Benchmarking has long been a source of strain for the relationship between customers and service providers. The potential for disagreements over price comparisons and contractual obligations is huge, and market price analysis can easily lead to bickering.
But new developments in artificial intelligence (AI) and analytics are starting to transform the benchmarking process – allowing companies to assess the competitiveness of their contracts throughout their lifecycle. Increasingly cost-effective and reliable data can drive significant savings for clients and reduce the room for differing interpretations. The exercise can even help Nearshore providers identify and assess new strategies that lead to savings on their end.
During the presentation, Chris Pattacini, the managing director of ISG’s ProBenchmark platform, said customers were no longer satisfied with benchmarking once or twice during the transaction.
“Clients [are] using price intelligence – because of its availability and cost-effectiveness – much more frequently throughout the lifecycle,” Pattacini said. “In fact, we’re seeing service providers doing the same thing and helping their clients ensure that they are have a good deal at any point in the lifecycle.”
The Need for Regular Benchmarking
Without regular benchmarking, service contracts – whether for information technology or business process outsourcing – create value leakage over time. Productivity increases, driven by automation, typically lead to year-on-year price declines. That holds true whether we are talking about a terabyte of cloud storage or a hour of a contact center agent’s time. Contracts quickly fall out of line with the market, so staying on top of the latest price trends has never been more important.
Price benchmarking exercises should have a central role in any Nearshore outsourcing agreement. After all, cost containment has always been the principal reason companies seek out providers in foreign locations.
Daniel Akre, managing director of the outsourcing consultancy UNI partners, told Nearshore Americas that location remains the single most important variable on prices, with cost fluctuations dictated by currency and political changes. Akre said smart executives are taking advantage of the increasingly affordable and readily available data to benchmark their service contracts more frequently.
“Most companies that are diligent with their overall costs will benchmark on a quarterly basis minimally,” Akre said. “[The goal] is to identify whether their key performance indicators (KPIs) are being achieved and whether those KPIs are equaling profitability.”
Today, companies view price benchmarking services as a subscription – offering real-time data that allows them to make strategic decisions in response. Automation tools have dramatically shortened the time it takes to collect data and make comparisons.
“[Nearshore providers] have to be collaborative, because there is significant price transparency these days,” Daniel Akre said.
According to Akre, the Covid-19 pandemic has further accelerated the dependence on benchmarking. Many executives are seeking to reduce costs, implement digital transformation and take advantage of new opportunities – all at the same time. The growing volume of data has also reduced the controversy around prices. Clients and providers typically embark on a benchmark exercise agreeing the numbers are reliable and relevant.
A Potential Win-Win
Akre said accurate benchmarking also reduces the potential for providers to resort to dishonest tactics to secure an initial contract with clients.
“Some companies will quote a low fee to acquire the business and it will generally be unprofitable,” Akre said. “But they will later go back to the client and raise the price. That’s one of the tricks of the trade that is unbecoming of the industry.”
However, modern benchmarking processes can be beneficial to service providers as well as clients. While they can lead to demands for price reductions, they can also reveal new strategies that result in savings for both parties. For example, a “what-if” analysis of potential outcomes could inspire a provider to affordably implement AI or cloud storage solutions.
Nearshore outsourcers that proactively conduct price checkpoints are also investing in their future by strengthening their relationships with clients. Providers with strong partnerships built on trust will inevitably see their contracts renewed, while those looking for a quick buck have a poor chance of survival.
Sam Barringer, principal consultant with ISG, told Nearshore Americas that providers increasingly view benchmarking as an opportunity to demonstrate the value of their services.
“ISG Research has found that 69 percent of deals are put to competitive renegotiation at the end of their term,” Barringer said. “We refer to this as the ‘incumbents dilemma’. The number one reason given for this phenomenon is a provider’s inability to demonstrate their capabilities. Regular benchmarking affords the provider the opportunity to do just that.”
Akre agreed that improved benchmarking processes had transformed the industry and fostered greater trust and transparency.
“[Nearshore providers] have to be collaborative, because there is significant price transparency these days.” Akre said. “Benchmarking keeps suppliers honest and productive and profitable. If not, it precipitates the opportunity for companies to reevaluate… and pivot towards another supply partner.”