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.
Compass recently worked on a proxy bid for a large North American pension fund provider nearing the end of a 12-year outsourcing deal with a major IT services vendor. The proxy bid showed that the pension fund was paying almost double the market rate, says Bob Mathers, a principal consultant with Compass Management Consulting. The company brought some of the work back in-house and renegotiated pricing structures, service levels, penalties and incentives with the provider on the remaining outsourced work.
Occasionally, customers opt for a proxy bid as a first step toward benchmarking. “Some client organizations feel that they don’t know what they don’t know and simply wish to find out if their pricing is in synch with the market,” says Feuless. “Based on what they find out, they can decide whether to proceed—or not—with a formal benchmark.” The proxy bid can also help to narrow the scope of services to benchmark officially.
The Downside of Proxy Bids
There are drawbacks to the proxy bid approach. It’s not always as authoritative as formal benchmarking, depending on how the benchmarking clause is written. Some benchmarking clauses state clearly that prices must be adjusted to reflect the results of the benchmark, which makes actual benchmarking preferable to a proxy bid. Others only state that the benchmark can be used as a guide for discussion and negotiation.
In addition, a proxy bid provides less accurate results than benchmarking that involves the provider.
Finally, notes Adam Strichman, an independent outsourcing consultant based in Mechanicsville, Va., if the vendor has no interest in renegotiating, the proxy bid “can be a complete waste of time.”
“Proxy bids can work,” adds Strichman. “And anything that works is good. But the open dialogue is the key, and recognition that something must change. Without that, neither benchmarking nor proxy bids will work.”
Editor’s Note: In a previous version of this story, CIO.com misidentified Scott Feuless as a senior consultant with Compass Consulting Services. In fact, Feuless is a senior consultant with Compass Management Consulting. We regret the error, which we have corrected in the story.