by Stephanie Overby

Outsourcer Benchmarking: The Sanity Clause

Mar 01, 20073 mins

Benchmarking works best when it's used to ensure competitive pricing over the term of a contract, not as a device to wring every last cent out of an outsourcer.

“Outsourcing is a constant barter,” says Daniel Masur, who represents outsourcing customers at Mayer, Brown, Rowe & Maw. That applies to the benchmarking of outsourcing too. Expect a lot of back and forth with the vendor on everything from the language of the benchmarking clause to the benchmarking process and what you do with the results. Here are some best practices.

Negotiating the Clause

Costs: Customers may prefer to pay for benchmarking, giving them greater control over the process. Suppliers may propose sharing expenses, which could ensure more cooperation from the outsourcer and greater perceived objectivity on the part of the benchmarker. Keep in mind, however, that outsourcers will probably find a way to recover their part of the benchmarking costs in the contract agreement—there are no bargains in benchmarking.

Timing: Ideally, you should conduct benchmarking every year. Reject language that limits it to less than that or pushes benchmarking out beyond the first year.

Sample size: Vendors may try to make the process more difficult or expensive either by demanding that you benchmark against a larger-than-normal number of peers or by stipulating an overly complicated process for peer selection. Benchmarkers say you usually need only a handful of peer companies for a successful result.

Results: Suppliers are usually reluctant to agree to automatically match market rates determined by a benchmarker—especially if there are stringent service quality requirements elsewhere in the contract. They’re unlikely to agree to match the bottom 10 percent of pricing, but may agree to the lowest quartile or third—though they may ask to cap the total cost reduction amount.

Managing the Process

Budget and plan: Include the estimated cost of a benchmark in your outsourcing business case. And start planning the benchmarking process at least four months ahead of time.

Do it early and often: Most customers never invoke their benchmarking clause until year two or three of the contract, and then only when the outsourcing relationship is already on the rocks. That’s a mistake. “The process is most likely to be successful—and least likely to bruise working relationships—when conducted as part of a periodic review or recalibration of the entire relationship,” says George Kimball, partner with Baker & McKenzie.

Focus: Campbell Soup CIO Doreen Wright sees little value in benchmarking every service IBM provides in her huge outsourcing deal. Rather, each year she and her team identify areas of growth or change where it’s likely that prices or service levels will need adjusting. For example, last year Campbell benchmarked server hosting after moving to a new virtual server environment with IBM.