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Benchmarking
Benchmarking is a risk management tool designed to overcome the risks of fixed price long-term contracts. In its simplest format, a benchmarking process compares a contract price to a market price, and the contract defines the legal obligations of the parties as a result of that comparison.
In BPO services agreements over a term longer than a year or two, the question is whether a market price exists at all. The quest for a comparable price using benchmarking methodologies leads only to an approximation of a market price. In commercial transactions, approximations may result in legally binding changes in price, provided that the procedures are predictable and objectively verifiable and thus enforceable by a court.
Benchmarking provisions in outsourcing contracts require a series of decisions. For simplicity, we can list several issues in the use of benchmarking as a price adjustment technique.
This partial list highlights the complexity of attempting to applying an emerging market price to a long-term contract price. Additional considerations may be addressed by the relationship governance process.
Benchmarking may not be objectionable when the service provider’s price is based upon an hourly rate of its employees doing a labor-intensive BPO service. Labor rates can be readily determined.
The suitability and terms of a benchmarking become more complex and nuanced when the BPO resources require the application of unique technologies or methods of doing business that the service provider has developed as a matter of proprietary intellectual property rights. In that case, measuring what other customers paid other service provides for the same or similar services may not result in a meaningful comparison. Accordingly, benchmarking is a topic for careful review and negotiation depending on the particular configuration of services and the availability of a meaningful benchmarking process.
As an econometric process, benchmarking requires significant work by a benchmarker to sift through data and present a “valid” result. This process may require extensive labor by highly trained personnel over a period of several weeks or months. Accordingly, the use of benchmarking may reflect not only a question of suitability, but also of cost of administration.
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