Benchmarking for value: better business outcomes through better transformational outsourcing deals
This paper sets out a point of view on how transformational outsourcing deals can be made more successful and valuable by selecting a single supplier early, and appointing a Benchmarking for Value Advisor to mitigate the price and value assurance risks that this may create. It integrates the substantial experience and insights of IBM, in both transformation and outsourcing, with those of a selection of strategy and specialist outsourcing advisors, into a set of Critical Success Factors (CSFs). These CSFs can be used when selecting and appointing a Benchmarking for Value Advisor. The set of CSFs are attached in the appendix.
Context & Method
The views set out in this document are the result of various exchanges of views in workshops, calls and emails between a group of senior IBM staff with experience in transformational change programmes and outsourcing delivery contracts in the areas of processes, systems integration, applications, and IT infrastructure. In addition we engaged with a number of expert outsourcing advisors in various organisations to test our perspective and incorporate their insights on the subject. (These included ‘big four’ strategy consultants as well as some other specialist consultancies who provide outsourcing advisory services). Finally, we carried out a scan of current thinking by means of a review of current literature on the subject of successful transformational outsourcing.
Our sources generally agreed on the potential benefits of single sourcing for organisations (clients) who plan to use outsourcing as a key component of a business transformation strategy. They also agreed on the nature of the risks which such single sourcing approaches create. We also found a number of broadly consistent risk mitigation strategies proposed in the documents we reviewed.
We synthesised these sources to develop a proposed solution. An advisor appointed to serve both the client and the outsourcing provider (supplier), would be be responsible for benchmarking the value delivered via the contract. This is the best mitigation for these risks. We have called this approach “Benchmarking for Value”, to distinguish it from the established ‘price benchmarking’ services currently available in the market.
To make our conclusions as practical as possible, we created (with input from all of the participants), a set of Critical Success Factors (CSFs) for a Benchmarking for Value engagement which can act as a checklist for a Client adopting this approach.
When is Benchmarking for Value the right approach?
FIGURE 1: Motivations for Outsourcing
|“Enterprise Innovators consistently outperform other segments in 20 financial measures tested”
(Source: Why Partnering Strategies Matter” IBM Centre for Applied Insights May 2013).
IBM has found that 19 per cent of organisations which outsource choose this sourcing strategy as a means to drive or support the transformation of their business. This 19 per cent of ‘Enterprise Innovators’ on average, are more successful than their peers when measured by the growth of revenues and of gross profit. We expect the increase in this category of outsourcing deals to continue. However, when business transformation is the primary objective of an outsourcing strategy, there is a strong likelihood that the exact scope of the outsourcing will be:
Difficult to define at the point of contract… as the scope of the outsourced work and assets will be required to change as the transformation is effected.
Expected to change and evolve post contract … in ways, and at a pace, that cannot be precisely defined at the point of contract.
These challenges require innovations in both the sourcing and running of outsourcing contracts.
Using an example: A programme to establish a global Shared Service Centre (SSC) for back office processes, where IT is a key part of the scope.
The strategy is to attack new markets using a more effective business operating model, with a reduced cost base. In implementation, the pace of growth and the exact mix for growth in these new markets will not be clear at the start – three to five years before the transformation is complete. There may be a feedback loop from the pace at which the transformation takes place in different areas of the new SSC to the choice of which new markets to focus on.
This suggests that the outsourcing supplier needs to understand the market expansion strategy in some detail, design a flexible solution, and contract to reflect this context. Also, the better the client organisation understands the ‘art of the possible’, and the risks, in this scope of the transformation journey, the better the client’s plans will be. Because of the level of engagement required to develop this understanding, this is best done with a single supplier selected for their capability and experience.
|These concerns are not new … a comment from 2002To draft an appropriate contract, clients need to understand that there are three different types of outsourcing deals: Utility deals (80%), Enhancement deals, (15%), and Transformation deals (5%). An outsourcing engagement’s likelihood of success increases by 50% if the client knows what type of deal it wants to enter into before the contract is drafted.
