This is not an existential question. Of course you want to make sure you are not paying above market price only two years into your contract. Surprisingly, research has found invoking the contract’s benchmark clause is not the best way to do this.
“Invoking the benchmark clause is an expensive and time-consuming way to do this because buyers have to do it according to the provider’s rules,” says Andy Sauter, senior consultant, ProBenchmark. “We advocate not going the third-party benchmarking route because it can often create a hostile relationship and delay implementation of the findings, which means postponing the price reduction back to the customer.”
The Snapshot Benchmark
Instead, Sauter posits the best way to capture real-time prices is to do a “snapshot” benchmark of the market in real time. Buyers can conduct this study “on their own terms,” he points out. Even better, buyers don’t have to share their results with their vendor if they so choose.
Snapshot benchmarks are advantageous, according to Sauter, because:
- They cost less money
- They take less time
- Buyers can do them independently
- They allow buyers to determine their negotiating strategy without the vendor
Sauter says most customers have a good relationship with their providers. So they want to share the snapshot benchmark with them. This can be a mistake, according to the ProBenchmark executive. “In most cases the provider immediately switches into negotiation mode and, by sharing results, buyers often lose their pricing leverage,” he observes.
He says buyers rarely achieve the results they want “when they let emotion and price control their thinking.” Instead, he recommends planning the negotiation sessions like a lawyer preparing to argue a case before a jury. “Have a concerted plan,” he suggests.
Creating a Win-Win
In addition to the obvious price discounts, he suggests “finding other ways to make the discussion a win-win for everyone.” For example, if you are in growth mode, offer to give the provider additional business, he suggests.
“It’s expensive to switch providers,” Sauter points out. So planning out the negotiation so “it doesn’t get drawn out” gives the buyer an advantage.
Data center and network services buyers are wise consumers, Sauter continues. “They know if the supplier doesn’t make money, they will not get the best service.” So it makes sense to figure out in advance how both sides can win.
Sauter says ProBenchmark has done many snapshot benchmarks, helping buyers level the playing field.