Neil Barton

Wednesday, February 14, 2007

How Accurate Are Benchmarks? TPI Speak Out

TPI, the outsourcing advisory firm, have published new guidelines for their consultants about the use of contractual benchmarking.

The new TPI position is, in many ways, very welcome. But they have asked a question which they have not fully answered.

They correctly ask "how accurate are benchmarks?" They conclude that they are not accurate enough for "micro" adjustments of 10%-15% or less. They suggest that benchmarks should only be used for "macro" adjustments, larger than this. Yet they also suggest there should be a maximum adjustment that a service provider should be bound to, and in their slides they suggest that this maximum should be 15%-20%.

In other words, a benchmark is not accurate enough for a change smaller than 15%, and not accurate enough for a change larger than 15%.

And if a benchmark can't set a precise price target for a small change, then how can it set a precise price target for a large change?