Outsourcing: Moving Towards the Benchmarking Process

One of the major challenges facing companies that bank on the outsourcing industry is making sure that they get a good return for the money that they dish out.

Outsourcing contracts regularly integrate an initial cost "reduction" of between 10 to 15 per cent which is set against the expense of running services in-house. In most cases, clients are able to make greater savings. However, the competitive nature of the IT industry and the dynamics of Moore's Law would make it mean that the true cost of IT can fall over the lifetime of a lasting contract.

The challenge for CIOs is distinguishing how far they should expect costs to fall and how they could influence their suppliers to either build cost reductions into a contract or to open up negotiations.

A new technology (which was unforeseen when the contract was signed) that dramatically reduces the cost base for a service poses a difficult. The change to IP-based networking, the increase of voice over IP, and the emergence of software as a service are all recent examples.

For that reason, CIOs would now be most likely be insisting on including benchmarking sections in outsourcing contracts, allowing them to compare both costs and service levels with those enjoyed by other companies with related technological needs.

A single international standard for contrasting outsourcing contracts and benchmarking projects is said to be run by the huge management consultancy firms.

Typically, companies benchmark when they get to the point where they either need to make a decision to outsource or decide to renew a contract. Normally, the Chief Financial Officer (CFO) will ask why, for example, PC prices have fallen and yet he is still paying the same price as what he had paid three years ago. On that point an outside benchmark is often needed."

Conventional benchmarking, however, has disadvantages. A consultancy-led benchmarking exercise can cost between $100,000 and $200,000 (£50,000 to £100,000). This can also be seen as an adversarial method of suppliers, especially when benchmarking is either not specified in the contract or a benchmarking section is not automatic but has to be "invoked".