In the global services industry, cost benchmarking is a method enterprises use to compare their outsourcing cost competitiveness against those of similar organizations. Yet, in Everest Group’s experience and observations, businesses all too often erroneously view salary benchmarking as indicative of overall expenditures.
While salaries constitute the biggest component (60-70 percent) of operating costs, salary benchmarks fall short of providing the requisite insights, as higher salaries don’t necessarily mean higher overall costs. There are multiple other factors driving costs. The top three factors driving outsourcing operating costs, other than salaries, are:
- Pyramid and talent model
- Scope of work
- Non-compensation cost
These factors are specific to companies’ context and typically depend on their positioning. In addition, there are market-driven forces impacting costs, such as attrition, wage inflation, and the exchange rate in different countries.
A typical benchmarking exercise takes all these factors, and others, into consideration.
Following are three cost benchmarking best practices.
Best practices of cost benchmarking
Take a holistic view
Cost benchmarking should consider a comprehensive set of factors effecting cost. Everest Group classifies these components into three broad buckets:
- Compensation-linked costs (e.g., salaries, benefits)
- Non-compensation costs (e.g., real estate, technology, support staff, transportation, recruitment, and training)
- Policy levers (e.g., delivery pyramid, support staff leverage, and space usage)
An ideal cost benchmarking takes a holistic view across all three categories.
Identify underlying cost drivers
By definition, cost benchmarking determines differences within the market. However, on their own, these differences offer limited insights. To discover opportunity areas for cost optimization and subsequent calibration, enterprises need to identify the underlying drivers of differences.
For example, if an organization’s real estate costs are higher than the market average, benchmarking should identify whether it is due to rentals, space per seat, seat utilization, or a combination of these factors. Similarly, for companies with higher support staff costs, benchmarking should identify if it is driven by higher support staff salaries, skewed support staff ratios, or both. There are multiple such costs elements (e.g., transportation, recruitment, training) for which benchmarking could help identify the underlying drivers for calibration.
Even in situations where cost drivers are identified, it is critical to ensure like-to-like comparisons in order to derive meaningful conclusions. For illustration, in the real estate example above, economies of scale can result in different real estate costs for a 100 seat center and a 1,000 seat center.
Thus, organizations should normalize data along key dimensions impacting the cost. Typical dimensions to normalize include:
- Locations (e.g., onshore/offshore, Tier-I/II/III)
- Scope of work (e.g., ITO/BPO, front office, back office)
- Nature of work (e.g., transactional, complex)
- Player type (e.g., GIC, service provider, specialist)
- Scale (e.g., mid-size, large scale)
Cost benchmarking is not an easy, close your eyes and toss the dart exercise. Benchmarking that fails to take a comprehensive view of cost, identify underlying drivers, and normalize data runs the risk of making misleading comparisons that may lead to flawed results.
Over the last five years the story of growth in the global services industry has been one of the rich getting richer. In fact, the larger tier-one firms, especially Cognizant and TCS, are growing faster than the marketplace. But I think it’s more notable, at this time when markets are maturing and growth is difficult to achieve, that some of the tier-two providers, such as EPAM, Syntel and Virtusa also outperform the market.
A few years ago the global services industry basically wrote off most of the tier-two providers, relegating them to a fate of consolidation. But like the still-alive man being carted away mistakenly in the British comedy film, “Monty Python and the Holy Grail,” they’re not dead yet. Just the opposite — these three tier-twos are enjoying increased profit and earnings. This is not the case for all smaller providers, so what’s their formula for success?
They follow a simple but long-proven formula. EPAM, Syntel and Virtusa offer a differentiated alternative to their competitors and thus become market challengers that stand out to buyers.
In some cases they provide a challenge on price. In others they bring a differentiated source of deep industry and functional expertise. In the case of EPAM, the alternative challenge is a delivery model with a source of highly technical talent from Eastern Europe.
Perhaps the most piercing challenge they have ushered into the marketplace is attention. In some of the more mature spaces in the services market the providers have become complacent. Clients are frustrated because they don’t get the level of attention they used to enjoy. The challengers are delivering intense attention to existing and potential clients’ needs.
The tier-two providers bear watching. History demonstrates that shake-ups result on any battlefield where challengers successfully deliver levers that break down barriers.
One of my favorite quotes of American humorist Mark Twain is: “I didn’t have time to write you a short letter, so I wrote a long one instead.” He knew the secret of creating effective content: less is more. This is absolutely the case when creating content for marketing your service offerings and capabilities. But it’s not the dominant view, which is why so many service providers’ odds of getting new business sink when they launch new content — sort of like fruitcake.
Fruitcake is dense and heavy. Although it’s sweet and looks like a dessert, many people just pass it around without sampling it. Don’t let your marketing content be like fruitcake. It needs to be like a buntini — light, snack size, easily picked up and memorable. Your marketing intellectual property needs to be short, easy to digest, and easy to refer to other people.
