The Importance of Normalization in Contract Benchmarking | Market Insights™
May 21, 2019
Taken together, various contract-specific adjustments can double the price per unit per month
Taken together, various contract-specific adjustments can double the price per unit per month
Application Support Services: 12 fee drivers you must normalize to ensure a like-to-like comparison in benchmarking application support pricing
Outsourcing contract third-party benchmark clauses: typically observed auto-adjustment scenarios
A large enterprise client recently asked us to confirm whether its belief that the majority of organizations have moved to output- and outcome-based contracting models for testing services was true.
Our analysis of deals in our extensive database over the last 18 months showed that more than 75 percent of buyers are still contracting for testing services on a fixed price basis. Of those, nearly 50 percent are managed services contracts, where performance is linked to key performance indicators (KPIs.) The other 50 percent are a combination of fixed price and Time and Materials (T&M) contracts. In these types of arrangements, the part of the contract where the scope is clear and well defined is fixed price, and the T&M is for the part of the contract where the requirements are unclear, like testing support during the UAT phase, for change requests, etc.
About 10-15 percent of the contracts in our set of deals from the last 18 months are purely T&M contracts where clients ask for specific testing resources.
Only the final remaining 10-15 percent of the contracts are based on output- and outcome- based models.
While the current percentage of output- and outcome-based models is small – the model is well-suited for engagements where the majority of work is transactional in nature, the client wants pricing clarity and guarantees, and the service provider has no explicit motivation to improve performance beyond service levels.
In fact, we believe that the transition to these as-a-service models is both critical and inevitable for enterprises with engagements matching these criteria – which exceed 15 percent of our database. Why?
At the same time, output- and outcome-based models pose different types of challenges than other types of contracting options, and enterprises must be prepared to address them to achieve success. For example:
In our view, most enterprises going down the output- and outcome-based model path will be best served by phasing in the adoption. Doing so will not only help them reduce risks, but also enable them to appropriately update their systems to process output-based transactions, create and put in place sufficient governance mechanisms for the new contracting regime, etc.
Have you embraced an outcome- or output-based contracting model for your testing services? Are you considering it? Please share your experiences with us at [email protected].
Automation driving 30%+ productivity improvements across the IT stack
Sample indexed productivity improvements, 2016-18YTD
Is there a right time to benchmark? While benchmarking clauses can be built into a contract, it is best to align benchmarking with concrete objectives throughout the sourcing journey
As part of our Pinnacle Model™ methodology and benchmarking, Everest Group recently conducted a study of over 200 companies on their digital transformation readiness. The study found companies’ boards of directors typically believe digital transformation is about technology, and they typically under-estimate the cost and expect results in months, not years. Those expectations are a huge gap away from the reality challenging CIOs and senior leaders leading the digital transformation. CIOs participating in our study revealed their companies were unprepared, under-funded and under-supported as to the tools, investment and commitment required to succeed. In this blog, I’ll share how to effectively communicate to your company the requirements for digital transformation to succeed.
The gap between expectations and delivery capabilities is because digital transformation is fundamentally different from companies’ past experiences with transformation. The technologies are disruptive and necessitate changing the organization, talent model, mind-sets, policies, processes and procedures – basically, the entire business model. Those changes are not easy. They don’t come all at once. They’re not completely known at the outset. And they unfold over a multi-year journey.
Peter Drucker advised, “If you want something new, you have to stop doing something old.” But the depth and breadth of necessary changes and the required commitment and investment for digital transformation are complicated to explain. They are hard to understand.
The digital journey requires far more resources, support, commitment and investment than anyone wants to believe. Digital technologies also take far longer to implement than people expect. For instance, in Robotic Process Automation (RPA) technology, a company can put a robot up quickly to create process improvement; but getting significant value involves more than that. Sure, a company can automate a function. But until the executives rethink the process that the robots will perform, they cannot create a meaningful improvement or breakthrough performance.
So, it’s no wonder that the boards don’t understand the extent of what is required to successfully complete a digital transformation journey. They also don’t understand that they need to fund IT transformation at the outset so that IT can successfully support the digital transformation.
As a result, most digital transformation initiatives fail (70%, according to a 2013 McKinsey & Company study. Many participants in Everest Group’s Pinnacle study revealed that, even when they understood the journey, they could not communicate it to their board, could not get funding, could not build support for it, and thus could not drive the change necessary to get it done.
From our Pinnacle Model study, we developed an assessment vehicle (a 30-minute questionnaire) from which your company can compare its digital readiness against the broader population and against the market leaders (the Pinnacle Enterprises™). Together with a four-hour workshop, you’ll have the tools that will allow you to identify gaps, create learnings, understand what things you could do differently to improve your company’s readiness and performance and well as build road maps that allow you to systematically mature your digital readiness.
Executives that have gone through the assessment and workshop tell us it created a great tool for communicating with their board of directors and the rest of the business about the support, resources and investment necessary to allow for successful digital transformation.
It is also a supporting budgeting tool that allows you to demonstrate the value against the cost, build support for the investment required to mature digital readiness and communicate the value that the IT organization will be able to achieve or support by increasing its digital readiness.
