Valuation of Benchmark Provisions on IT Services Contracts

• Main Authors: KAUFFMAN, Robert J., SOUGSTAD, Ryan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Benchmarks; Contracts; Economics; IT Outsourcing; Risk Management; Computer Sciences; Management Information Systems
• Online Access: https://ink.library.smu.edu.sg/sis_research/1748; https://ink.library.smu.edu.sg/context/sis_research/article/2747/viewcontent/p270_kauffman.pdf
• Institution: Singapore Management University

Information technology (IT) services are often subject to downward price pressures due to improvements in technology and business processes in a competitive market. When clients enter into IT services contracts, they are faced with the future risk that their services will be overpriced relative to the broader IT services market. To mitigate this risk, clients often add benchmark provisions, whereby a neutral third party assesses the prevailing market price for services. It will support fair price adjustments if the market prices are lower than the current prices. We model the decision to benchmark in order to provide managerial information on the value of benchmark provisions. We ground the model empirically with data from a leading IT service provider.