I’ve blogged before about problems with ineffective thought leadership and marketing content. Often the issue is people and companies want to be stars. To be effective and memorable, you need to check that mindset at the door and focus on creating content that is compelling, interesting and based on real experience.
It’s even better if you serve up your content as a story or illustration rather than presenting it in a theoretical context. People gobble up stories. But theories, like fruitcake, are difficult to digest. If you go the theoretical route, you need to increase the level of synthesis and brevity.
Yes, it takes more time and effort to be concise. But your content will be more effective if you whip up a compelling topic, synthesize it down to its essence, present the essence in a short story and then stop. This way you’ll leave your potential customers hungry for more instead of wondering how they can squeeze in a nap to digest what they’ve eaten.
Photo credit: Richard Elzey
Would you maintain a marketing strategy that has shifted to a disadvantage? The answer seems like a no-brainer, but the reality is many providers in the global services market are indeed marching forward with a disadvantaged strategy.
In the increasingly competitive services marketplace, providers are running to thought leadership as a differentiation. That’s great. But here’s the problem: they use white papers to present their thought leadership but, frankly speaking, the world doesn’t need another white paper.
Nearly every provider has dozens of white papers; some have hundreds. Hoping to get past purchasing and get access to more senior people and business stakeholders, providers write white papers with the hope that they will percolate new business.
But the papers are not compelling enough to help increase their customer bases. They don’t differentiate in the area of thought leadership, because most of the providers are talking about the same topics or angles. The strategy might have worked when the topics were new; but that’s no longer the case. White papers usually sit on people’s desks and don’t get read. Even if they are read, they don’t make a strong impression and rarely result in new customers or serving an existing customer better.
For a white paper to work, it has to be different. It needs to be simple, profound and short. Buyers are looking for a practical vision of how to improve their business — they want something different than another paper about the capabilities of some tool or process. The paper won’t be remembered if it just tells the reader how to use a tool or process to do something.
Instead, a white paper with an effective message must ask penetrating questions. The right five questions will open the door.
IBM’s is doing this very well. So is Accenture. Think of their paper that gives an illustration of how a company saved $1 billion. The message is simple, clear, and leaves the potential customer asking questions. It invites a conversation between the buyer and the provider.
Webinars are similarly not effective. Like white papers, everybody is doing webinars and talking about the same thing. There is nothing compelling.
So you’re probably asking: Why is Everest Group doing webinars?
The audience for our webinars is a group of people who have subscribed to our content agenda on certain topics. In the webinars we effectively have a conversation with an intimate group invited to that conversation based on their expressed interest in it. We don’t attempt to evangelize through webinars; instead, we attempt to advance the knowledge of people who tell us they want to learn more about a topic and what’s going on in a particular space. Then we seek to move past the webinars to personal interactions and conversation with individuals.
It’s not that white papers or webinars are wrong in today’s marketing maneuvers. They have their place. It’s just that they are bad vehicles for projecting and demonstrating thought leadership to new people. They tend to be not insightful, all providers have them and the intended audience for the papers and webinars aren’t reading them or attending.
In the global services world marketing leaders depending on white papers or webinars to convey their message need to reinvent their strategy.
We need to stop using the term “analytics.” Yes, I know analytics is red hot. Practically every service provider has an analytics group. IBM has poured billions into acquiring analytics software companies and has built a formidable capability in this area. The marketplace is full of anecdotes about how powerful and impactful analytics can be, and enterprises are enamored with the possibilities from this capability. But if you’re a buyer, you need to refuse to have conversations about analytics.
Beware of engaging with vendors and providers talking about analytics — it’s a waste of your time on a conversation that is really a distraction and, if successful, will result in your making a wasted investment. My advice is to show the door immediately to any vendor or provider trying to talk with you about analytics without first making sure they understand your organization and know what business problem you are trying to solve.
Don’t let a vendor or provider talk to you in abstract terms about the capabilities of analytics or tell you anecdotes that are not specific to your company’s situation and business issue. If you force the salesperson to talk about how a tool is the solution that will deliver the capability you need to meet a specific objective, you’ll eliminate much of the noise and get answers and solutions much quicker.
Shape the discussion to your business relevance. For example, let’s say your business problem is managing your company’s reputation and you’re concerned about the unintended consequences of social media destroying your firm’s reputation. The vendor or provider needs to discuss tools you can deploy to monitor the Web and identify where you have potential problems so you can nip reputation problems in the bud.
Another example: your business objective may be to limit or control the amount of credit card fraud in your retail stores. With this clear perspective on what you’re trying to accomplish, the vendor or provider needs to identify tools for fraud detection.
Insist on an analytics-free discussion. Make sure the vendor or provider converses with you in terms specific to your business problem. The moment they veer from that path, explain that you’re not interested in the “value” of “analytics” and you expect them instead to discuss specific answers to your problem. If they don’t do it, show them the door.
This will separate the wheat from the chaff, the solution pretenders from the reality — and it’s likely also to lower the cost of your solution.