The Vendors Strike Back

A few years ago, major outsourcers began taking active steps to restrict benchmarking. They created dedicated teams to analyze costs and negotiate benchmarking clauses to their advantage. "What was once just grumbling turned into organized grumbling," says Strichman. "Now every major service provider has a group that manages the process." These groups are charged with analyzing internal intelligence; benchmarking to calibrate their pricing models (the outsourcers use the benchmarkers' services too); and managing the process when a customer decides to invoke its benchmarking right.

Alan Yamamoto set up such a group at IBM five years ago. True to Big Blue form, the company has filed a patent in this area (see "Patent (Fight) Pending", end). Meanwhile, IBM's arch rival, HP, has created a team, as has EDS. "[Vendors] definitely have gotten more vigorous in protecting their interests," says Stuart Harris, a partner with outsourcing consultancy TPI. "I can't say they're systematically obstructive, but some of their clients might."

One of the tactics these teams use is to make a benchmarking clause so specific in its requirements that it becomes too difficult or expensive to invoke — for example, requiring too many peers in the benchmarking group (five is generally plenty, say benchmarking companies). Other terms the outsourcers may seek include negotiating a detailed limit on how soon or how often the customer can benchmark, the opportunity to review and negotiate draft findings, and caps on mandatory reductions in charges, among others.

Shutting Off the Data

But perhaps the most obstructive effort by outsourcers so far is their attempt to stymie benchmarker data gathering. In order to build their market cost estimates, benchmarkers need to pool data from many different outsourcing customers. Since the beginning of the benchmarking era, outsourcers have allowed benchmarkers to reuse the data they gather during their benchmarking engagements as long as they agree not to reveal customer names.

Yet within the past year and a half, vendors have begun asking benchmarkers to sign a legally binding document promising that they will not reuse the data they gather from the outsourcer's customers, thereby preventing the benchmarkers from making comparisons across companies — the very essence of what they do and the foundation for the service they provide their customers. Indeed, some providers, such as IBM and EDS, have banned data reuse — with rare exceptions for particularly large and determined customers. This is despite the fact that most service providers use third-party benchmarkers themselves to construct and maintain competitive deals. "If one believes in the reuse of pricing data, you have some obligation to permit that to happen," says HP's Barton, noting that HP employs the services of benchmarking companies Compass, Gartner and Germany-based Maturity Consulting. HP is in the process of "reviewing" its data reuse policy, he says.

EDS's Stewart sees the contradiction: He complains that the benchmarkers lack sufficient data to make good pricing estimates, and now he's exacerbating the problem. He doesn't much care. "The reality is I have better data than the benchmarkers do," Stewart says. "We participated in 9000 deals last year. We have much more robust information. We don't need [benchmarkers] to define our view of the market."

But CIOs do. And the trouble is, many of them buy the outsourcers' pitch that by preventing reuse of data, they are simply trying to protect customers' privacy. "The client will say: 'That sounds scary. Thanks for bringing it up'," says Nautilus Advisors' Strichman. "They don't see the agenda underneath." If every customer agreed to such restrictions, price benchmarking would cease to exist.

Meanwhile, consolidation has left just a handful of big, full-service outsourcers — all with tremendous power in the marketplace. IBM, for example, has the biggest market share of any outsourcing company, more than double that of its nearest rival, EDS. The two companies' combined market share is more than their four next nearest rivals combined, according to Gartner. Other major providers may ban the reuse of data now that the two biggest players have started moving in that direction. If CIOs don't want the benchmarking clause to go away, they will need to take a more active role in negotiations.