Introduction

Price benchmarking should be used as a constructive tool to align the commercials and underlying drivers to market norms. However, if not carried out in a structured and well thought-out way, it can cause unnecessary frustration for both buyers and service providers, and can also lead to significant value erosion.

The two most common pricing models used in outsourcing contracts are input-based pricing (i.e., price per FTE) and output-based pricing (i.e., price per transaction/output). Output-based pricing has been around for some time now and its adoption among buyers of outsourcing services has witnessed gradual increase over the years. Though, output-based pricing still features in a relatively small percentage of overall outsourcing deals, the stakeholders in HRO seem to have accepted this model as the obvious choice.

Despite the high adoption, most buyer organizations lack the depth in understanding pricing drivers in the output-based model. This is further complicated by high dependence of these pricing drivers on the buyer’s sourcing environment. Therefore, using a standard, off-the-shelf benchmark rate to gauge competitiveness of contracted HRO prices generally results in a significantly flawed assessment.

In this viewpoint, we have explained a systematic approach for HRO price benchmarking. If adopted, it provides the right level of actionable insights enabling buyers to make an informed decision. It covers:

• Typical pricing metrics in HRO processes
• Complexities in price benchmarking of HRO services
• Suggested benchmarking approach
• Best practices to follow