Proxy Bids Alternative to Benchmarking Outsourcing Provider
Ann All spoke with Scott Feuless, a senior consultant with independent management consulting firm Compass, about using a proxy bid as an alternative to a formal benchmarking clause in an outsourcing contract.
All: What are some common reasons organizations decide to get a proxy bid?
Feuless: The first involves an insourced company that is thinking of outsourcing. You don’t know what it’s going to cost you, you aren’t sure of the business case. A proxy bid gives you a projection of what kind of bid you would get before you actually commit. There’s also the reverse of that. You’re already outsourcing, you’re thinking of insourcing, and you want to know what the cost impact of that decision would be. A lot of companies have been outsourced a long time. They don’t have anyone to tell them the cost of building something on the inside. The first scenario is more common, but (Compass) has done the second one as well.
Second reason: You’re soliciting bids from multiple vendors, either because you’ve come to the end of your outsourcing contract term or you’re just starting out, and you want to know what’s reasonable. If you get a bid for $1 million and another for $10 million, which vendor is not understanding? If the proxy says it’s $10 million, then you know the other guy doesn’t understand something.
Next one, you’re thinking about a formal benchmark, but you may not know where to start. If you’re fully outsourced for your infrastructure, your application development and your networking, you may not want to do it all at once. Some companies want a preliminary assessment to figure out where they should start.
You may also not really be sure you should take the time to do a formal benchmark because you think maybe your deal is OK. You’re happy with the services, things are going pretty well, you don’t necessarily want to distract the vendor from operational responsibilities, you’re not sure you want to get into what could become an adversarial situation with a formal benchmark. When you invoke a benchmark clause, that can happen. The vendor is all about preserving revenue; it’s what they are in business to do. So they aren’t going to be thrilled. The proxy may come back and say, “You’re within a few percent of the market, so there’s no real reason to do anything else.”
If your benchmarking clause doesn’t have real strong language in it around requiring the vendor to change anything based around the benchmark, the proxy bid may be just as good because you’re going to use it as negotiating leverage. You tell the vendor, “An independent third party tells us there’s a gap between what we’re getting and what’s out there in the marketplace.” If your clause doesn’t give you much leverage beyond that, then a benchmark doesn’t get you more.
And last reason, proxy bids are cheaper and faster than a formal benchmark.
All: So a proxy may point you toward a formal benchmark and help you decide whether you want to spend the added expense and effort?
Feuless: Often the benchmark clause requires a vendor to pay half. So you might invoke that and say to the vendor, “Look we’ve had this done, and they say we’re paying 30 percent more than we should.” The vendor may say they had no input into it, so the bid isn’t completely accurate. But then they might say something like, “Why don’t we avoid all of the hassle (of a formal benchmark). We’ll give you 20 percent.”
All: So avoiding expense and perhaps avoiding antagonizing a vendor are benefits. Any others?
Feuless: If you pull back up to the high-level view, information is always good. The more information you’re armed with, the better decisions you can make. And decisions regarding outsourcing agreements can be really critical to the organization. It’s not just related to cost. It’s related to the quality of service you’re getting. It can affect every business unit. So it’s pretty important to have the information to make quality decisions.
All: What are some challenges associated with proxy bids?
Feuless: We mentioned one. The vendor may not be accepting of the result. They will say, “We didn’t have anything to do with it, therefore we don’t accept it.” So you have to get past that. Even though they are always going to say that, most have been down the (proxy) road before. They know it can lead to a formal benchmark. If the proxy bid says there’s a gap, there probably is one. The percentage may change with a formal benchmark, but it probably won’t change a huge amount. So you can usually get past the objections.
The other thing, you need some access to data. Frequently if the vendor is running the operation, they’ve got all the data. Typically, though, you can do a proxy bid with less data than you get with a formal benchmark. There’s some data on the invoice. If you look at service reports, there’s good data there as well. So typically (lack of data) isn’t a showstopper.
All: What should you consider when deciding whether a proxy or a benchmark makes the most sense for your organization?
Feuless: If you’ve got a formal benchmarking clause in your contract that’s pretty strongly worded, such that you’ll get some results based on the benchmark, and if you feel pretty confident there is a gap and a correction that needs to be made, then go ahead and pull the trigger on the full benchmark. Chances are good you’ll get a real benefit out of it and get it in the shortest period of time possible.
It’s when you have more preliminary questions, or when you don’t think a formal benchmark is going to get you much, that you can look to the proxy as an alternative. Or when there’s no vendor, from the scenario where you aren’t outsourced yet.
All: What criteria should you look at when engaging someone to help you with a proxy?
Feuless: You want to find a firm that’s been doing it for a while, because it’s not a simple exercise. Obviously the firm has to have not only the methodology, but the data. You need a company that’s built that up and has a substantial database to draw on. And you want to look for fierce independence. You don’t want someone doing a proxy that is biased either toward you or the vendor. Those are the key things to look for when choosing a services firm.