Clients Pressing For Price Reductions Of Up To 23 Percent On Outsourcing

Concerned about a looming economic downturn, client organizations are pressing outsourcers for price reductions of up to 23 percent as they negotiate extensions of long-term deals, according to a study of global outsourcing contracts.

A 12-month analysis of 120 global deals worth over $60 million each by Compass, a management consulting firm, finds renewal negotiations increasingly driven by pricing pressure. Companies are demanding rate cuts of 15 percent to 23 percent across the board, according to the analysis, without consideration of whether existing services are being delivered at a fair market price. For their part, vendors are in many cases agreeing to price discounts up front – in exchange for long-term agreements.

"A 20 percent cut across the board could drive many contracts to failure," says Geraldine Fox of Compass, "Clients are plucking aggressive price targets from the air with no due diligence around the competitiveness of existing service and with no regard to what the business needs."

By comparison, says Fox, between 2005 and 2007, clients were significantly less inclined to focus solely on cost reduction when renegotiating contracts.

"The priorities have clearly shifted," says Fox. "Until recently, clients considered strategy and future requirements when undertaking a renegotiation. Today, cost cuts are increasingly at the top of the agenda."

From Compass’ perspective, negotiating for short-term price reductions in exchange for long-term agreements – without a detailed understanding of existing costs, services, and requirements – is a losing proposition. The cuts will eventually become unsustainable, leading to a de-motivated supplier, a poor working relationship, and poor service quality.

"Some executives are beginning to view outsourced services as discretionary spend that can be cut at will," says Fox. "They are losing sight of long-term considerations, of the fact that the outsourcer is delivering core services to the business."

Compass says top-performing organizations exercise regular benchmark analyses of outsourced operations to compare pricing with prevailing market rates for a comparable bundle of services. Once a baseline is established, the client and vendor can develop plans to achieve top performance at a fair market price, and turn their attention to more strategic, enterprise-wide initiatives such as rationalizing applications, standardizing business processes, and consolidating sites.