- How price benchmarking saves you money
- Ways that outsourcers are trying to limit benchmarking
- How to negotiate a good bench marking clause
When Darius Jackson became ING's head of IT infrastructure support and service delivery in January 2005, his job was to clean up a mess. two years earlier, the financial services company had outsourced its IT infrastructure (hardware, software, help desk and so on) to a major service provider in a seven-year, $US600 million deal. But now the business leaders of the company are worried that they aren't getting the value they want out of the relationship.
Jackson has a crowbar for leveraging more value out of the deal, though he hasn't used it.
It's called the benchmarking clause, a small paragraph hidden in a vast, complex outsourcing contract that gives him the right to assess the outsourcer's prices using an independent benchmarking firm. If those prices turn out to be way above the going rate, he could bring his outsourcer back to the negotiating table. The outsourcer probably wouldn't be too pleased with Jackson should he choose to exercise that right. "They like to look at the relationship as a partnership," says Jackson. "Their preference is that you come and talk to them about issues and concerns and try to work through them as opposed to looking under the covers."
Still, Jackson admits, "having [the benchmarking] option is invaluable".
But what Jackson and other IT leaders may not know is that the power of the benchmarking clause, which is hidden inside most outsourcing agreements today, has diminished and the practice of price benchmarking is in danger of disappearing altogether. "Suppliers have scant enthusiasm for benchmarking, which shaves their margins and tends to be invoked just as their contracts start to become profitable," says George Kimball, a partner with law firm Baker & McKenzie who represents outsourcing customers. Not surprisingly, benchmarking clauses are among the most contentious and negotiated terms in an outsourcing contract, says Kimball.
The major IT service providers have launched an all-out assault on benchmarking, fighting to turn it to their advantage
In fact, the major IT service providers have launched an all-out assault on benchmarking, fighting to turn it to their advantage. "[They are restricting] what you can benchmark, how often you can benchmark and the amount the benchmark can reduce the price of services," says Mark Robinson, executive director of advisory services sourcing consultancy EquaTerra.
Other experts say the big outsourcers are looking to avoid the process altogether. "They want to stonewall it," says Howard Rubin, a senior adviser to research company Gartner.
All of the major providers we spoke to for this story — EDS, Hewlett-Packard and IBM — deny that they are out to kill benchmarking. However, all express frustration with the current state of the practice and all are trying to change it — to their benefit. "Benchmarking isn't ever going to go away, but I think it will change," says Jon Stewart, VP of market management for Electronic Data Systems (EDS). "I think we need, first and foremost, more credible [benchmarking firms]. There's not a lot of players in that space. Second, there needs to be some recognition of what you can realistically expect from a benchmark. The old mind-set is: 'Ah, I'll go to a benchmarker and they will have a robust view of the market'. They don't."
If the power of the benchmarking clause diminishes, CIOs will concede one of the only tools for controlling the cost of outsourced services. The risk with any outsourcing contract is that you end up paying through the nose for services that should be getting cheaper, particularly in the infrastructure area, where prices for hardware are dropping constantly. "If you leave it up to the vendor, there won't be any benchmarking. Your next shot to adjust prices is when the deal's up," says Robert Finkel, partner with law firm Milbank, Tweed, Hadley & McCloy.
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