Method for Estimating Financial Risks/Impact of a Benchmark Clause

Method for Estimating Financial Risks/Impact of a Benchmark Clause

Disclosed is a method for modeling financial risks/impact of various financial elements found in a Benchmarking Clause associated with a contract.

The Benchmarking Clause may lay down provisions of one or more of, but not limited to a process and a timeline associated with conducting a Benchmark. The Benchmark may be conducted on one or more of, but not limited to, a pricing and a delivery performance of a Service Provider. For example, the Benchmark may be conducted to account for differences between a contract price and market price. The financial elements of the Benchmarking Clause associated with the contract may include one or more of, but not limited to, financial adjustments, adjustment limitations, and adjustment years. The financial risks/impact of the various financial elements may be modeled either before the contract or during the execution of the contract. The disclosed method may use one or more models to estimate the financial risks/impact of various financial elements including, but not limited to, a contract structure, pricing model, benchmark adjustment model, and contract financial model.

In an embodiment, the Benchmarking may be conducted before the contract is ratified. Various financial risks/impact scenarios may be generated before the contract is ratified, including but not limited to the best possible Terms & Conditions (T&C's) from the Service Provider's perspective, and the contract with the T&C's that a Service Receiver is most likely to accept. In another embodiment, the benchmarking may be conducted after the contract is ratified and may include estimation of current financial risks/impact, as it is.

In an embodiment, the disclosed method may use a Pricing Model to estimate the financial risks/impact. Figure 1 illustrates various parameters associated with the Pricing Model.

1

Figure 1

A Benchmarked price is the price calculated on the basis of Benchmarking conducted over a pricing of a Service Provider. In an embodiment, normalization is performed on a calculated Benchmarked price to allow for one or more errors in calculation of the Benchmarked price including but not limited to insufficient and incorrect data. In an exemplary embodiment, a Pricing Tolerance Threshold is permitted that defines a range in which no pricing adjustments are made. When the Service Provider's price exceeds
a computed Benchmarked Price plus the Pricing Tolerance Threshold, a Service Receiver is entitled to an adjustment on the Service Provider's price. In an embodiment, size of the adjustment is controlled by a Maximum Adjustment parameter defined over and above the Service Provider's price. Therefore,

Adjustment on the Service Provider's Price = 0, if Service Provider's Price <= (Benchmarked Price + Pricing Tolerance Threshold).

Adjustment on the Service Provider's Price = Maximum Adjustment, if (Service Provider's Price - Maximum Adjustment)...