Benchmarking clause

Definition

A benchmarking clause lets the client periodically compare the supplier's prices and performance against the wider market, typically through an independent benchmarker, and adjust the contract where it has fallen out of line. This protects against gradual erosion of value in long-term outsourcing deals. The clause rests on contractual freedom and has no specific statutory anchor.

Example

Every two years an independent firm benchmarks the managed-services fees against comparable contracts, and prices above the market median are reduced.

Why this is a business risk

Without a benchmarking clause, long-term outsourcing clients can find themselves locked into above-market rates for years because switching costs are too high. Suppliers face the opposite risk: an aggressively drafted clause may force price reductions every cycle without accounting for investments, inflation or improved service scope made since the original contract.

How to manage it

• Specify the benchmarking frequency, the selection criteria for the independent benchmarker and who bears the cost to avoid disputes before the first exercise.
• Define the comparison methodology: which market data sources, which peer contracts and what adjustments are made for scope or quality differences.
• Agree a remedy mechanism -- price adjustment, negotiation window, termination right -- and what happens if the parties cannot agree after the benchmarking result.
• Set a calendar reminder for the benchmarking trigger date so the right is exercised before the contractual window closes.
• Include a floor on how much prices can fall per cycle to protect suppliers from disproportionate adjustments driven by temporary market dips.