Quick Tip #13: Is benchmarking a useful remedy?
In almost all managed services and outsourcing arrangements that we advise on, one of the fundamental objectives for the deal is to achieve savings and to lock those savings in for the duration of the contract. Using the contract to ensure that the supplier remains competitive in the marketplace for the duration of the deal can be challenging, but a benchmarking right can be very helpful.
Benchmarking exercises can be cumbersome, time consuming and expensive, so having the right to benchmark in your contract is only of value if it provides the customer with rights and remedies if the outcome of the benchmarking shows that the supplier has not remained competitive in the marketplace. Therefore make sure that the benchmarking clause includes a meaningful remedy for the customer. This would typically be in the form of the right to automatically adjust the pricing to come in line with market or, if supplier refuses to do so, the right to terminate the agreement.
Be cautious of a supplier who insists that the termination right will give rise to termination charges if it is a fundamental term of the contract that the supplier remains competitive in the marketplace. A benchmarking report which shows the supplier has failed to do this would amount to a material breach of the agreement triggering a customer’s right to terminate for cause rather than convenience.