The COVID-19 pandemic has led many organizations to revisit their sourcing strategy in order to recalibrate their in-house vs. outsourced portfolio, identify further value and concentration risks in the outsourced portfolio, ensure resilience of operating models (including business continuity), and identify and mitigate any compliance risks with the new ways of working.
As part of performing a comprehensive contract healthcheck, organizations review contract terms and conditions, their current outsourced scope of work, and business continuity plans to make these “future-proof.” This activity is also typically accompanied by an assessment of the relative value of the outsourcing contracts as it compares to the marketplace through a benchmarking exercise.
When performing a benchmarking project, Wavestone advises clients to keep a few finer nuances in mind so that the benchmarking delivers full and meaningful value. Below are just a few benchmarking best practices we recommend:
Don’t make it a “P vs. P” exercise only: A meaningful benchmarking exercise has a holistic approach and focuses on right-sizing of the organization, optimal offshore ratios, best-in-class staffing, and the impact of continuous improvement and automation on a year-on-year FTE. This analysis ensures a right-sized solution, which brings the ‘Q’ into the PxQ equation. Benchmarking the price and solution simultaneously can result in savings of two or three times more than the original deal. Remember, a “good” price with an “average” solution will lead to mediocre results.
Do the maths: For many T&M deals, we have observed that annual rate cards are positioned by service providers as “discounted” rates. However sometimes the underlying math tells us otherwise. For example, rate cards with a 5% discount on hourly rates and a 2,080 annual hours assumption may actually turn out to be more expensive if FTE availability is only going to be 1,920 hours.
Do define your rate cards carefully: Rate cards are typically structured around position and years of experience (this is how provider cost structures are built). The rates, however, can vary by up to 20% between two adjacent bands, and service providers may game this to their advantage by consistently using a higher-rate resource. Rate card bands need to be clearly defined and distinct so there is little ambiguity at the time of staffing and billing.
Don’t just settle for an opinion: A doctor who can diagnose well but can’t operate doesn’t serve your purpose. If you choose to get help from an advisor when undertaking a contract benchmarking and healthcheck, partner with one who brings real-world deal experience—one who not only knows the market, but can drive fit-for-purpose solutions, negotiate contract improvements and deliver the savings you deserve.
Holistic benchmarking is a good first step towards gaining increased value realization from your outsourcing contracts. However, understanding where value leakage can occur with service providers and how to protect yourself will serve you well in the long run.
Educate yourself about these common pitfalls, get someone to help guide you, and use the benchmarking best practices listed above as you engage. By mitigating these potential risks up front, you will establish a solid foundation for success in your next services agreement.
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