Market & Sourcing
Benchmark clauses in IT sourcing
by Timo Kopp
Think about the future today - this also applies to IT sourcing. A benchmark clause in the sourcing contract can protect clients (and providers) against imponderables. What do IT managers and purchasers have to bear in mind?
"At the request of either party, the parties will conduct a joint benchmarking exercise." This reference to a benchmark clause is found in most IT service contracts today and sooner or later leads to a market price benchmark. Benchmark clauses have become established in outsourcing contracts because they allow customers to compare the price level of their contracted services with the actual market price. To achieve this, however, the clauses must follow content standards - companies are well advised to negotiate decisively and not to rely solely on the providers' templates.
Why market price benchmarks?
The aim of a market price benchmark is to determine a binding and neutral assessment of the market price for certain services and to clarify the extent to which the fees agreed for the services are competitive in conjunction with the quality delivered. In this way prices and services are to be kept at a level that is acceptable to both contracting parties in the long term. In addition, further questions are often included in the scope of the assessment, for example a general contract and service review or the analysis of customer requirements.
For a meaningful benchmark comparison, a general statement of intent in the contract alone is not sufficient. Both parties need to follow several best practices for the benchmark clause to be on the safe side. It serves to define the terms and conditions for reviewing the agreement in advance in order to avoid points of friction downstream.
In addition to this goal, a benchmark clause includes agreements on the following points, among others:
Frequency of the benchmark: As a rule, a market price comparison only makes sense once the operation of the outsourced services has stabilised. Rule of thumb: after two years at the earliest.
Selection of the benchmark partner: Both sides must agree on a recognised benchmark partner. Beforehand, companies can be put on a shortlist or explicitly excluded if, for example, they are in competition with the provider or do not have a comprehensive database.
Benchmark costs: The client and the sponsor must be named in the benchmark clause. Ideally, both parties commission the assessment and share the costs. The internal expenses are borne by the parties themselves.
Joint participation: Neither side should be able to withdraw from responsibility, but should actively support the benchmark. This is also guaranteed by a predefined benchmark duration.
Content of the assessment: Which services does the comparison include and how is it calculated? In case of deviations from the market price, do the individual results of a service count or only the overall results?
Implementation of results: Is there a price corridor in which the deviation from the market has no impact, how are the adjustments staggered and is the provider able to benefit from rising prices?
Adjustment of services: To what extent can clients change the services ordered (volume, quality, scope)?
A suitable benchmark clause can result in a longer and more balanced contractual relationship. By being able to compare a contract with the market, the client is usually less reluctant to sign a long-term outsourcing agreement. This reduces the risk of being bound to certain conditions that are no longer in line with the market until the end of the term.
No benchmark clause, no chance
If the outsourcing customer has failed to include a benchmark clause in the contract or has accepted an inadequate clause, this can hardly be corrected after the contract has been signed. You’ll have to wait until the end of the duration to renegotiate or tender a new contract.