Outsourcing: Benchmark Your Provider Without the Hassle
Benchmarking is a useful way for outsourcing customers to ensure that their service providers are offering competitive prices. But the process can be costly, contentious and time consuming for outsourcers and their customers. One alternative--the proxy bid--has its pros and cons.
CIO — Savvy IT outsourcing customers insist on including benchmarking clauses in their IT services contracts. Benchmarking clauses are beneficial to outsourcing customers because they allow the customer to bring in a third party to assess the competitiveness of the outsourcer's prices.
But benchmarking can be a daunting task. It requires the outsourcer's often reluctant participation. It's expensive. And it takes time.
Buyers often begin to think about benchmarking when times are tough and they need to renegotiate their outsourcing contracts to lower their costs—the very time when devoting additional funds and resources to a benchmarking effort is most difficult.
But there is an alternative, say some consultants—the proxy bid.
"A proxy bid represents what the benchmarker would bid to provide the services if the benchmarker were in the outsourcing business," explains Scott Feuless, senior consultant with Compass Management Consulting. "Independent [benchmarking] firms are not in the outsourcing business, but they have access to extensive data on what the services cost and how they are priced."
[Need to lower the cost of your existing outsourcing contract? See 9 Ways to Save Money on Your Current Outsourcing Contract.]
Unlike formal benchmarking, which requires the outsourcer to provide data and participate in interviews, a proxy bid does not require the vendor's participation.
Consequently, adds Feuless, the proxy bid process can be less contentious than traditional benchmarking. Outsourcers who get called on the carpet by third-party benchmarking firms are often reluctant to participate. It's no wonder: By initiating benchmarking, a customer is essentially saying they don't think the provider's prices are fair. The provider not only has to devote its time and talent to the benchmarking process, but in all likelihood, will end up having to reduce the prices it charges to the customer as a result, which puts its revenue at risk. (This explains why many leading IT services providers are disinclined to include benchmarking clauses in their deals unless the customer insists. See No Comparisons: The Outsourcers' War on Benchmarking.)
"Some customers have already had bad experiences with formal benchmarking and expect their vendor to challenge the process in every way possible, reasonable or not," Feuless says. As a result, he adds, "They prefer to skip the formal benchmark process, get some pricing targets [via a proxy bid] and go straight to the negotiation phase."
Proxy bids are also cheaper and take less time than traditional benchmarking. In many cases, proxy bids can be half as costly and time consuming because the independent firm providing the bid does not arbitrate between the provider and customer the way it would during actual benchmarking proceedings, says Feuless. "It's simply a matter of analyzing the available data and information and delivering the results," he says.
