Interview: Frederik Bastkaer Christensen, Zangenberg Analytics

May 19, 2016

 

 

Trellis spoke to Frederik Bastkær Christensen, Associate Partner at Zangenberg & Company, one of the largest benchmarking organizations in the Nordic region, based on volume of transactions in which it has assisted. In addition to helping buyers of outsourced services, Zangenberg assists the larger advisory firms and law firms in forecasting prices and projecting the standard services in contracts. Frederik explained Zangenberg’s analytic approach to benchmarking, which has diverged from the “classical” consulting methodology as experience has accumulated across multiple industry and as outsourcing of IT services has become an increasingly digital phenomenon.

 

What was the principal goal of your presentation at the IAOP program?

 

Benchmarking in IT outsourcing has been around for 30 years. The traditional approach has not been very scientific. It has been a very manual process. But the outsourcing market has changed and benchmarking has changed with it. The discussion at the IAOP meeting was intended to open the black box around how this is done.

We talked about emerging technologies and disruptions from the cloud vendors and other developments – how those are affecting the services associated with benchmarking. What are the new contracts that we’ve been seeing telling us about the changes in our role as a consultancy – since now you can just go to the web to see how the typical cloud-based services are priced?

 

How do you differentiate your approach, especially in IT services contracting?

 

There will always be classical benchmarking, focused on analysis of whether the current pricing of IBM or CSC or another major vendor is competitive based on what we see as market price levels. But we believe the trend is from contract-based benchmarking to one based increasingly on indices. As services become more standardized, it makes sense to talk in terms of general trends in pricing. To remove the friction from these sorts of engagements, it’s in the interest of both the client and the vendor that the price adjustment mechanism is simple and transparent.

So we’ve developed a set of indices that we’ve published, and we use those in more or less customized ways to remove this friction and make it easier to revitalize the outsourcing contract and make the need for a transition every three or four years less important, because you have removed the issue of price.

If a contract has been in place for five years, and we know that given Moore’s Law and the benefit of experience a lot of these services will change in price, then we should be able to buy the same capacity for less. You would expect some technological evolution of these services. So you anticipate downward pressure on price.

In classical benchmarking, you select five, six, maybe eight peers, with comparable contracts where the common denominator is industry or the types of services and you report on pricing and a host of other factors.

We have felt clients and vendors needed more precision. In statistics, you get more precision if you increase the sample size. If you consider a larger number of contracts, you can report with more certainty that this is the standard price or service. That’s what we do differently. We start with a much bigger sample, and add mathematical modeling of prices and services, whereas the classical approach is that a benchmarking expert is normalizing the prices within a selected set of peers.

 

But as you say, the benchmarking is no longer just focused on price.

 

An increasingly important part of the benchmarking exercise is the analysis of how those services evolve – what could we do differently that might make for a better contract, with better service or quality of services?

So one of the topics at the IAOP summit was, how can we use these insights for transformation? This might be the right price, but it’s the wrong service for you. You could achieve the same thing faster or at higher quality, but you need to use a different technology. So the challenge is to make the contract flexible enough to incorporate the innovation that’s going on in global services firms.

Since we see all these contracts and new ways of structuring them, how can we take benchmarking beyond this outdated situation where it’s only concerned with price? How can we turn benchmarking into a transformational tool and part of the strategic discussion?

Clients want transparency, they want a tool for transformation, and they want benchmarking to be part of the strategy-development process.

 

Was this discussion exclusively focused on IT services?

 

No. An IT contract is very different from a raw materials or supply chain contract. Some of the pricing is a bit arbitrary, for example when depreciation is long gone but you’re still paying fees for maintenance and so on. Benchmarking IT contracts is a discipline in itself. BPO contracts, across a variety of disciplines, usually are simpler. Infrastructure and operations – but then you also have application maintenance or development. You need to decompose what is in a Software as a Service versus on-premises software maintenance, how the process maps align and so on.

A lot of these services have been repackaged, rebundled in the transition from in-house software implementation to SaaS. You don’t see all the different components. Some transparency has been lost in that process. It’s very easy for the client, who pays one monthly fee, to understand. But when you decompose it, it becomes a bit tricky because you no longer see what goes into providing that service. That is where benchmarking helps, because we will have read all the fine print.

 

Your approach is different from that of the other presenters?

 

We differ in our approaches to a degree. We’re committed to using statistical methods to drive decisions, for our own reasons. But the message we all have in common is that benchmarking is not just focused on price. It’s a tool for gaining insight into how you can transform your current sourcing model into something more intelligent, and removing the friction between the client and the vendor, so that both parties benefit from increased transparency.

Traditionally, the client initiated the benchmark – that certainly was the case three to five years ago. Now, a lot of what we do is initiated by the vendor, to help them perform better relative to their peers. They want to get better at providing cloud services of different kinds, and they want to understand where they are underperforming and where they are underperforming.

People are now buying data from each other, using that as a sort of intelligence-gathering to govern management decisions about specific projects. The benchmarks are used as target metrics for success.


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