In long-term IT operations agreements, it is essential from a financial perspective to ensure that the prices paid for services remain in line with market prices throughout the contract term.

The market price of IT operations services can change significantly over the term of an agreement. Technological advances and ongoing efficiency improvements can, over time, reduce the cost of delivering the same level of capacity. Conversely, factors such as rising hardware and software costs can periodically increase the cost of service delivery for vendors.

Benchmarking is a mechanism that can be used to adjust prices to reflect the prevailing market level.

In essence, a benchmark compares the prices in an agreement with market prices for comparable services. The purpose is to determine whether the prices in the agreement remain in line with the prevailing market level.

In this article, we review the key elements of a benchmark clause and the choices that should be considered when drafting it. These include the choice of benchmarking method, who may initiate a benchmark, which parameters should be normalized to ensure a fair basis for comparison, and how the benchmark results should translate into price adjustments.