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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

You signed a long-term deal. It would be embarrassing if, in a few years after signing, the pricing is significantly higher or your service levels are significantly lower than market. Benchmarking provisions are intended to provide a mechanism for ensuring that your pricing and/or service levels are within market (taking into consideration the unique factors applicable to your deal). Set out below are some of the key components of a meaningful benchmarking provision.

Who Can Benchmark?

Often a list of preapproved companies is included in the agreement that both parties agree may be used to perform a benchmark. There also is typically a mechanism for adding new benchmarkers over the term. Service providers may want to be able to agree to the benchmarker or at least get comfort that the benchmarker will not be a competitor.

Who Pays for the Benchmarker?

Deals vary as to responsibility for payment of the benchmarker. Some deals require that the service provider pay or that the parties split the costs of an annual benchmarking. Other deals may require the customer to pay, but that the service provider reimburse the customer if the benchmarking reveals that the fees or service levels are not within an agreed market range.

What Can Be Benchmarked?

Customers generally look to benchmark the fees (including rate card rates), but in some cases service levels also may be subject to benchmarking. Consider whether it makes sense for your engagement to be able to benchmark pricing and/or service levels for

  • any of the services;
  • services by function or category; or
  • all of the services in the aggregate.

What Is Market?

This is a nuanced question, and each benchmarker will have its own method for determining this. However, the parties can agree on certain considerations the benchmarker must use in making its determination. These considerations often include agreeing on

  • what market percentage or quartile that the benchmarking results must be within (e.g., top quartile);
  • the number of comparative points that the benchmarker must use in its study; and
  • normalizing factors to ensure that the services being compared are of a similar nature.

How Are the Services Normalized?

Benchmarkers typically have their own methodology for normalizing services and transactions. Often, the agreement may include certain factors that the benchmarker should consider in such normalization methodology. For example, if service provider A is providing services from a certain region with lower labor costs than the region from which service provider B is providing services, one would expect service provider A’s price would be lower than service provider B’s.

When Can a Benchmarking Occur?

Again all deals vary, but many service providers request that the first benchmark does not occur for some period of time (e.g., during the 12 months after contract signing). After that period, and usually on some agreed interval thereafter, benchmarking is either required or permitted.

What Are the Consequences If the Benchmark Reveals That the Pricing or Service Levels Are Not Within Market?

The service provider may either be required to (through an automatic adjustment requirement) or be given an opportunity to bring its pricing or service levels in line with the market requirements. In some cases, if the service provider is not able or is unwilling to bring its pricing or services level within the market requirements, the customer has the right to terminate the agreement in whole or in the affected part.

What If There is a Dispute?

Given the consequences, it is no surprise that disputes can arise during a benchmarking. It is not uncommon to see the benchmarker, as an independent third party, be given the right to make final decisions with respect to disputes during the benchmarking process.

Benchmarking provisions can be helpful provisions for customers looking to assess whether the pricing and/or service levels that they receive are within market. They can also be used as tools for service providers who want to validate for customers that they are being treated fairly.