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Benchmarking Clause
Because contracts can cover a substantial period of time, and because technology is evolving so rapidly, there is a natural concern that an agreement, although it originally provides for a high level of service at a favorable price, will become outdated, or over time will not result in the level of service anticipated.
One method by which contracting companies address this issue is to include a benchmarking clause in the agreement. Benchmarking clauses provide that specified terms in the contract will be periodically reviewed against benchmark levels in the applicable marketplace. The review may result in modifications to prices, services, service levels, and other terms in the contract.
It should come as no surprise that vendors often are not fond of benchmarking clauses, and a number of issues can arise during negotiation and implementation of the provision. The first question will be when and how often the benchmarking review occurs. Another natural issue is the question of who will perform the analysis. A common resolution is to agree upon and hire a third-party provider for this purpose. Of course, that leads to the question of who will pay the third party’s fees.
Other issues include the determination of which services and prices will be benchmarked, and the standard to which the provider will be held. Notwithstanding the difficulties, benchmarking clauses can be an effective way in which contracting partners can deal with long-term contracts and rapidly evolving technology.
Frequently Asked Questions
When should you ask for a benchmarking clause?
Ask for one in long term deals where pricing or service levels are likely to drift from the market, such as multi year outsourcing, managed services, and IT agreements. If the term runs a year or less, the effort usually isn’t worth it. The longer the commitment and the faster the technology moves, the more it earns its place.
Who pays for a benchmarking review?
That gets negotiated, and it belongs in the clause itself. Common approaches split the third party’s fees evenly, put them on the party that requested the review, or shift them to the vendor when the results show the pricing is off market. Decide which one applies while you’re drafting, or you’ll argue about it later.
What happens if benchmarking shows you’re overpaying?
It depends on the remedy the clause spells out. Strong clauses require the vendor to bring prices or service levels back to the benchmark within a set period, and give the customer an exit if that doesn’t happen. Weaker ones only require good faith discussion of the findings, which a vendor can sit through without changing anything.
