Dave Brown, Managing Director, Financial Architecture Advisory Services

Considering undertaking a benchmarking initiative to evaluate how your cost structure stacks up against the market? First, understand if you really need a benchmark. Many executives feel they need a general read on market pricing and see a benchmark as the only mechanism to obtain the data. There are many faster, cheaper tools to gauge market pricing. One of EquaTerra’s recent papers, Executive Dilemma: How do you Know if Your Cost Structure is Optimum,” helps sort through several options to benchmarking. But, benchmarks do serve those who are looking for a detailed, historical cost comparison. Here are three key points to consider before you start:

1.    Set realistic savings expectations from the outset. IT suppliers today do not have large, double digit margins built into the labor portion of their deals to take out. IT services (not hardware) are going down each year at a declining rate but not as fast as hardware costs. Factors such as these affect the business case and add time to the realization of savings. Be conservative in your estimates and understand that market conditions change over time.

2.    Understand the cost drivers underlying your outsourcing contract or internal solution and make sure your agreement has flexibility built in to adjust to changing circumstances. For example, server virtualization is not the main driver for reductions in unit pricing. Instead, this technology reduces the transaction volumes for which the buyer will pay for hardware servers, and thus the overall contract price goes down. This is the type of mechanism that is built into any well structured contract.

3.    When evaluating the potential savings, it is critical to consider the cost-to-achieve element. This is seldom if ever included in a benchmark. To commence in virtualization efforts the client will need to remediate their software (i.e. get to a current release) and, for some applications, this can costs millions. New hardware will also be needed to run the equipment which further increases the costs. These efforts can take 18 to 36 months to achieve the run-rate savings found in the benchmarking results.

Filed under: Benchmarking, Information Technology (IT) by EquaTerra