The Birth of the Benchmarking Clause

The benchmarking clause dates back to the mid-90s, when the number of mega-outsourcing deals began to explode, along with the lengths of the agreements. Signing a 10-year deal with a multibillion-dollar price tag was a big risk — one that customers wanted to mitigate.

In the beginning, says Kimball, benchmarking clauses were kinder and gentler — designed only to bring outsourcer and customer together to confer diplomatically if prices seemed higher than market averages. But as the decade drew near a close, CIOs and their business colleagues got nervous. They wanted some assurance that increasing competition among the outsourcers and constantly dropping costs of computing power would be reflected in what they were paying. Outsourcing consultants and external counsel were only too happy to oblige. Midwifed by such advisers, new benchmarking clauses emerged. With teeth.

The clauses not only enabled periodic benchmarking, they forced a remedy. Should charges fail to fall within the bottom 10 percent of the market, the supplier had to lower its prices. Some more aggressive clauses even required retro­active reductions. "They were planned to be punitive to the providers," says Rubin.

In the vendor feeding frenzy of the time, outsourcers signed these customer-centric provisions left and right. "Back then, it was all green pastures and room enough for everyone. Outsourcers just chased deals," says Stewart. "There wasn't a lot of thinking about how the market might change in the future."

A few years later, however, when some large customers began to flex their benchmarking muscles, outsourcers felt the pain. In one of the most extreme cases in 2002, Britain's Cable & Wireless sued IBM for more than $200 million for price gouging after a disputed benchmark. IBM counter­sued and brought Cable and Wireless's benchmarking company, Compass, into the lawsuit. They ultimately settled out of court. The outsourcers suddenly woke up, as if from a nightmare. "They started to say: What the hell have we agreed to?" says Geraldine Fox, global sourcing practice lead for Compass. "The price standard they were being held to — the lowest decile — was ridiculously strict."