Application cases for price benchmarks

Typical application cases for price benchmarks include regular price reviews of cur­rent IT service agreements, the definition of the price corridor for second-generation outsourcing projects, as a basis for upcoming make or buy decisions, or price setting during a changeover from cost to price orientation in allocation models. This range shows that price benchmarking is a tool which can be used flexibly and meshes with the IT sourcing process at a number of different points. Within the scope of the IT sourcing process, preliminary work is prepared for the price benchmark, then the benchmark results are developed further in the sourcing processes.

“Is the calculated price usual on the market?”

Price benchmarks compare the price allocated by the service provider with the prices allocated by a peer group. Service providers can be either the internal IT depart­ment or a shared service center or an external service provider. In other words, the organizational form of the service provider and his legal relationship to the service recipient are of no significance. But it is decisive that the prices allocated between the deliverer and the recipient of the service are in line with the market and that the service provider operates as a profit center. An important factor in this context is that price information, and not costs plus a surcharge “usual on the market”, is used by the benchmark provider. If activity accounting, as is usual for cost centers, for example, is based on cost allocation or full cost prices, a different form of benchmark, one ap­propriate to the allocation model, must be selected, e.g., a cost benchmark. That is why, as a rule, price benchmarks as used in practice are applied to outsourced IT services. They provide an effective instrument for regular review and adjustment of the contractually agreed IT service prices to ensure their conformity with the market.

The result of the application of price benchmarks is typically a price adjustment, which for IT infrastructure frequently translates as a price reduction. A price reduction logically leads to the service provider finding it necessary to reduce his costs and/or increase his efficiency. But price benchmarks are of little or no help to the service provider during the subsequent optimization of his service performance. When all is said and done, a price benchmark shows nothing more than the price at which the service providers in the control group perform the service. It is the service provider’s job to identify the sensible and necessary steps if the benchmark provider does not offer any recommendations.