Outsourcing or distress sourcing?

UK companies are using the emergence of mixed economic news to press their outsourced service providers for lower prices - and are mortgaging their future.

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Managers under financial pressure seem as ready as ever to succumb to the attractions of short term discounts on offer from outsourcers, despite all the evidence that such “distress sourcing” is likely to store up huge operational and financial problems in the future.

Yet, according to our latest global study of outsourcing contracts, UK quoted companies are using the fear of downturn to press outsourcers for discounts of up to 23%, as they re-negotiate the extension of long term deals.

A 12 month analysis of 120 deals worth over £30m each by Compass Management Consulting has shown a marked increase in the price pressure on outsourcing vendors in the first two months of the year. Compass reports UK quoted companies opening negotiations with demands for 15-23% cuts across the board, regardless of whether the service provider is delivering a fair market price.

So, although the broader economic signals are mixed and senior managers largely optimistic, we are seeing aggressive, high-level targets plucked from the air in contract negotiations which bear little relation to what the business needs.

Moreover, 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. This lack of visibility on true costs and value means that asking for a 20% cut across the board could be too much – and drive a contract to failure. It depends on the whether the existing price is competitive and that can only be clear after due diligence which is being skipped as clients rush into making long term business commitments for a short term boost to cashflow.

In some cases, managers are beginning to treat outsourced service providers in the same way as discretionary spend that can be cut at will, whereas they are in fact delivering core services to the business over the long term. Moreover, companies will loose capacity in the medium term that will leave them without the resources to meet the increased demand of a growing economy.

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