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Do Benchmarks Produce Cost Savings?
By ProBenchmark

Price benchmarks are used to ensure multi-year outsourcing transactions remain competitive over the life of the outsourcing agreement. Contractual price benchmarks are often triggered by the "third-party" benchmark clause found in most outsourcing agreements. These clauses provide the client with the opportunity to benchmark their services, but often client objectives aren't aligned with the purpose of the clause.

Some organizations view the third-party benchmark as an "easy" way to achieve cost savings. In reality, the third-party benchmark clause is designed to ensure that the price-performance of a service is market competitive, but the clause and the associated benchmark activity do not in and of themselves guarantee cost savings. If the outsourcing market was perfect, half of the time third-party benchmarks would reveal that the vendor's price was competitive. Because of this, clients solely seeking to reduce costs are often surprised when the benchmark reveals that the vendor's price is competitive – and therefore no price adjustment is necessary. Instead, clients seeking ways to lower their outsourcing spending should look at alternative approaches that focus on three main areas: reconfiguration of the services, reduction in consumption, or modification of service levels.

This article explains the issues that have led to the trend away from third-party benchmarks and reasons clients today are seeking new ways to “benchmark” their transactions that are much more collaborative and transparent - and don't require the execution of the third-party benchmark.

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