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Using Benchmarking to Determine Fair Market Value for Outsourced ServicesBackground
The client is an electric and gas retailer in Canada, providing services to approximately 900,000 customers. They purchase all their customer care and billing services from an outsource provider. They have the business requirement to assure they are getting a fair price for the services, and at the same time justify to their regulator that the prices they are paying are fair, in order to recover the costs in their rates.
Key Issues
- The performance of the outsource provider was to be evaluated every two years as part of their contract
- Benchmark comparisons were necessary to assure a proper market assessment. The range of services had to be comparable
- The level of detail the client had about the costs and services being provided by the supplier was barely adequate for them to manage the relationship
First Quartile Assignment
First Quartile was retained to:
- Study the relevant market to establish the fair market value for the individual services provided to our client, as well as for the overall portfolio of services
- Prepare a report assessing whether or not the services and costs provided by the supplier fit within a fair market value range
- Provide testimony in a regulatory proceeding about the pricing and services
First Quartile Solution
1QC gathered data from a wide array of utilities and outsource providers to determine the fair market value for the services in question. The analysis required a number of adjustments to the individual company data, in order to address differences in cost of living, currency, service levels, and others.
- A 3-stage analysis approach enabled a comprehensive analysis and development of conclusions about the services being purchased by our client.
- The external comparisons led to clear understanding of the fair market values
- Precise regression models allowed appropriate, understandable adjustments based on cost drivers
- The internal cost analysis resulted in much better understanding on behalf of the client of the services they are being provided
- Investigation with the service provider gave a better indication of the processes used for service delivery
- Analysis of the costs provided additional insights
The Benefits
Our client was able to demonstrate that the services it was receiving were being delivered at a cost and service level consistent with fair market value
Findings from the investigation led to modifications to the outsource contract, creating greater control for the client
The stage was set for easier verification of the service levels and costs for future analysis
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