f&a price benchmarking - in practice paul morrison june 2012

F&A Price Benchmarking - In practice

Paul Morrison

June 2012

Copyright © 2011 Alsbridge plc. All rights reserved. 2

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


Contents

1. Benchmarking in context

2. The engagement

3. Process maturity

4. Sample

5. Metrics

6. Normalisation

7. Targets

8. Outcomes

9. Post-script - Off contract benchmarking


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


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


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


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


Process maturity – not all benchmarking is the same

2000 2012

Outsourcingmaturity

Þ Implications for benchmarking data and accuracy...


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


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


‘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?


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...’


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


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


Targets

What is competitive? Upper decile? Upper quartile? Average minus 20%?

Most benchmarking works with +/- thresholds Smaller ranges for more mature processes


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.


Practical benchmarking

How to avoid the wrong dynamic?


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


For more information, please contact

[email protected]

+44 7747 865 955


IT and Business Process Benchmarking

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house or outsourcing provider

• Delivered faster, more reliably and more accurately using:

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Most experienced benchmarking teamOnline Market Assessment (OMA)

Web enabled subscription service

Real time access to the ProBenchmark modeling engine

Analyze many outsourcing price scenarios: Desktop, Mf, Network, Server, Storage

Snapshot BenchMARQTM

Project based version of OMA with more analysis

Allows for rapid turnaround and scenario planning

Expedites strategic decision making

Third Party Benchmark Detailed benchmark project typically performed with both

client and provider participation

Very detailed results – act as "fair witness“

Perfect for accurate, unbiased execution of third party benchmark clause in contracts

f&a price benchmarking - in practice paul morrison june 2012

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