Outsourcing: Approaches to benchmarking
One of the greatest challenges facing companies embarking on outsourcing is ensuring that their contracts are, and remain, value for money.
Outsourcing contracts often incorporate an initial cost “reduction”, set against the expense of running services in house, of between 10 and 15 per cent; in some cases, clients are able to make greater savings. But the competitive nature of the IT industry and the dynamics of Moore’s Law means that the true cost of IT can fall by far more over the lifetime of a long-term contract.
The challenge for CIOs is knowing how far they should expect costs to fall, and persuading their suppliers either to build cost reductions into a contract, or to open up negotiations.
The issue can be particularly tricky when a new technology emerges that could not have been foreseen when the contract was signed, but which dramatically reduces the cost base for a service. The transition to IP-based networking, the growth of voice over IP and the emergence of software as a service are all recent examples.
As a result, CIOs now tend to insist on benchmarking clauses in outsourcing contracts, allowing them to compare both costs and service levels with those enjoyed by other companies with similar technology needs.
