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Bolster Your Contract with a Strong Benchmarking Clause

by ISG

Benchmark clauses allow you to assess the service you are receiving against the market to ensure it is competitive. A successful benchmark needs to be swift so that it drives implementable change and does not consume more time and money than it is meant to save. When hammering out your next contract, consider the following Top 5 essential features of a worthwhile benchmark.

1. Stick to a realistic time frame. For services that have price trends that do not vary much, keep the frequency of the benchmark exercise to every two or three years. For those with pricing that tends to vacillate often, i.e. networks and storage, consider benchmarking every year. Be sure that any service price correction will cover the costs of undertaking a benchmark, and ensure that you do not stray far from market pricing over time.

2. Choose the right target. Your team has worked hard to get the very best price on the market. After two or three years of reductions in general pricing, you might match the market average, so a benchmark clause that targets the average may bring you limited benefits. At the very least you should meet the average, but wherever possible you should target the top 25th percentile for performance. Be aware that if you aim for the lowest price in a reference group plus a small percentage, or a very low percentile, you will end up with a disruptive and time-consuming process. A provider may fight to keep its margins and may not match another provider who is willing to lose money on a single deal.

3. Ensure the future is certain. Setting a date for any revised pricing will keep the provider from slowing the process. On occasion, providers will make the process as complex and time-consuming as possible to enable them to bill longer at current rates. If a fixed date for pricing exists, even if the benchmark overruns, the pricing will be corrected retroactively.

4. Agree on providers up front. A benchmark clause that specifies a short list of providers will result in an easier choice from the selection. Be aware that service providers perform hundreds of benchmarks around the world and will have knowledge of which benchmark provider’s current database may flatter them.

5. Make benchmark results final. If you want revised pricing to be adhered to, make sure the benchmarker’s decision is final. If either party does not like the outcome and refuses to agree to the result without the benchmarker holding the final decision, the time and effort spent on performing the benchmark will be wasted.

Benchmarking can ensure that you continue to receive value for money over time. We can observe major shifts in pricing year on year as technology improves and underlying costs reduce. Tracking and staying true to these shifts can mean a savings of 15-20% year on year in some areas. Benchmarking, rather than blindly accepting a static-priced future, allows you to tie your price to these trends in the same way that you might have if you had kept services in-house. To discuss benchmarking further, contact me.