There’s a startling fact in the 2013 McKinsey study I cited earlier: Of the “successful” 30% that didn’t report their initiatives as failures, “success” was described as either breaking even or finishing the program but not delivering the anticipated business results. Of course, no company wants to undergo the challenge, effort, and expense of transformation only to break even or remain in the same relative competitive position.
Harvard Professor John P. Kotter’s study of 100 companies that underwent transformation initiatives found more than 50% failed in the first phase (getting organizational commitment and cooperation for the initiative). The Pinnacle assessment, workshop and communication tools are very helpful in addressing these issues.
Is there a right time to benchmark? While benchmarking clauses may be built into a contract, it is best to align benchmarking with concrete objectives throughout the sourcing journey.
Disruptive forces – open banking regulations, growing FinTech ecosystems, and increasing demand for a seamless customer experience – are forcing banks to make significant investments in digital technologies.
To effectively compete, banks must move away from being perceived as physical structures that offer financial services/products to an ambient fabric that connects people and businesses. They must transition from a transactional, product-centric approach to an intelligence-oriented customer-centric model centered around customers’ journeys. Artificial Intelligence (AI), API-enabled open banking architecture, and cloud are fast-becoming the foundations of banks’ IT architecture.
In order to evaluate and measure how organizations are faring in their leverage of digital technologies, Everest Group several years ago developed the Digital Effectiveness Assessment model.
On the Capability maturity axis, we measure organizations’ presence on all digital platforms, the quality of their mobile apps and online banking capabilities, their activity on various social media channels, their self-service innovations, and their open banking capabilities. On the Business outcomes axis, we measure their digital prowess using parameters including customers’ digital channel adoption, the customer experience (based on mobile app ratings, website optimization, and engagement), brand perception, and financial performance.
Earlier this year, we used the model to determine the European digital banking leaders. And from a field of the top 20 banks in Europe, we identified seven: Barclays, BBVA, BNP Paribas, HSBC, KBC Group, Lloyds, and Société Générale. These financial institutions have achieved:
These leaders have re-designed their customer journey to adapt to external disruptions by:
To learn more about the characteristics of Europe’s digital banking leaders, and what sets them apart from the others, see our report: Digital Effectiveness in Retail Banking | Focus on Banks in the UK and Europe: Identifying Digital Banking Leaders in the Open Banking Era.
At the Procurecon Indirect conference in Copenhagen a couple of weeks ago, three senior procurement people from different corporations approached me with their woes about the lack of control and the high levels of procurement indiscipline their marketing departments exhibit. They wanted to know how and if Everest Group could solve the problem of rogue spend with external agencies for marketing services. It’s an interesting and very valid question.
Marketing services is one area in which many enterprises’ Chief Procurement Officers (CPOs) have had neither the evidence nor the mandate to challenge established thinking. Furthermore, unlike IT and non-core business process outsourcing alternatives that have been around for 20 years, outsourcing options for marketing didn’t exist until recently. Now that they do, CPOs are sensing the opportunity, in partnership with Chief Marketing Officers, to transform the way marketing services are delivered.
Benchmarking can certainly provide rate-card analysis, SLA review, a breakdown of the cost-stack, and any number of other elements from the contract, to give a view of pricing and equitable contracting. But there are problems:
But, as one of my Procurecon conversations suggested, the issues for CPOs aren’t high levels of spend or a desire to be in control of every spending decision. Rather, they’re concerned about fragmented spend and lack of overall visibility.
They can begin by promoting the procurement function as an exemplar of best practice by pointing to examples in other spend categories of how procurement has driven cost savings, improved quality, or stimulated innovation. Doing so establishes CPOs’ leadership credentials.
Next, they can introduce some level of technology that will deliver at least visibility into spend. Several speakers at the conference cited the need for the procurement process to generate data to increase efficiency. Many CPOs without a mandate for category management seem reluctant to push for integrated procure-to-pay or source-to-contract systems. But less invasive approaches, such as customized applications in Salesforce, could still generate useful information about spend categories, transaction volumes, and whether suppliers are being contracted by separate groups within an enterprise.
Third, they can consider portfolio rationalisation, against these rationales:
Next, they can investigate alternatives. Arguably, marketing services and creative agency spend are still immature enough to offer the opportunity to arbitrage. And providers with capability are rapidly emerging. Accenture has acquired over 20 agencies since 2010. Onsite digital design agencies such as NuFu, Oliver, and Spark44 have a growing impact. Every major service provider – Atos, Cognizant, Sutherland Global, Wipro, etc. – is investing in or acquiring digital agencies, and these investments will allow enterprises to consider accessing marketing services alongside a suite of outsourced IT or business process services.
Finally, they can benchmark the status quo with an alternative. Can a sourced solution give the enterprise not only a cost advantage but also faster delivery, access to global talent, measurable outcomes, and real transparency?
So, CPOs, there’s little reason to ask yourself “how do I do it?” Instead, the real question is, “why wait?”
You can find out how Everest Group helps enterprises optimise global procurement operations here. We also help enterprises rationalise complex portfolios of external suppliers.
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