Cost reduction is obviously a top priority these days for executives charged with managing sourcing relationships. Toward that end, benchmark analyses can be an effective way to align prices more closely with market rates. But customers should resist the temptation to use the review process to simply squeeze a bit of additional savings from the service provider.
Indeed, we’ve found that the most effective benchmarks facilitate communication and further negotiation, rather than mandate immediate price adjustments.
Consider this example: In analyzing an outsourcing agreement between a financial-services organization and a major service provider, Compass found that the customer was paying significantly more than market rates for storage technology. However, we also determined that the high costs were being driven by the client’s existing environment and unique business requirements. Specifically, growing volumes of data throughout the enterprise drove demand for storage resources, while obsolete data processes and myriad legacy systems failed to keep up with the business’ information management requirements.
The short-term, tactical approach would have been to use the benchmark findings to institute immediate market-based price adjustments. While that may have provided short-term relief to the customer, both parties would ultimately have suffered, as the service provider would have been unable to viably support the customer, and the customer would have been exposed to the risks of an inadequate and insecure data storage environment.
In this instance, the benchmark was used as a baseline from which to chart a roadmap toward a future state that aligned with the customer’s business needs. The customerworked with the service provider to implement a transition initiative to replace legacy systems with more streamlined storage platforms, and to develop a program to more effectively manage information by categorizing and prioritizing access to data throughout the enterprise.
A win/win resulted: The customer was able to gain control of storage requirements, while the vendor won additional business and the opportunity to innovate and deliver a cost-effective solution.