Source: The correct contract leads to outsourcing success (Gartner 2002)
However, the sole sourcing balances improvements in solution understanding and speed to benefits with significant potential risks:
- Price assurance risk: The client has no obvious test to establish that they will be buying the services at a fair price.
- Quality assurance risk: The client has no evidence to support the supplier’s assertion that the solution to be deployed is best practice.
Because the execution of the solution, typically over a period of five or more years, must deal with changing circumstances, and potentially with advances in technology, further risks are exposed:
- Delivery risk: The client has no way to test whether the pace of benefits delivery and the currency of the solution deployed is the best that the circumstances allow.
- Exit risk: The contract needs to be designed for a smooth exit a the end of the term, ensuring, for example, that intellectual property and knowledge transfer are addressed. Also the contract needs to minimise risks involved in an early exit, however this might be triggered.
All of these risks are exacerbated by the fact that the supplier, by default, is more experienced and capable in addressing these risks than the client will ever be. A good relationship between the client and supplier is a ‘must have’ to mitigate these risks. However, no matter how good such a relationship is, there is also a need for the client to address (and to be seen to have addressed) these risks in a robust and auditable way.
|Innovation is still lacking in outsourcing relationships: Over the years, innovation has become a stronger and stronger requirement in outsourcing relationships. According to a recent Forrester Forrsights Services survey, 87 per cent of IT executives and technology decision-makers say innovation will affect their company’s spending in 2012. But it also shows that innovation is still a challenge in existing outsourcing relationships
Source: “Innovation in Outsourcing Relationships” ComputerWeekly.com 2012
In addition, from the supplier’s point of view, these risks present a very substantial commercial and relationship danger. If the transformation goes more slowly than planned through inaction or an underestimate on the part of the client, it will be difficult to manage that delay to the planned realisation of benefits that the contract is based on.
The problem is that these risks can drive the sourcing solution towards a traditional procurement process, which is not be for purpose for a transformational outsourcing contract. Another common and problematic solution is to deploy price benchmarking to address the price assurance risk. However, price benchmarking is a poor solution to price assurance in a transformational outsourcing contract and it can even exacerbate the quality assurance and delivery assurance risks that we identified.
|Feedback received from both outsourcing clients and service providers is that the process of benchmarking as a contractual means for testing and adjusting committed pricing is not working.
Where benchmarking has been used, there have been two closely related, major components leading to the clients and service providers entering protracted discussions about the data and comparison process. The two components are misaligned expectations of the purpose of benchmarking and misguided expectations around the reality of the marketplace and the availability of data to predict prices.
Source:TPI 2007 (now merged with Compass to form ISG)
IBM, and the expert outsourcing advisors we discussed these challenges with, recommend a new approach to mitigate the risks and deliver the targeted benefits of a transformational outsource. An expert advisor is appointed by the client to provide Benchmarking for Value services from the selection of the preferred supplier, through the contract negotiations and onwards through the life of the contract. The costs of this solution are small in relation to the business case for the transformation itself, and will be paid for by the savings generated by avoiding traditional procurement costs and the improved time to benefit for the client organisation.
What is the nature of the Benchmarking for Value relationship, with the client and the supplier?
The relationship of a Benchmarking for Value Advisor is tripartite. Appointed by the client to augment expertise and bring practical experience. Paid for by the client and the supplier to provide an independent view of the contract and the benefits it delivers. They must also be outward facing, to understand both the outsourcing market and the client’s industry from both an operational and strategic perspective.
FIGURE 2: Relationship
|“In long-term IT deals there is often a disconnect between expectation and delivery, Long-term contracts need mechanisms to evolve as the relationship develops.
Source: “KPMG Value Assurance Services” (KPMG Apr 2013)
The role of the advisor should be designed to evolve from pre-contract through to contract close out. Initially the role is weighted towards expert consulting inputs as the terms of the contract are designed and agreed. This consulting expertise is also important in the early stages of the contract delivery when transformation is the focus. Later, the more traditional price benchmarking component will grow in importance.
