Sitting on the bench... an introduction to benchmarking


In today's economic climate public sector bodies are under increasing pressure to ensure they are getting the best deal from their contracts. One way of achieving this is benchmarking.

The aim of benchmarking is to compare key performance indicators such as price, quality, and mode of delivery with other providers of similar services, and allow adjustments to be made to the contract. However, ill-thought out benchmarking processes can sometimes lead to headaches in the long run.

To benchmark or not?

If your contract lasts for at least three years and there are limited termination rights available, then benchmarking can be a good way of ensuring the contract keeps pace with market standards.

However, benchmarking can often add time and expense to contract negotiations. In the current market, a more efficient model may be to enter into shorter term (two to three year) contracts to allow the opportunity to re-tender at regular intervals. This ensures that you do not have to run the risk of changes in the market longer term, as you regularly have the ability to source the services from another third party (without having to expend time or money on benchmarking in the first instance).

Tips for a smooth benchmarking process

However, if benchmarking is required, it is important to get it right. Ideally, a good benchmarking process will be fair, proportionate and preserve a good working relationship between the parties.

Some key considerations for benchmarking are:

Get the Details Right
Try to agree as much as you can up front. Consider:
- What is being benchmarked - price, quality of service, method of delivery, all of the above?
- To what level will it be benchmarked (first, second quartile in the market?) and against whom?
- Who will act as benchmarker?
- Timing of initial benchmark and of the process generally.
The Role of the Benchmarker

In larger agreements, benchmarking will usually be conducted by external organisations. At a minimum, you should agree a list of acceptable third parties who can act as benchmarker and approach at least one of these organisations before contract signature to ensure that they can do what you need them to.

Customers will want the right to benchmark early on but suppliers will argue that a newly negotiated contract was a considered commercially agreeable at the time. Agreeing a time frame for the initial benchmarking avoids any dispute once the contract has begun.
Playing the Field

Suppliers will want the comparison to be made against companies in the same sector and geographical area in order to reach a fair comparison. This isn't always possible, particularly in more niche markets and it could restrict the number of samples used. It is important to agree on the comparators before hand.
Who Pays?

Negotiate who will pay for the benchmarking process before it begins. Offering to pay for the process may make the supplier more amenable to the idea of benchmarking.
Add Some Teeth

Consider the consequences of the benchmarking process. Including terms such as an automatic price adjustment or an early termination right, if the results of the benchmark don't meet a certain standard, will add some bite to your benchmarking provisions. However, you should anticipate that suppliers will want the right to dispute the results of the benchmark. Consideration should also be given to whether the price can only be adjusted downwards, or whether the supplier can reap the benefits of price increases in the market.