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Benchmarking

June 6, 2012

Today I am in Finland and among the meetings I had been asked to present to the Scandinavian offices of an international law firm on the subject of benchmarking.

In the context of contracts, benchmarking is not a topic to which I had previously applied a great deal of attention. Of course I am familiar with the use of benchmarks, especially related to pricing, but have never really applied much thought to its wider context, application or impact.

In the presentation, we discussed the fact that benchmarks can be used at three quite distinct levels – one being to drive general improvement relative to past performance, another to check competitiveness by comparison with others, and the third to achieve transformation by setting a vision or goal and benchmarking progress towards it.

Each of these is quite different in its impact and in the actions necessary to support measurement. Yet in my research, it became clear that many of today’s benchmarking clauses are in the contract due to habit, rather than with any specific purpose. Frequently they have little correlation to key performance indicators or business priorities; typically, they are designed to provide leverage over the supplier, rather than being a statement of shared goals and value.

So I discovered that benchmarking today is often ineffective and just another source of contention. Yet used properly, it could be so different. A shared benchmark could provide the basis for joint working and problem solving. Benchmarks that focus on achievable data can provide an objective insight to performance. For high quality suppliers, they can illustrate the benefits of their offerings or services relative to competition.

We also explored the extent to which networked technologies allow the collection of a far wider range of benchmark information (through low cost, targeted research); and we looked at the extent to which a benchmark against the supplier’s own internal data might reveal some excellent insights. For example, if the supplier is competitive in the market, why would we not request periodic benchmarks of their pricing for winning bids over the last 90 days? Or perhaps a benchmark of performance – for example, the percentage of wrong invoices that they issued to us versus those to other customers for the same services.

Overall, the research for the presentation and the discussion that ensued suggest that benchmarks have a valuable place in contracting, but that today they are not being approached in a practical way. Often the measures or the base data are impractical, misleading or unachievable; the incentives that result from them are negative; and their practical benefit is therefore extremely limited. It is time for contracts experts to step back and look at a more effective and beneficial approach.

A copy of the Benchmarking presentation is available in the IACCM Library at www.iaccm.com

One Comment
  1. Hi Tim,

    You’re right that there are challenges around getting the data that underpins benchmarks and challenges in even defining the scope of what is being benchmarked.

    But a bigger challenge in my view is organisational. Really good benchmarking initiatives need someone who knows what to measure, someone who actually measures it, and someone who can put it put it into a contract in such a way that it creates an environment with the right incentives. Getting these resources consistently working well together is not easy. I’d be keen to hear examples of where it is being done really well.

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