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Benchmarks: More Than a Number

by ISG

Defined in basic terms, a “benchmark” of an outsourcing deal is simply a comparison of one set of numbers against another, with the objective of adjusting pricing terms to more closely reflect market standards.  

But benchmarking can and should be much more than a discrete exercise aimed at cost reduction. Used properly, benchmarking allows you to demonstrate an ongoing and proactive commitment to quality and continual improvement.

Here are the Top 5 ways to make the most of benchmark analyses:

1. Think big. Consider benchmarking a core part of your operational strategy, an engine that drives incremental improvement as well as transformational change. A benchmark is less about adjusting prices than it is about changing the behavior of all parties in positive ways and improving your sourcing relationship.

2. Take a long-term view. Let’s say a benchmark finds that you are paying significantly more than market rates for storage technology. If the high costs are driven by unique business requirements, and by obsolete data processes and myriad legacy systems, a simple short-term cost reduction would prevent your vendor from providing effective support and expose you to the risks of an inadequate data storage environment. In this instance, the benchmark should chart a roadmap toward a future state aligned with your needs; specifically, toward a transition that replaces legacy systems with more streamlined storage platforms, and implements an information management strategy that categorizes and prioritizes data access throughout the enterprise.

3. Insist on transparency and collaboration. Doubts or questions about a benchmark invariably complicate the ensuing negotiations and increase the likelihood of rancor. Clearly defined and detailed terms in the agreement can address potential errors, omissions, and misunderstandings. Focus on transparency — not only into the results, but into the benchmarking methodology, data, and analytical process applied. Remember too that a collaborative approach facilitates open discussion rather than contentious confrontation. 

4. Define appropriate comparators and adjustments. All parties should agree on the benchmarking criteria, such as, for example, the simple mean of six of the best data points available. Balance the need for meaningful, apples-to-apples comparison against unrealistically narrow and specific requirements. Criteria for data normalization should openly address issues raised by either party.

5. Get your timing right. A benchmark analysis should be conducted prior to a sourcing transition, and subsequent analyses should be conducted every other year. Benchmarks conducted too late in the contract term risk becoming an instrument of last resort to arbitrate conflicts, rather than a means of facilitating dialogue.

Compass, an Information Services Group company (ISG) (NASDAQ:III), is the premier independent global provider of business and IT benchmarking, performance improvement, data and analytics services. Contact us for more information on benchmarks and performance improvement.