How benchmarking improves outsourcing effectiveness?

Outsourcing is now accepted as a common practice in the business world and cost cutting is the most common cited reason for outsourcing decisions. Many statistics and analysis show that there is an upward trend in spending on outsourcing activities. In a scenario, where cost-cutting poise bigger challenges the key is how can a company ensure that they have got value for money for the services they have outsourced.

Benchmarking. Source:

Benchmarking is a tool that can be used to measure the value of services provided to them. Benchmarking is the process of comparing one’s business process and performance with that of the industry leaders or best practices of other industries. This helps the organizations to plan and develop strategies to improve their performance or to adapt new practices to remain competitive. Although benchmarking is not a new practice in outsourcing, still many firms do not realize the benefits of benchmarking processes while drafting an outsourcing agreement.

What are the key benefits of using process benchmarking?

  1. With market analysis and comparisons made, the companies can gain in-depth knowledge of the services that are to be outsourced.
  2. The companies are able to choose the best service provider who can provide them the required services and deliver the desired outcomes.
  3. The service provider also benefits by comparing their performance with best practices of the leader. They can review their performance or adapt new methods to enhance performance thereby increasing customer satisfaction.
  4. The outsourcing companies can compare if they are given a fair price as per the industry standards.

How benchmarking technique can be made successful in an outsourcing agreement?

To make benchmarking exercises effective for both outsourcing companies and service provider, they need to focus on following elements:

  1. Independent third party for doing the benchmarking: In order to avoid bias, benchmarking should be carried out by an independent third party.
  2. Agreement clause: The buyer can include a benchmarking clause in contracts to benchmark the services of the provider and compare prices with other outsourcers. They also specify as which benchmarking organization the buyer may use.
  3. Transparency: Both the buyer and service provider will have access to information regarding the comparison indices used for benchmarking.
  4. Compare with most appropriate: Make sure that comparison is made with most appropriate data.  They should use data of similar organization with similar services and work.
  5. Pricing: The pricing of the services delivered should be compared with the market value.
  6. Top management involvement: Top level involvement is necessary to ensure a high level cooperation from the service provider, benchmarking organization and buyer organization.

With many options available, today benchmarking helps widen the scope of fair pricing, improving the relationship between buyer and service provider and engaging in continuous innovation and performance improvement.

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