A recent article over on SourcingMag.com that addressed why vendors don’t like benchmarking clauses got my attention, because I believe that, since you’re outsourcing for better performance, that all contracts should have benchmarking clauses to help insure that you get that performance. So I read it, and then discovered that the “benchmarking clauses” being referred to were not really performance benchmarks, but market-cost benchmarks. All these types of benchmark clauses do is exert constant price pressure on the vendor and, as the author notes, create a lose-lose situation for the vendor. And that’s not good.
It’s one thing to expect a vendor to improve performance year after year, and you should, but another to expect them to lower their price every time their competition lowers prices. After all, the competition might not be as good or might not be as familiar with your business, and, therefore, might not give you the same value. Moreover, you should be content to pay whatever price you agree to on day one provided the vendor continues to deliver value. And as long as the vendor improves year-over-year with shorter responses times, higher throughput per FTE, better processes and technology, etc. that vendor is delivering value.
So go ahead and put a benchmark clause in your contract that not only requires performance reviews on a regular basis but reasonable year-over-year improvements as well, because you should expect that. But don’t try to cheat your vendor out of a fair price for services rendered. Not only do they have bills to pay too, but they won’t be very incentivized to beat expectations and get you to best-in-class as soon as possible if all you do is nickel-and-dime them.