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Tough bargaining forces outsourcing price cuts
Buyers haggle contract prices down by up to 23 per cent

By Nick Heath

Published: Tuesday 11 March 2008

Outsourcing prices have slumped in response to aggressive cost bargaining.

Buyers have forced discounts of up to 23 per cent on outsourcing deals during the first two months of this year, a study by Compass Management Consultancy (CMC) has found.

The 12-month analysis of 120 deals worth more than £30m each showed UK companies opened negotiations with demands of between 15 per cent to 23 per cent cuts across the board as long-term deals were renegotiated.

Compass claims that many clients are renewing deals in order to get short term discounts from vendors without due diligence and with no understanding of the competitiveness of their current contract.

Special Report: Inside India

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♦ SAP and Wipro in Bangalore

In a statement Geraldine Fox, director of sourcing services at Compass, said: "We are seeing aggressive, high-level targets plucked from the air in contract negotiations which bear little relation to what the business needs. Asking for a 20 per cent cut across the board could be too much – and drive a contract to failure."

Fox said that some managers were overlooking the fact that outsourcing providers were delivering core services and treating them as discretionary spend that can be cut at will.

Compass warns that even though outsourcing providers might offer discounts of 18 per cent below the in-house operation on day one of a deal they will often recoup the discount over the term of the contract.