What should go into a Benchmark Clause?

Does your contract have a benchmark clause – if not, what should go into a benchmark clause? If so have you covered these key areas?

Generally speaking all contracts have several key clauses. When it comes to Telecom contracts, especially long term agreements (more than 2 years), or agreements… dare we say it, with chunky spend commitments, one key contract clause you must include is the right to benchmark your cost.  In laymen terms, a benchmark clause is meant to provide you with protection that your contracted rate today will remain competitive throughout the contractual relationship.

Our advice is to keep your benchmark clause simple!

As we prepared for this blog post we wanted to see what others thought about this topic as well.  We came across an article from Sourcing Innovation on Benchmarking Clauses that left us speechless. (Click here to read) Their blog almost seems like a telecoms vendor wrote it!  In a nutshell their view was do not focus on the price you’re paying but focus on the services the vendor is providing.  We completely agree that performance is a key driver in the relationship, but don’t get caught in the game of letting the supplier tell you that you’re paying a premium because “we provide a superior service.”  You’ll wish you never went down that rabbit hole.

(Note: We couldn’t believe this line…. “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.” …. Really?  Are you kidding me…uh hello, welcome to a competitive market place folks!)

We particularly like what the team at LB3 had to say about benchmarking, effectively make sure your benchmark clause has some teeth. (Click here to read.)

LB3 covered at a high but simple-level the two important elements:

1. Avoid benchmark clauses that just say, “we’ll talk.”

I can just hear myself now:

• “Hi this is me, I think my rates are too high”
• Hi this is your supplier we think your rates are in line with the market and our network is far superior blah blah blah!”

LOL…  !

2. Have skin in the game! We thought LB3 was spot on here:

“both sides have skin in the game—the provider can refuse to reduce the customer’s rates, but if it does so the customer can reduce its commitment and take some of its traffic elsewhere to get the good rates that the incumbent won’t give it.  Under the provider’s “standard” rate review clauses the customer has the “right” to ask for an offer, but nothing changes unless the parties “mutually agree” to amend the agreement, and the provider pays no price for offering a paltry reduction or conditioning any reduction on more traffic or a term extension.”  

So in other words, what LB3 is saying is if the supplier is not willing to reduce their rates within your benchmark clause, include language that says if neither sides can reach an agreement at a minimum, then your remaining spend commitment will be reduced by x% and / or the remaining term will be reduced by x months.

We covered this point in our “Traps to avoid when outsourcing a network expense benchmark to a TEM provider blog post” Make sure you also avoid benchmark clauses in which the supplier tries to include language that says the benchmark comparison has to be completed against an organization within a similar sector.  Basically this locks you into a carrier’s internal vertical structure which aligns all customers by verticals, where the pricing is controlled by the same financial pricing analysts.  You can imagine the conversation next, “well we’ve compared your cost against your peers and your cost are exactly in line with theirs…”   Really? Now imagine that.

Our advice is to keep your benchmark clause simple:

• Include a post service implementation date not to exceed 24 months.
• Include language which has teeth and a clear decision path in which you have a way forward if an agreement cannot be reached.  For instance leverage industry pricing like Telegeography that specializes in telecom pricing.
• Considering leveraging experts like LB3 to assist you with drafting the contractual language, these guys are really good and have seen and negotiated it all.
• Leverage LinkedIn to find your peers in the industry and build out your social network and then ask your peers what their best practices are around their benchmark clauses.
• Finally and most importantly, once you’ve negotiated the benchmark clause don’t just throw the contract in a drawer and forget about it, track it through and build it into your business plan to review your contract rates when the time comes.

Conclusion

If you’re reading this as a carrier our advice is to play ball when it comes to benchmarking.  Having worked on the carrier side ourselves we understand the challenge you face in terms of maintaining the client relationship and the internal battles you’re up against to drive down what is viewed as a really competitive price.  One thing we found is a happy customer opens the door for new business opportunities against existing as well as new products and services.  You have to give a little to gain a little more.

Temforce is a provider of Telecom Category Management SaaS enabling teams to boost their Telecom Management!