| Anyone who has negotiated an outsourcing contract | | | | characteristics of the client environment, including |
| knows that one of the most contentious issues tends | | | | legacy environments, company-specific processes and |
| to be the benchmarking clause. How often should the | | | | policies, and indeed specific contract terms. The proof |
| price and service be benchmarked? By whom should | | | | of this, the sceptics would argue, is that benchmarking |
| it be done? Against what data should performance be | | | | provisions have hardly ever been successfully invoked. |
| compared? Who will pay for the market comparison? | | | | Indeed, seldom does a commercially competent |
| And what should be the result if the supplier’s price | | | | supplier agree for the findings of benchmarking to |
| is found to be too high or the service level too low | | | | trigger any more than a review in any event. If you |
| – automatic adjustment to the target level (as | | | | want to make sure your deal stays up-to-date, say |
| clients and their advisors might argue)? or just an | | | | the sceptics, do it by keeping the contract term |
| obligation for the supplier to discuss the results with the | | | | relatively short and give yourself the opportunity to |
| client (as suppliers would wish)? | | | | re-tender the services - competition is the only |
| While getting answers to these questions is important, | | | | benchmark that counts. |
| even more fundamental questions exist and should be | | | | Which view is right? My view is that, on balance, |
| addressed as a company develops its’ sourcing | | | | having benchmarking provisions in the contract is |
| strategy including: | | | | better than not having them. Firstly, despite historic |
| - Can benchmarking ever work? | | | | shortcomings when used properly they can result in a |
| - Can complex, client specific or unique services ever | | | | stronger relationship and contractual agreement |
| be accurately compared against the market? | | | | between the parties. |
| - Indeed, why bother at all with benchmarking? | | | | Secondly, even if they are seldomly used, benchmark |
| The arguments in favour of contractual benchmarking | | | | clauses act as contractual leverage should the client |
| provisions run something like this. Outsourcing | | | | ever need it. And clients in long-term outsourcing |
| arrangements are typically long-term service | | | | relationships should have all the levers they can |
| agreements based on an exclusive or semi-exclusive | | | | available to them to ensure that expected value is in |
| service relationship. The market capability and the | | | | fact delivered over time. |
| market price may change significantly during the term, | | | | Finally, and perhaps more importantly, the capability of |
| yet the usual competitive market pressures don’t | | | | benchmarking companies has improved in the last few |
| apply due to the exclusivity, so benchmarking is often | | | | years. Benchmarking is not the purely financial numbers |
| the only lever which clients can pull to ensure they are | | | | game that it once was. Traditional cost benchmarking |
| not trapped in an out of date arrangement which costs | | | | tended to be not very useful in the context of |
| too much and delivers too little. | | | | outsourcing deals, where market pricing was the most |
| A good benchmark often identifies specific ‘pain | | | | important measure, because this information could only |
| points’ in a client supplier relationship and/or | | | | be obtained through data gathering relating to actual |
| uncovers the ‘root cause’ of known problems | | | | deals, was problematic for traditional benchmarking |
| while providing detailed information on which to base | | | | organisations. But a small new group of specialist |
| solutions. Solutions might be as simple as lowering price | | | | outsourcing consultants and benchmarking firms has |
| or adjusting service level metrics if they are found to | | | | now emerged with applicable deal-based data which |
| be inadequate or out of alignment with the market. In | | | | can be applied effectively to outsourcing deals under |
| other situations, benchmarking might lead to the | | | | consideration. |
| renegotiation of some or all of the agreement causing | | | | This has made the biggest difference – comparable |
| pain between the supplier and client. In either event the | | | | data on outsourcing deals is now available, and clients |
| objective is clear, to drive beneficial change into the | | | | should make use of it. If benchmarking can be made to |
| relationship and make the deal and contract stronger | | | | work, then it can deliver real value during the buying |
| as a result. | | | | and the contract renewal process. |
| Arguments against the use of contractual benchmarks | | | | In summary, benchmarking makes more sense today |
| typically run as follows. Benchmarking clauses are | | | | than it has in past years. When used properly, |
| toothless in most cases because properly comparable | | | | benchmarking clauses do more than provide |
| data is not available with which to make definitive | | | | contractual leverage for clients. Good benchmarks can |
| financial or service level assessments – outsourcing | | | | drive beneficial change into a client’s supplier |
| service and price is too dependent on the unique | | | | relationships and contractual agreements. |