Better Benchmarking: Getting the Prices Right

Price & Commercials: are service costs fully understood, actively managed, and constructed to drive the right behaviour?

This is the fifth in a series of seven brief blogs on the subject of Value Assurance – best defined as an effective route to maximising value in a long term outsourcing agreement, through aligning service expectations, perceptions and realities. A Value Assurance exercise typically involves a review of both service provider and client in equal measure. It takes a more holistic view than benchmarking alone and includes and assesses 6 ‘Ps’. The fourth of which, ‘Price & Commercials’, is discussed in this blog.

If you’re currently managing an outsourcing relationship, analysing the ‘6P’ areas of a relationship is an excellent way to move the performance of the contract towards an optimal state – typically, but not always, this means from a transactional to a true partnership relationship. Organisations I have advised have found the process beneficial regardless of whether they’re at the beginning, middle or nearing the end of a contract.

‘Price & Commercials’

Getting pricing issues right is challenging, but essential. Charges for the services that you’re buying need to be clearly specified, predictable, measurable and able to change to allow prices to reflect changes in consumption of services. 

The price should not change beyond fluctuations in consumption and any non-volume based changes should be clearly understood and actively managed by your appropriate commercial manager. Charges must of course also be comparable with the market-rate for similar services purchased on the same scale. 

To test the effectiveness of ‘Price & Commercials’ in your contract, consider:

Management of commercial issues: Are commercial issues logged and tracked through from identification to resolution?

Price predictability: Is the price predictable and does it change to reflect fluctuations in your consumption? Also, do invoices match the forecasts?

Pricing competitiveness: Are individual pricing units and the total contract price competitive with the market rate given the scope, scale and geographies of the services being bought?

Billing accuracy: Are your invoices thoroughly checked for accuracy before being paid?

Resource units: Are the resource units appropriate for the services being consumed? Also, are the resource units measureable and is there an up-to-date inventory of the resource units?

Value: Is there a real commitment to deliver value? Does the contract and relationship support the delivery of value through innovation and the sharing of risk and reward?

Next will be a blog on ‘Perception’ – looking at issues such as perception management and measurement