When it comes time for an enterprise to renegotiate its information technology outsourcing (ITO) contract, it can approach the event either as a crisis or as an opportunity. An enterprise’s stance depends largely on its renegotiation strategy and what it can leverage for its benefit. It’s not atypical for an organization in this position to decide to embark on a renegotiation without a benchmark study, believing that such a study is simply too expensive and too time consuming.
While it may seem expedient at first blush to skip a benchmark, this kind of fast-lane thinking can result in far less savings and a relationship that is costly to repair. In fact, a benchmark that measures the performance and cost of the current ITO relationship can give an organization just the fact-based negotiating leverage it needs to create a contract that will save it significant amounts of time and money over the long term.
Here are the Top 5 ways to make a benchmark work to your advantage:
- Keep the end in mind. The goal of a benchmark is to give an enterprise an objective view on pricing and associated performance levels. By clarifying specific problem areas and creating situational awareness for optimal work methods and improvement opportunities, a benchmark serves as a compass to both internal and external stakeholders. It also helps an organization evaluate and understand the impact of its constraints and decisions on a provider’s ability to deliver services and, therefore, allows both parties to look constructively at the mode of delivery and find ways to derive mutual and long-term benefit.
- Use it as a lever. Without a benchmark, an enterprise lacks leverage to drive an engagement that best serves its needs. In fact, the cost of a benchmark is much cheaper than what an organization might leave on the table if it were to enter a renegotiation without one, especially in a sole-source situation. ISG experience shows that enterprises that take the time to conduct a benchmark can save as much as 10 to 20 percent of annual contract value.
- Avoid going in blind. If the enterprise does not have a strong view of its ultimate goals, it puts itself in a position in which it must ask the service provider to implement a plan without knowing exactly what to implement and whether it can and should be implemented. In this way, a benchmark is an essential part of building a sound business case for the fundamental decision to outsource.
- Think creatively. Don’t forget that a benchmark can be adapted to fit a specific scenario. An enterprise can reduce the time required by conducting the full benchmark in an iterative fashion, establishing a rough going-in position first and refining it later. Alternatively, an enterprise can choose to conduct the benchmark in parallel with the renegotiation, starting with other items first and moving to pricing once initial benchmarking results are available.
- Institutionalize the benchmarking clause. ISG recommends including an iterative benchmark in an ITO contract from which results can be regularly adopted and incorporated into the agreement over time. Relationships that are built on this best practice benefit from a commercially clean contract that establishes a plan for continuously improving service provision.
Experience shows that benchmarks also do the important work of setting expectations and laying the foundation for the kind of enterprise-provider relationship that is more likely to be productive and healthy over the entire life of the contract. ISG works with organizations around the world to make the most of their ITO contract renegotiation. Contact me to discuss further.About the author
With more than 20 years of experience in IT, including research and development, management consulting and outsourcing sales, Thomas understands the whole sourcing lifecycle from both the enterprise buyer’s and provider’s perspective. His clients benefit from his know-how in dealing with technical, financial and strategic issues. A German national who is fluent in English, Thomas holds a diploma in computer science from the Karlsruhe Institute of Technology (KIT). Prior to ISG, he worked for Fraunhofer, McKinsey, Accenture and IBM. Thomas wrote his PhD thesis on enterprise application integration.