What is Market Conformity?

A contract locks in the price at the moment of signing. That price reflected what the market charged at that point in time. In stable markets with slow-moving cost structures, the contract price may remain reasonable for years. In markets where technology, labour costs or competition change quickly, a two-year-old contract price can be significantly above what a new supplier would charge today.

Market conformity is the question every business should ask before renewing or renegotiating: is what I am paying still what this service or product is actually worth in the current market? The answer requires a benchmark, which means obtaining comparable quotes or reviewing published price indices for the relevant category.

A benchmarking clause formalises this process contractually, allowing you to request a market comparison at defined intervals and to renegotiate if the contracted price deviates beyond a specified threshold. However, most SME contracts do not include such a clause, which means the responsibility for benchmarking falls entirely on the buyer.

Market conformity is particularly relevant in categories subject to rapid change: cloud computing and software licences, where prices have generally fallen as competition increased; logistics and transport, where fuel and labour costs fluctuate; and professional services, where market rates vary considerably by geography and specialism.

The absence of market conformity checks is one of the reasons procurement costs drift upward over time. Each renewal without a benchmark comparison is an opportunity for the gap between contracted price and market rate to widen.

Bain and Company estimate that external procurement accounts for 43 percent of total business costs on average. Even a modest gap between contracted and market prices, say 5 to 10 percent, across a significant portion of that spend represents a material impact on margins.

The Hackett Group found that 10 to 20 percent of expected procurement savings are lost to uncontrolled or unmonitored spending. Failing to benchmark contracted prices against the market regularly is one of the most common ways those savings erode after the initial contract is signed.