One of the keys to a successful outsourcing endeavor should take place before the contract is even signed with a service provider: benchmark existing service levels to measure how well services are currently being delivered and how much it costs to deliver them.

These benchmarks are critical to a business-process outsourcing or IT-services engagement because they establish a performance standard that the service provider is contractually obligated to produce. Benchmarks often are cited in service-level agreements, and if the supplier's performance doesn't meet the standards, financial penalties and even termination of the deal can result.

But for companies embarking on a benchmarking expedition for the first time, questions abound. How do you benchmark effectively? How much does it cost to conduct benchmarks? Should you conduct a benchmark internally or hire an indepen- dent 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 pro-cesses isn't a core business function is enough to make it a low priority. All too often the benchmarking process takes a backseat 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 or 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 a request for proposals.

DuPont Co. developed metrics around systems and network uptime and availability as part of its benchmarking effort before outsourcing IT processes to Computer Sciences Corp. and Accenture in the 1990s. The chemicals manufacturer now is in the midst of benchmarking human-resources processes and technologies as it considers outsourcing those functions, looking at service levels in areas such as payroll administration, says Frank Conway, global human-resources 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, 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--before 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.

On The Right Track

Many companies 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 companies gauge call-center performance with such measures as average hold times for customers calling or the number of abandoned calls..

It's also important that benchmarking data be captured in the same way each time so the measurements are repeatable and can be audited, Kalnik says. Oftentimes, clients don't consistently measure these levels.

Benchmarking should take into account the business value of a service or process, so companies can assess not only how well things are working but the direct impact of processes on business performance, says Richard Sneider, a benchmarking expert and the managing director of the InterUnity Group, a technology consulting firm. For example, Sneider says, a financial-services firm benchmarking network and systems availability could look at the number of trades or transactions supported over a period of time.

How much it costs to conduct a benchmark depends on the size and scope of the process or service being measured and the number of metrics used. Sneider says companies that hire a consultant to perform a typical pre-outsourcing benchmark can expect to spend anywhere from $25,000 to $1 million. Doing the benchmark in-house could cost considerably less than hiring a consultant.

In addition to the cost factor, there are advantages and disadvantages to performing a benchmark measurement internally.