One of the keys to a successful outsourcing endeavor is a process that should take place before the contract is even signed with a service provider: the benchmarking of existing service levels.

In fact, among the first things an enterprise should do before it outsources a business or IT process to an onshore or offshore service provider is measure how well it currently delivers services and how much it costs to deliver them. These benchmarks are critical to a business-process outsourcing (BPO) or IT services engagement because they establish a performance standard that the service provider is contractually obligated to produce.

Benchmarks are often cited in service-level agreements (SLAs), and if the supplier’s performance doesn’t meet the standards stated in the agreements, financial penalties and even termination of the deal can result. Regardless of what’s being outsourced—IT infrastructure or applications, human resources, financial processes, or some other function—experts say benchmarking is something every organization should do before it begins a relationship with a service provider.

But for organizations embarking on a benchmarking expedition for the first time, questions abound. How do you benchmark effectively? How much does it cost to conduct benchmarks? What are the advantages or disadvantages of conducting a benchmark internally versus hiring an independent third party to do it? And how effective is benchmarking when the service entails an intangible such as customer satisfaction?

Just the simple fact that benchmarking IT or business processes isn’t a core business function is enough to make it a low priority. All too often the benchmarking process takes a back seat in the race to complete an outsourcing deal in a short period of time.

What To Track

One of the first challenges is to define the performance metrics the organization needs to track, says Stan Lepeak, managing director of research at EquaTerra, an outsourcing advisory firm. For example, in human resources it could be measuring rates of employee recruitment, worker attrition, or the administration of training programs.

“It’s important to define a universe of what you need to measure from a process performance [standpoint], then do a benchmark to develop a baseline,” Lepeak says.

Defining what’s quantifiable is occasionally a problem in customer-supplier negotiations. That’s another reason to define working metrics before issuing an RFP.

DuPont Co. in Wilmington, Del., developed metrics around systems and network uptime and availability as part of its benchmarking effort prior to outsourcing IT processes to CSC and Accenture in the 1990s. The chemicals manufacturer now is in the midst of benchmarking HR processes and technologies as it considers outsourcing those functions, looking at service levels in areas such as payroll administration, says Frank Conway, global HR IT director at DuPont.

In its benchmarking efforts, DuPont measures its performance to create a baseline, and also compares itself to competitors and other companies noted for best practices, Conway says.

GERS Retail Systems, in San Diego, which provides software products to retailers, developed benchmark metrics—such as the amount of time used for product development and work units completed by programmers—prior to outsourcing design, programming, and other work to offshore outsourcer Symphony Services about two years ago.

Although GERS couldn’t get the benchmark results into its contract with Symphony because of legal differences over language, it uses the data regularly to communicate expectations to Symphony’s development teams in Bangalore, India, says Tom Mudd, VP of development at GERS.

The Right Track

Many organizations are already measuring IT and business-process service quality as a matter of operational delivery, says Chris Kalnik, chief knowledge officer at TPI Inc., an outsourcing advisory firm. For example, some firms measure call-center performance such as average hold times for customers calling or the number of abandoned calls.

“They use that to make sure they’re delivering good quality to customers and to help with staffing,” Kalnik says. “What’s really important when you’re setting an outsourcing agreement is that you have enough historical data so you can look at things like seasonality; certain peaks happen once a year.”

It’s also important that benchmarking data be captured in the same way each time so the measurements are repeatable and auditable, Kalnik says. “If you’re going to ask a service provider to repeat or better your service levels, you want to make sure you can audit [service levels],” he says. “Often times clients don’t consistently measure” these levels.

Another key is to choose metrics that give an indication of multiple facets of a service. “You can pick things that are too narrow or too broad,” Kalnik says. “For example, there’s overall average response times for applications. That’s interesting, but it might not be applicable to one group of users that’s getting terrible service. When you over-generalize you can mask poor service. People need to understand what affects users and customers and pick the right measures.”

Benchmarking should take into account the value of a service or process to the business, so organizations can assess not only how well things are working but the direct impact of processes on business performance, says Richard Sneider, managing director of the InterUnity Group, a technology consulting firm in Concord, Mass., and a benchmarking expert.

“Benchmarking is typically an exercise looking at efficiency. But we find that efficiency within an IT department is not as important as effectiveness,” Sneider says. “If you’re going to do a traditional IT benchmark looking at cost per MIPs or cost per server, you’re not reflecting what value IT should be providing or is providing to the organization. That needs to be factored in when you do the benchmark” through the use of business metrics associated with a particular function.