benchmarking in outsourcing contracts: indispensable · pdf filebenchmarking in outsourcing...

Benchmarking in Outsourcing Contracts:

Indispensable price protection tool or all pain no

gain

28 March 2012

Paul O’Hare, Head of Outsourcing, Kemp Little LLP

Paul Morrison, Director, Alsbridge

Housekeeping

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Key contract issues & negotiation hot spots (Paul O’Hare, Kemp Little

LLP)

Benchmark implementation - practical considerations (Paul Morrison,

Alsbridge)

Presentation of Benchmark Case Study Facts

Coffee/networking break

Case study answers

Q&A

Today’s agenda

2

Background & Context

Preliminary considerations

Setting the benchmark target

Identifying the peer group/comparators

Normalisation factors – ‘comparing apples with apples’

Status of benchmark results

Contract and Negotiation Hot

Spots: Outline of Presentation

3

Indispensable price protection tool or all pain no gain?

One of a range of price-protection tools

– Committed annual reductions

– Shorter deal terms, break options, lower T for C charges

– Off-contract benchmarking

Some outsourcings better suited to benchmarking than others

– Dependent on market maturity and standardisation

Remember - an art not a science

– Bear in mind during negotiation and implementation

But can provide genuine price protection if properly constructed and

implemented

Background & Context

4

Is benchmarking needed?

– Consider contract term (and other factors)

Status of benchmark results

– Binding or non-binding

What can be benchmarked?

– Service lines/service towers, geographies

– Impact on supplier’s pricing model

Benchmarking – preliminary

considerations

5

How frequently can services be benchmarked?

Honeymoon period

Consider in context of duration, complexity and cost

Impact on right to benchmark in part

Benchmarker costs & appointment

Changing market practice – driven by suppliers’ desire for greater involvement in

appointment process

Benchmarker charges shared

Selection from pre-approved list

Benchmarking – preliminary

considerations

6

Gradual shift in market practice on this issue

Percentile measurements historically used

Lowest quartile and decile targets most commonly encountered

But requires large number of data points/comparators

Most benchmarkers now prefer to use alternative price points

Consider also tolerance thresholds

Setting the benchmark target

7

Size and make-up generally determined by benchmark expert -

working within contract parameters

Minimum sample size:

Beware unrealistically high minimum sample size

Defining the peer group

Supplier competitors or contract characteristics

Delivery location restrictions – should offshore solutions be included?

Defining the peer

group/comparison sample

8

Pre-agree where known:

Financing costs

Asset/personnel transfers

Specific contract obligations

– e.g. high availability solutions

– tech refresh commitments

Retain records

Otherwise, leave to benchmarker’s professional judgment

And be realistic about factors to be taken into account

Normalisation – comparing apples

with apples

9

If non-binding: How realistic is termination

How will termination be treated – convenience or cause

If binding: Will reduction be subject to a cap?

Consider tolerance threshold

Will adjustments be retrospective or forward looking only Impact on supplier – forecasts, revenue recognition etc

If forward-looking only, consider terms to disincentivise delay

Finally, any impact on other contract terms? Volume-based price bands, revenue commitments, indexation/COLA provisions

Status of benchmark results:

binding or not?

10

Price Benchmarking - Implementation

Paul Morrison

March 2012

Copyright © 2011 Alsbridge plc. All rights reserved. 12

Contents

1. The engagement

2. Process maturity

3. Sample

4. Metrics

5. Normalisation

6. Targets

7. Outcomes

8. Post-script - Off contract benchmarking


The Engagement

Supplier and/or client roles

Data provision

Validation

Duration

1-2 months per tower, not 6 months+

A balance must be struck

Robust enough to be comparable, open enough to be challenging


Process maturity – not all benchmarking is the same

2000 2012

Outsourcing maturity

Implications for benchmarking data and accuracy...


Different processes have a wide variety of metrics

• IT Infrastructure – Cost per blade; cost per terabyte; cost per MIPs

• IT Applications – Cost per resource per year

• Finance – Cost per resource per year (some transactional metrics)

• HR – varies by sub-process – e.g. Cost per hire, cost per training session

• Payroll – cost per payslip


Metrics matter

BPO example – What is the right cost per unit?

1. ‘Rate cards’ – Cost per grade per location

2. Blended rate – fully loaded cost per FTE (full time equivalent) per location


‘3D Benchmarking’

Unit pricing on its own is potentially dangerous:

The total service price might be right – for the wrong reasons

High cost x low volume = Low cost x high volume = Right cost x right volume?


Comparing like with like

Expectations can be high:

‘... assess comparative information on outsourcing contracts of

comparable financial and accounting systems, service levels, volumes,

term, investments made, global/regional scope, risk allocation,

ownership of intellectual property rights and other material terms and

conditions between Benchmarked Companies and top-tier outsourcing

service providers of comparable reputation...’


Sample selection

Much will be pre-determined by the contract

Client peer group – Same industry? Same geography?

