5 Benchmarking Alternatives That Will Improve Outsourcing Relationships

Benchmarking can pit you against your IT outsourcing supplier on prices. Here are five friendlier alternatives to keep costs competitive and your relationship positive.

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3. Automatic Renegotiation

Automatic renegotiation is a similar tactic that can be employed for longer contracts during which the environment might change impacting the cost structures of IT services.

"Suppliers should, over time, become more efficient and cost-effective at providing the services, taking advantage of synergies and lessons learned as the contract progresses," says Paul. Both parties might to agree to an automatic renegotiation of the charges prior to any contract renewal, putting the customer in a better position to negotiate competitive pricing going forward.

However suppliers may have little incentive to agree to such a clause. "Automatic renegotiation may not be welcomed by a supplier seeking to retain those savings for itself," says Bates. "There is little incentive for a supplier unless some sort of gain-share is agreed between the parties. This drives better behavior as both parties will ultimately benefit from the efficiencies and the supplier's hard work."

4. Director's Certificate

When a vendor views benchmarking as unfair or unreasonable, an alternative is to have the supplier's chief financial officer or other senior corporate officer confirm to the customer in writing on the commencement of the agreement that the pricing is competitive with that offered by the vendor to similar customers for equivalent services. That certificate is renewed and reissued every contract year.

No corporate officer should be willing to sign such a statement if false. However, says Bates, "the customer may not be willing to rely on a non-contractual statement from an officer of the supplier on the basis that the statement given will not be an impartial view but, most probably, drafted from the opinion of the director and therefore unlikely to satisfy the customer when it would prefer to rely on an objective, contractual promise or obligation." And ,unless made fraudulently, there is little recourse for the customer if an officer's statement turns out to be incorrect.

Ultimately, Bates advises relying on such a statement only with large, well-known vendors. Additionally, most IT service providers will only agree to such a stipulation for their biggest customers who are likely to be receiving the best pricing.

5. Informal Benchmarking

If there is no formal, contractual benchmarking process in an agreement, a customer can still undertake an informal benchmarking exercise. Unlike the formal alternative, the customer conducts the exercise based on information obtained without any vendor participation. And there are no automatic consequences or other contractual processes for dealing with the outcome of the benchmarking.

Nonetheless, it can be a powerful tool in renegotiation. "The timing of the exercise is important," says Paul. "If conducted at a time before renegotiation, it can incentivize a supplier to provide competitive pricing. However, customers should be careful of the message it sends to suppliers and an open and frank discussion should be had as to why a customer feels it necessary to conduct such an exercise."

Stephanie Overby is regular contributor to CIO.com's IT Outsourcing section. Follow everything from CIO.com on Twitter @CIOonline, Facebook, Google + and LinkedIn.

Copyright © 2014 IDG Communications, Inc.

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