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The Way Business Is Moving

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Issue Date: November 2005

Benchmarking is not a rule

1 November 2005
Magda Engelbrecht, acting executive Outsource division of arivia.kom

Entering into an outsourcing agreement is a complex, long-term decision that can have far-reaching consequences. Benchmarking can serve as a guide to the suitability of the contract and can add a level of confidence to the deal, but it is not the ultimate measure of success.
Companies strive to achieve strategic goals through outsourcing, but this cannot be achieved in only a few months. Thus, executives need to take precautions to ensure that the deal offered meets their short-, medium- and long-term requirements.
For example, in every outsourcing deal there comes a time when the service provider has to buy new equipment or increase its fee. Will the client simply negotiate the lowest costs possible, possibly hampering the future effectiveness of the deal; or does the client accept the costs presented without question?
Clients need help in deciding if their outsourcing contract is on par with others in their industry or if they are getting the short end of the stick. A cut-throat price can be just as harmful as over-paying.
This is where benchmarking comes into play. Benchmarking Service Providers (BSPs) collect detail of outsourcing agreements from around the world to allow companies to compare their contracts to other businesses with a similar type of arrangement.
BSPs consider the price paid for services, the structuring of the contracts and services, the performance of the outsourcer and the governance model implemented. Clients can use this information to determine what the market is doing and paying to judge the fairness and effectiveness of their outsourcing service provider.
Most companies choose international BSPs because these companies usually have large databases of statistics garnered from around the world from which to draw their comparisons. Of course, the method of benchmark data collection must also be determined to ensure the relevancy of the comparison - and this leads to a few challenges.
The comparison challenge
Simply comparing statistics regarding other companies outsourcing agreements is a bad idea. One can end up comparing apples with oranges. An electricity utility's contract will be vastly different from that of an international bank, for example. One may need a focus on the back-end, ensuring its systems are always running, while the other may demand better service on desktops to ensure clients receive uninterrupted service.
When making a comparison, a company needs to examine the size, complexity and sophistication of the infrastructure related to the outsourcing deal. It must also ensure that the performance, costs and services it will contract for are comparable to those used by the sample. However, every company is unique and simply comparing averages is not always an accurate measurement.
The whole is more important than the parts
Every outsourcing agreement contains a collection of services. Unfortunately, no BSP has enough data to compare these collections, thus limiting the usefulness of the benchmarking exercise. One service may be more costly to one company because of the situation and environment it operates in, while a competitor may obtain a similar service cheaply. One cannot make decisions based on information gathered from a single component.
Most importantly, comparing one's company to international equivalents does not consider country peculiarities. For example, South Africa's telecommunications costs are far higher than those of the US and European Union and this needs to be considered when doing comparisons.
The best solution to overcome these challenges is to benchmark an outsourcing contract with similar South African companies using outsourcers familiar with the environment.
Selecting a BSP and a set of companies to use as a comparison is not a simple task, especially considering these services can cost well over R1 million. Executives must therefore make sure the data provided is suitable for effective decision-making. Benchmarking, however, is only a guide as no two companies have exactly the same structure and needs. The statistics gathered from other companies can indicate if your outsourcing deal is on the right track, but it does not give you ammunition to pressure your outsourcing service provider for lower costs or to change their modus operandi. Remember that it is easy to squeeze lower costs out of the deal, but you always get what you pay for.
Magda Engelbrecht, acting executive Outsource division of arivia.kom
Magda Engelbrecht, acting executive Outsource division of arivia.kom
For more information contact Peter Phillips, arivia.kom, 011 319 9013, peter.phillips@arivia.co.za


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