This guide explains the different parts that make a benchmarking block.
Navigating the complexities of the tech industry, businesses often lean heavily on outsourced development teams. While outsourcing can bring about significant benefits, it also introduces risks, especially when such teams become integral to a company’s operations.
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Companies often benefit from the unique insights and understanding that outsourced teams can offer about their business. However, an over-reliance on these teams can emerge, potentially making the company vulnerable.
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Financially, this reliance can manifest as skyrocketing hourly rates that may not align with the output or quality of work delivered by the development team. Therefore, it’s crucial to consider measures for financial stability in tech contracts. A key tool at your disposal in such scenarios is the benchmarking clause.
This part of the benchmarking block grants one party the right to compare the fees charged by the other party to those of similar businesses in the industry. It also specifies the frequency of benchmarking and the appointment of an independent, industry-recognized company (the Investigator) to conduct the process.
This part outlines the steps and responsibilities of both parties during the benchmarking process. It includes cooperation with the Investigator, providing access to personnel and records, signing confidentiality agreements, and following documented procedures. The Investigator will compare fees, choose a sample of similar businesses, adjust data for differences in services, and give both parties a chance to request changes to the proposed findings before issuing a final report.
Based on the Investigator’s final report, if the Provider’s fees are found to be more than a specified percentage (e.g., 5%) above the average fees of the sample, certain actions must be taken. The Provider must propose alternative fees and an effective date. If the Customer accepts the proposal, the fees in the agreement will be amended. If the Customer rejects the proposal, they can terminate the agreement without penalty.
Including benchmarking provisions in a tech contract is advisable in the following situations:
Outsourced of critical services: When a company outsources critical services, such as software development or IT support, benchmarking provisions can help ensure that the service provider’s fees and performance are in line with industry standards.
Long-term contracts: In long-term agreements, benchmarking provisions can be useful in periodically reviewing and adjusting fees, ensuring that they remain competitive and reflect the evolving market conditions.
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