Benchmarking in outsourcing: Best practices for service buyers


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The best way to outsource is by doing a benchmarking study. This will allow you to determine if the provider can deliver equivalent services at lower prices than what your internal team provides.

It also gives data for an initial baseline on which you’ll structure their work from now on, as well as points of measure when deciding whether or not outsourcing was worth doing in the first place.

Using benchmark data: A good way to decide to outsource


Benchmarking is a widely used technique to analyze carrier performance and compare it with industry standards. However, buyers should keep two crucial points in mind when using benchmark data: how they can use the results of studies for negotiations on price or service quality adjustments so as not to harm their relationship with providers but also avoid adversarial conflicts that could damage those connections.

Buyers need access to both broad comparisons between various industries/carriers and specific detail about what has been measured; this allows them greater insight into all aspects of it.

Outsource providers have benchmarking needs and can benefit from benchmarking in several ways.

  • Benchmarking is a meaningful way to assure the owner that you are providing them with competitive services consistent with industry standards. It’s also used as a negotiating tool in contract negotiations.
  • Outsourcers will use their experience to inform the best way of working for each client, benchmarking internally and comparing it against other portfolio clients.
  • They used data to find the best-performing sites and identify what led them to succeed.
  • Outsourcers must constantly stay up-to-date on industry and market trends to develop the best proposals. Doing this successfully requires access to data from benchmarking companies which can provide insights about pricing structures across various markets so that when contractors request, it helps create bids or estimates.
  • The client’s procurement group will use benchmarking to avoid the need for rebid work. When a project is receiving good services at market price, it doesn’t make sense to rebid so that you can prove your prices are competitive.

The contractual clause on benchmarking

Most outsourcing contracts today include a benchmarking clause, allowing the buyer to periodically compare providers’ services and prices. The contractual provision might also specify which organization will conduct these studies, or it could depend upon both parties agreeing at the time of signing for them.

Benchmarking studies can compare the performance of different suppliers on various factors such as price, service quality, and delivery time. You must specify which types of data your company wants from their study, so they accurately reflect results and future improvement opportunities.

Benchmarking is integral to any business strategy, but it’s not without drawbacks. The time lag between conducting benchmarking studies can be up to one or two years with data that comes from six-month-old sources, making them less useful than they might seem at first glance.

Financial benefits of outsourcing: How to benchmark?


The benchmarking is crucial because it will be used as a baseline to compare against the service level of other providers. Make sure you use an appropriate point in time for your internal cost-of-delivery study rather than one further back from when outsourcing was first considered.

Example 1: With its CEO mandate that cost-cutting would not result in sacrificing production quality, the company recognized arbitrage opportunities through labor outsourcing. It conducted a benchmarking study and determined onshore vs. offshore solutions to be equally effective for reducing costs while maintaining or improving output standards.

Example 2: The European company, with a shared-services unit for its HR, finance, and accounting services, conducted an in-depth study to determine if they were better or worse than average compared to other companies operating within the same industry. The benchmark data revealed that some of their support functions, such as Payroll processing, are at competitive levels, but other areas fall short, including processes related directly to benefits administration. This revelation led them to outsource those processes to ensure a high level of service in all functions.

Example 3: When a utility company wanted to outsource work, it faced competition from other industries that had not been outsourced before. To make its case for why this would be better than in-house or domestically based employees performing similar tasks with fewer costs, the buyer conducted a benchmarking study of similar scope in several other industries.

Example 4: The company found that its internal service levels were comparable to those of other companies in the industry. However, it costs more than “world-class” when considering the return on IT spend. As a result, they decided outsourcing would bring them closer to achieving excellence at an affordable price point.

Example 5: When the buyer, in this case, experienced more than average customer churn, it recognized that its service needed to be improved. The company studied how it compared with competitors’ prices and the quality of services offered for comparison purposes. With the data from this study, executives realized that getting to the external benchmark level would take too long with current resources. They thus validated increased prices for outsourcing work and quickly achieved desired service levels.

Example 6: In this case, the buyer conducted a benchmarking study to compare other outsourcing providers’ service levels and prices. This competition is always effective in lowering costs. It’s one of many reasons buyers negotiate with two service companies until they find their final solution while working towards an agreed-upon rate from each separately selected by them.

Validate pricing of outsourcing on an ongoing basis: How to benchmark?


The baseline of any outsourcing deal is going to change over time. Market conditions, new technology, and even what your business needs can affect how practical that initial framework was at its creation point regarding accuracy in delivering services or products as promised.

To ensure that your business is getting the most for its money, you must stay up-to-date with all changes in pricing and contract negotiations. Benchmarking can help buyers maintain flexibility during a long-term outsourcing relationship while taking advantage of evolving technology – but if there are any discussions about changing these terms, they become adversarial rather quickly. After all, the buyer wants to minimize costs, and the provider wants to avoid price reduction to maintain a profit.

To make outsourcing a long-term and successful business model, both parties must remember that new issues will arise. They should work together as partners with a win-win mindset in addressing these challenges for the best possible results.

Example 7: After three years of changing outsourcing solutions in the healthcare industry, a buyer suspected they were paying too much for their provider’s services. They conducted a benchmark study to check if other companies could offer similar care at lower prices and used this data when negotiating with current contractors about adding new service areas.

Example 8: The buyer felt that the parties had negotiated into their contract a certain level of “flexibility” regarding ramping up resources, but providers disagreed with this assumption. They undertook a benchmarking study to have factual data rather than feelings as they worked through determining a fair price.

Example 9: The multinational buyer and their management team took a phased approach to outsource global services. Using data from previous regions and benchmarking each new location, they can ensure that every area receives equal attention concerning the quality of work.

Example 10: To stay competitive, the buyer must implement continuous improvement and yearly cost reduction. The company provides market benchmark data so these evolving services can remain on track with or above average market prices for their industry sectors.

Example 11: The new CEO of this company has a mandate that all business units periodically validate how their performance aligns with the company’s objectives. But those who outsourced could adequately benchmark service level performances and costs, so they didn’t need as much oversight from within for these purposes.

Example 12: After discovering that their service provider employed too many people on the account, a buyer realized they could lower costs and improve quality with fewer staff. The two parties came together to discuss ways of maintaining high standards while reducing headcount for them to succeed at business – this helped create long-term success for all involved.

Outsourcing is a strategic business model that works best when the parties address all issues surrounding benchmark data from both sides. This partnering approach benefits each party in terms of cost-cutting and innovation opportunities for win-win situations.

See more» Will Business Process Outsourcing (BPO) become obsolete in the era of Automation?

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