be delivered for a lower fee under the existing terms of the contract. Where the contracted services are labor based, a good sourcing benchmark will not only show the potential for adjusting labor rate charges, but also the degree to which the level of labor is actually required. This would mean benchmarking the requirements and not just the rates to make sure staffing assumptions can be validated and changed if necessary in order to arrive at a more competitive price for the work.
In summary, the best way to implement sourcing benchmark results is to consider the price drivers not just the price, so all available change levers can be used to arrive at the right market competitive price for the services required.
A sourcing benchmark needs to investigate the causes of any price differences to market, rather than just show the price difference itself. Without an analysis of causes, it is nearly impossible to make any changes to the price of your services because there could be multiple issues at stake. Will the provider agree to the change? What will that change do to the pricing mechanism? How will the price change impact the service? What effects will it have on the client/provider relationship?
To be effective in these circumstances, a sourcing benchmark needs to uncover the drivers of any price difference, such as volume changes, asset refresh rates, residual transformation charges, etc. These price drivers will determine the ability of either party to derive price benefits from the agreement. For example, if one client organization has decided to retain two email solutions, versus a lower priced agreement with only has one email solution, it would drive price increases for the client
organization. If, however, the client accepts the benefit of consolidating to one platform, the parties can agree on the benefits from a pricing point-of-view and ensure the change occurs and the price is altered accordingly.
Another driver of price change is the contract itself. There may be breakpoints in the contract at which time a price negotiation can take place, either linked to a sourcing benchmark clause or to a change in requirements. This is the obvious time to use a benchmark to determine the target for any price negotiation. However, there may be other ways to effect price change related to volume and service levels. For example, a benchmark can reveal the effect of volume changes on unit pricing so it may be possible to alter IT volumes (by changing application functionality or the relationship between business volumes and IT volumes) to the degree necessary to hit a price breakpoint in the contract charging mechanism. In a similar way it may be possible to decrease or relax certain service targets so that those services can be delivered for a lower fee under the existing terms of the contract. Where the contracted services are labor based, a good sourcing benchmark will not only show the potential for adjusting labor rate charges, but also the degree to which the level of labor is actually required. This would mean benchmarking the requirements and not just the rates to make sure staffing assumptions can be validated and changed if necessary in order to arrive at a more competitive price for the work.
In summary, the best way to implement sourcing benchmark results is to consider the price drivers not just the price, so all available change levers can be used to arrive at the right market competitive price for the services required.
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