A common question from our clients is, “How do I know I’m being charged a fair price for my ICT services?”. The most obvious answer is to undertake a market test in the form of a competitive tendering exercise. This normally can’t be achieved while a contract is running without incurring penalty charges, which might outweigh any benefit obtained from finding a cheaper supplier. Even if the contract is due for renewal, the costs and upheaval involved in a procurement exercise can make the renewal of the incumbent’s contract an attractive proposition, so long as there is certainty that the provider is still delivering value for money.
How can the true value of service be measured? Typically it is achieved by benchmarking current charges against those obtained by an equivalent peer group in the marketplace. This can be particularly effective if reliable market data is accessible and the incumbent supplier is agreeable to accepting the outcome. Benchmarking data is generally held by organisations that undertake regular procurement work and/or are specialist market analysts for any given sector. However, a number of factors must be taken into consideration, including the relative size of the contracts used for comparison, whether services are bundled within a larger package, whether improvements to service availability are an option and so on. This increased complexity means that straightforward benchmarking is not adequate and a more sophisticated approach is needed.
Strong influences
Mason Communications’ experience has shown that suppliers follow largely predictable behaviour concerning how they price a particular contract. The following can be strong influences:
- competition in the marketplace
- staff costs
- risk
- duration of the contract
- sunk costs
- exit costs
- what costs will be passed forward if a contract is renewed
- inflation indexation.
This appears to be a formidable list, but it is likely that a supplier will have factored all of these into its pricing formula. At this juncture, it is illuminating to look at how this process works in a different sector, such as civil engineering. A quantity surveyor is able to cost complex projects with accuracy because their approach is based on breaking a project into packages, each of which can be valued using an appropriate reference source.
Mason Communications applies a similar approach to valuing an IT or telecommunications-related service, starting with removing the commodity components from the equation, that is the items for which there is a known market value, such as an IP Virtual Private Network (IPVPN).
Hardware elements
The next category to be identified could be hardware elements, such as routers, where prices are generally accessible. The most difficult component to assess precisely can be manpower costs, for a variety of reasons. In some cases is it easy to see what resources are allocated. Where it is not, the supplier may volunteer the information, although caution is needed here to see through inflated figures or where some of the headcount has also worked on other accounts.
It is also important to have a good idea about the job descriptions of those who are on your account, although a broad brush approach is normally adequate, such as identifying people as being clerical, semi-skilled and skilled. Salaries can be estimated using sources such as job advertisements, salary surveys and so on. As a general rule, basic staff salaries can be doubled to cover overhead.
The remaining, and arguably most sensitive factor, is determining an acceptable margin above the base cost - the profit. There are many variables here, but values up to 20% would be deemed acceptable for long-term/low-risk contracts. However, if the supplier is exposed to more risk, such as no inflation indexation, that will be reflected in an increased margin to mitigate the risk.
To conclude, measuring value is a most useful exercise to ensure that customers know what they are paying for and ensuring that they get it. Only when armed with these facts are they in a position to negotiate and improve the situation where necessary. And of course it never hurts for the supplier to know that its performance is being monitored and compared against the market.