May 2012 | Commentary | IT Matters

Benchmarking Keeps Logistics IT Outsourcing On Track

Tags: Logistics I.T.

Nigel Hughes is Director of Global Service Development, ISG, 44 1 483 514 718

Logistics departments rely on technology to drive operational excellence. Benchmarking—analyzing an organization's performance against the comparable activities of another or its own over time—has traditionally been applied to validate and/or improve a service contract's value.

In an economy characterized by unstable growth and eroding margins, optimal logistics IT performance is necessary for companies to remain cost competitive and to support operational effectiveness and improvement in terms of reduced cycle times, product lifecycles, and innovative collaboration between businesses and logistics service providers.

By highlighting the differences between an organization's performance and a comparative reference standard, benchmarks can identify improvement opportunities and activities required to achieve superior performance.

Keys to Success

An effective logistics IT benchmark analysis should be part of an ongoing and proactive organizational commitment to quality and continual improvement—including, but not limited to, cost reduction. This can only come from understanding how and why performance deviates from the target. These differences are not simply side-by-side pricing comparisons showing a net gap or surplus. Rather, a benchmark should yield insight into how the organization's historical context and unique characteristics contribute to performance.

The benchmark should also define the different types of operational constraints, client choices within the organization, and how to address those constraints to improve performance. In a global logistics organization, these constraints can include geographic variations in service levels or reporting requirements that prevent a service provider from driving economies of scale.

Traditional improvement initiatives drive incremental efficiency gains within the existing operational environment, producing annual savings of 10 to 20 percent. A transformational approach to improvement, characterized by an optimized IT delivery model, utility computing, and a collaborative approach to identifying and implementing improvement, often produces overall cost savings of 40 percent or more.

Rather than tightening the screws on the status quo, IT leaders are able to establish a new and significantly better way of doing things—a clean slate that fully leverages the benefits of standardization and utility computing.

The improvement reflects both increased delivery efficiency from the supply side, and improved commercial management from the demand side.

Identifying the Target

Benchmarking plays a central role in a transformational strategy by quantifying the current state and the potential improvement opportunity of moving to an optimized environment. With the target identified, companies can chart a roadmap to the standard delivery model. The existing environment's characteristics and complexity help define the type of business team that will be needed to manage the change initiative.

Benchmarks are proving essential to change strategies in terms of identifying the potential benefits of transformational initiatives and charting a path to achieving significant performance gains.