Supplier peer group – ‘Tier 1’; global

Deal comparability

no 2 deals are the same

need to break into components (esp. by tower / by geography)

# of data points

Driven by market maturity

Need to avoid being unrepresentative or exclusive

Unrepresentative samples are too narrow and could be skewed by outliers

Exclusive scenarios are too homogenous and fail to bring in market variety


Normalisation factors

95%+ of the price is determined by:

Delivery location

Supplier / supplier margin

Competitiveness of process

Other common normalisation factors have varied relevance

FX, inflation

Size of deal

SLAs / quality

Commercial assumptions

Risk allocation, IP.....!

Many normalisation factors have minimal correlation with the price

Independence is required to cut through the complexity


Targets

What is competitive?

Upper decile?

Upper quartile?

Average minus 20%?

Most benchmarking works with +/- thresholds

Smaller ranges for more mature processes


Outcomes – what is being achieved?

Significant changes in recent years

● Market slowdown

● Maturing suppliers / customers

● Increasing offshoring

● Some price inflation

Range of results by sector

● IT - Year on year price decreases in some towers

● Finance – Benchmarking of recent 3-5 year old deals have result in 0-25% reductions.


Benchmarking is part of a spectrum of options to steer and reshape the terms of an outsourcing deal

FREQ

UEN

CY

Change process

• Managed within contract through

day to day change process

Renegotiation

• A major change to the existing

agreement / relationship

SEVERITY

Benchmarking – ‘on’ or ‘off’ contract

• Formal review / change of pricing driven

by market pricing data

Recompetition / termination

• Inviting other providers to propose on delivering the services


Post-script - Benchmarking ’off-contract’

● Benchmarking can be driven solely by the Client

● Increasingly common

● Doesn’t require permission of the Supplier;

● but as a result there are no agreed remedies

● The purpose is to gather information, with which to:

● Give reassurance that the deal is competitive

● Or - Indicate how the deal is not competitive

● A significant price gap could result in

● a retendering exercise

● With benchmarking result as new target price

● New alternative suppliers in tender process


Practical benchmarking

How to avoid the wrong dynamic?


Practical benchmarking

Avoid complexity – if it is not simple and transparent it may not work

Moderated outcomes – Excessively sharp teeth will encourage defensiveness

Use ‘off contract’ benchmarking as well


For more information, please contact

[email protected]

+44 7747 865 955


Alsbridge plc - company overview

Alsbridge is an award-winning management consultancy & benchmarker specialising in advising clients on shared services, outsourcing and offshoring of complex processes.

ProBenchmark is our suite of benchmarking tools and data.

Key facts:

Founded 2002; HQs in London & Dallas

Approximately 100 advisers – all experienced experts, no “junior pyramid”

Management team are all senior industry leaders, backed by an active and eminent Advisory Board

Clients: major blue chip corporations and government departments

2011 – Ranked Global No 1 Outsourcing Advisor


IT and Business Process Benchmarking

•Next generation benchmarking

Business process and IT service performance, from in-house or outsourcing provider

•Delivered faster, more reliably and more accurately using:

Patent Pending next generation Parametric Model

Most experienced benchmarking team

Online Market Assessment (OMA)

Web enabled subscription service

Real time access to the ProBenchmark modeling engine

Analyze many outsourcing price scenarios: Desktop, Mf, Network, Server, Storage

Snapshot BenchMARQTM

Project based version of OMA with more analysis

Allows for rapid turnaround and scenario planning

Expedites strategic decision making

Third Party Benchmark

Detailed benchmark project typically performed with both client and provider participation

Very detailed results – act as "fair witness“

Perfect for accurate, unbiased execution of third party benchmark clause in contracts

Case Study - Scene Setting

You are the “Client”

Supplier is providing HR BPO Services

Supplier is providing multiple service lines – HR, payroll, tax filing,

time/labour management

Supplier is a large multi-national – Top-5 largest HR BPO provider

Service delivery options have used new/innovative methods and

offshoring

To win the work they have accepted some terms that you know they

would not normally accept e.g. the provision of a PCG and an LOL of

200% fees

Coffee

31

Benchmarking Clause – Key Issues

Top 10:

1. Agreements to agree

2. Parameters of selection of Benchmarker

3. What is being measured

4. What are the comparators

5. Frequency

6. Whole or part?

7. Caveat

8. Supplier co-operation obligations

9. Cost

10. Outcome

Agreements to agree

Parameters of selection of

Benchmarker

Do the restrictions in the clause for choosing the Benchmarker

mean one might never meet the criteria?

What is being measured

Numerous restrictions on services being compared against

Unclear consideration of contractual and “non-contractual undertakings”

What are the comparators

Is the group of potential comparators small – does it make a

benchmarking feasible?

Supplier and services form part of the benchmarking survey – it can

equate to a dilution of any disparity

Frequency

Key:

When can it start?

How often?

How does that reflect against the term of your deal and the type of

services you are buying

Whole or part?

Why does whole as against part matter?

Caveat

Can the Benchmarker gain access to all the information they need?

Supplier co-operation obligations

An appropriate comparison will need Supplier input

Obligations that are objective allow suppliers to easily raise “not in

commercial interests” objections

Treatment costing 50p per child per year will allow them to

attend school, learn more effectively & live more prosperous

lives.

Kemp Little is

supporting SCI to

treat 40,000 children

suffering from

neglected tropical

diseases.

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