F&A Price Benchmarking - In practice
Paul Morrison
June 2012
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Alsbridge plc - company overview Alsbridge is an award-winning management consultancy & benchmarker
specialising in advising clients on shared services, outsourcing and offshoring of complex processes.
ProBenchmark Alsbridge’s suite of benchmarking tools and data.
Key facts: Founded 2002; HQs in London & Dallas Focused on ITO and BPO Approximately 100 advisers – all experienced experts, no “junior pyramid” Management team are all senior industry leaders, backed by an eminent
Advisory Board Clients: major blue chip corporations and government departments
2011 – Ranked Global No 1 Outsourcing Advisor
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Contents
1. Benchmarking in context2. The engagement3. Process maturity4. Sample5. Metrics6. Normalisation7. Targets8. Outcomes9. Post-script - Off contract benchmarking
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F&A – A buyer’s market?
Alsbridge has been tracking profound change in the F&A market over the last 2 years:
Supply side There is a larger number of mature service providers in F&A than ever before Several Indian providers once seen as Tier 2 or 3 are now seen by buyers as very competent These organisations are looking to build market share globally
Demand side The number of new F&A deals is still far less than in 2007/8 Most F&A activity today is in the renegotiation / renewal space Smarter clients, focused on tougher procurement
Net result More suppliers with more credibility, chasing fewer deals Potential for significant price drops for 5 and 5+ year deals Significant leverage for existing outsourcing users
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Benchmarking is part of a spectrum of options to steer and reshape the terms of an outsourcing deal
FREQ
UEN
CY
Change process• Managed within contract through
day to day change process
Renegotiation• A major change to the existing
agreement / relationship
SEVERITY
Benchmarking – ‘on’ or ‘off’ contract• Formal review / change of pricing driven
by market pricing data
Recompetition / termination• Inviting other providers to propose on
delivering the services
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Benchmarking – can be ’off-contract’ as well as via the contract● Benchmarking can be driven solely by the Client● Increasingly common● Doesn’t require permission of the Supplier;
● but as a result there are no agreed remedies● The purpose is to gather information, with which to:
● Give reassurance that the deal is competitive● Or - Indicate how the deal is not competitive
● A significant price gap could result in ● a retendering exercise● With benchmarking result as new target price● New alternative suppliers in tender process
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The Engagement
Supplier and/or client roles Data provision Validation
Duration 1-2 months per tower, not 6 months+
A balance must be struck Robust enough to be comparable, open enough to be
challenging
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Process maturity – not all benchmarking is the same
2000 2012
Outsourcingmaturity
Þ Implications for benchmarking data and accuracy...
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Different processes have a wide variety of metrics
• IT Infrastructure – Cost per blade; cost per terabyte; cost per MIPs
• IT Applications – Cost per resource per year
• Finance – Cost per resource per year (some transactional metrics)
• HR – varies by sub-process – e.g. Cost per hire, cost per training session
• Payroll – cost per payslip
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Metrics matter
BPO example – What is the right cost per unit?
1. ‘Rate cards’ – Cost per grade per location
2. Blended rate – fully loaded cost per FTE (full time equivalent) per location
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‘3D Benchmarking’
Unit pricing on its own is potentially dangerous:
The total service price might be right – for the wrong reasons High cost x low volume = Low cost x high volume = Right cost x right
volume?
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Comparing like with like
Expectations can be high:
‘... assess comparative information on outsourcing contracts of
comparable financial and accounting systems, service levels,
volumes, term, investments made, global/regional scope, risk
allocation, ownership of intellectual property rights and other
material terms and conditions between Benchmarked
Companies and top-tier outsourcing service providers of
comparable reputation...’
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Sample selection
Much will be pre-determined by the contract Client peer group – Same industry? Same geography? Supplier peer group – ‘Tier 1’; global Deal comparability
no 2 deals are the same need to break into components (esp. by tower / by geography)
# of data points Driven by market maturity
Need to avoid being unrepresentative or exclusive Unrepresentative samples are too narrow and could be skewed by
outliers Exclusive scenarios are too homogenous and fail to bring in market
variety
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Normalisation factors
95%+ of the price is determined by: Delivery location Supplier / supplier margin Competitiveness of process
Other common normalisation factors have varied relevance FX, inflation Size of deal SLAs / quality Commercial assumptions Risk allocation, IP.....!
Many normalisation factors have minimal correlation with the price Independence is required to cut through the complexity
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Targets
What is competitive? Upper decile? Upper quartile? Average minus 20%?
Most benchmarking works with +/- thresholds Smaller ranges for more mature processes
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Outcomes – what is being achieved?
Significant changes in recent years● Market slowdown● Maturing suppliers / customers● Increasing offshoring● Some price inflation
Range of results by sector● IT - Year on year price decreases in some towers● Finance – Benchmarking of recent 3-5 year old deals have
result in 0-25% reductions.
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Practical benchmarking
How to avoid the wrong dynamic?
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Practical benchmarking
Avoid complexity – if it is not simple and transparent it may not work
Moderated outcomes – Excessively sharp teeth will encourage defensiveness
Use ‘off contract’ benchmarking as well
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For more information, please contact
+44 7747 865 955
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