There are challenges in combining the qualitative transformation review and the quantitative price benchmarking components. However, the combination is essential to deliver a holistic Benchmarking for Value service.
FIGURE 3: Change over Time
What are the Critical Success Factors (CSFs) in a Benchmarking for Value engagement?
The CSFs set out in the table attached are the consensus view of the various experts who engaged and contributed to the discussion on this subject, as well as the various papers that the team reviewed. They can be summarised under four primary headings:
The relationship, including responsibilities and accountabilities, needs to be well defined with both the client and the supplier.
The payment terms for the advisor need to be linked in some way to the success of the transformation and the provision of an unbiased opinion to both the client and the supplier. For example, placing a proportion of the advisor’s profit at risk against the satisfaction of a few key executives in the client and supplier would evidence that this is addressed.
|At a Project Management Institute event hosted by Ernst & Young, in an audience poll of about 100 Institute members; Less than a fifth believed that their programme’s business case was wholly aligned to its vision.
“It takes time to devise and implement incentives that will motivate all the
participants to collaborate towards shared goals — but it’s time well spent.”
Source: “Let’s relearn the art of Programme Management” E&Y Mar 2012
The engagement needs to start before the contract is signed (so the advisor can assist with design of the contract) and continue through the contract term to contract close out. The advisor should maintain continuity of knowledge, and ideally key personnel, through the term. Finally the advisor needs to be a trusted member of the transformation delivery team, perhaps with a seat on the programme steering board.
|The capacity for innovation and improvement [in outsourcing contracts] depends on systemic effort involving multiple parties at different stages of the outsourcing lifecycle… decisions that occur before a vendor even reaches Vendor Management can do much to either hobble or facilitate improvement efforts.
Source: Deloitte’s 2012 global outsourcing and insourcing survey
Methods & Tools: Many existing methods and tools can be deployed by advisors in this new role. Experience in working on large outsourcing contracts of similar scope will be important for the advisor organisation and the individuals in that organisation who are deployed in the engagement.
Traditional price benchmarking used in isolation (sometimes with advisor rewards related to price savings) are a real danger in a transformation outsourcing contract. However, sophisticated price benchmarking capabilities remain a key component of the Benchmarking for Value Advisor’s toolkit. This benchmarking should be deployed sparingly to deliver enough evidence to satisfy the client and the supplier that prices are fair and reasonable at the macro level. A detailed understanding by the advisor of the supplier’s industry and operational drivers will be a fundamental underpinning to that benchmarking insight.
The advisor needs to deeply understand the strategic and operational challenges that the client has. These are critical to defining the KPIs and the benefits case for the transformation project and may evolve over the course of the contract in response to market and technology changes.
|IBM Client surveys confirm the shift to value:
69% of CEO’s are partnering for innovation
65% of CIO are partnering extensively to change their mix of skills, expertise and capabilities
Source: “Outsourcing’s Next Act” (IBM Apr 2013)
There is a consensus rapidly forming in the outsourcing services industry on how best to design and implement transformational outsourcing contracts. An important element will be the use of expert advisors serving both the client and the supplier in such contracts.
The right Benchmarking for Value Advisor engaged in transformational outsourcing contracts will:
- Accelerate the procurement process … and reduce the client’s time to value
- Help to assure benefits delivery through the term of the contract
- Provide price assurance to the client… to mitigate risks associated with a single powerful supplier
Where the client decision to outsource is driven by the need to transform their business, they should get to a single preferred supplier as soon as possible and engage a capable and experienced advisor to provide Benchmarking for Value services. The advisor should provide support from pre-contract to the end of the contract term.
Using the CSFs in this document will guide the appointment of a Benchmarking for Value Advisor with the right skills, on terms that will establish proactive and positive behaviours in the client, the supplier, and the advisor. This will maximise the benefits delivered by a transformational outsourcing contract.
Kieran Sheedy is an Executive in IBM with responsibility for developing transformational deals which enable strategic change. He has more than 20 years’ experience in strategy and change consulting working for blue chip clients across various industries and on three continents. This article represents his personal views.