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How benchmarking can improve IT outsourcing deals

Stephanie Overby | April 15, 2013
As IT outsourcing has evolved so, too, have IT outsourcing customers' benchmarking needs. As a result, a new approach to benchmarking is necessary, a new method for establishing new and better ways of operating. Kathy Rudy, partner with outsourcing consultancy Information Services Group (ISG), discusses pros and cons of benchmarking for transformation and how to do it right.

They are beginning to ask for benchmarks around supplier agility, innovation, simplification, flexibility, and quality.

How can benchmarking be used to better leverage the benefits of today's outsourcing deals?

Rudy: Benchmarking is an essential part of the process of getting to the future state of standardization and utility computing. First off, a benchmark that assesses the current state of the overall operation provides a baseline analysis that an organization needs to chart a path forward. In order to understand where you want to get to, you need to know where you [are]. This type of analysis also quantifies the improvement opportunity -- the "size of the prize" that can be achieved with standardization and utility computing.

A detailed analysis of the current state is [also] essential to defining and assessing alternative approaches to change. Specifically, the benchmark can quantify in real dollars the cost of placing operational constraints on suppliers.

These constraints often come from the business, which doesn't have insight into the cost of asking for specific requirements. For example, there are costs associated with not replacing legacy systems, not consolidating data centers, or resisting the offshoring of resources. By quantifying the cost of [such] constraints, the CIO can justify making transformational changes to business as usual. [It gives] CIO the data needed to ask for real change, rather than just tightening the screws.

This approach puts the onus on the customer to manage costs by managing demand. Why is that ideal?

Rudy: In a traditional IT environment, the business has no visibility into how they use IT resources. When there's no connection between consumption and cost and no consequences for consuming inefficiently, the business will use more and more.

Our data shows that IT costs have gone up over the years because of huge increases in demand for and consumption of IT resources [that] have outpaced steadily declining IT unit costs. For example, the cost of disk storage hardware has gone down significantly on a per megabyte basis over the years, but the consumption of storage resources has gone through the roof, so total spend on storage has grown significantly.

A consumption-based pricing model provides an incentive for the business to consume resources more efficiently. It's like an open bar versus a cash bar. This visibility also allows [an] infrastructure [group] to point upstream [to] application development to where much of the consumption starts and where there may be less rigor around consumption.

This would seem to benefit the provider as well? Are there downsides?

Rudy: Standardization and consumption-based pricing allow the service provider to do what they're good at. Rather than customizing service delivery for each client, the service provider delivers services using standardized tools, frameworks and methodologies to leverage economies of scale. The focus is on the "what" rather than the "how"; this allows providers to optimize efficiency and increase their profit margins.

 

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