Price cuts for outsourcing carries risks

UK companies that demand huge discounts and skip due diligence when negotiating contracts with outsource service providers risk contract failure, research from Compass Management Consulting revealed.

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UK companies that demand huge discounts and skip due diligence when negotiating contracts with outsource service providers risk contract failure, research from Compass Management Consulting revealed.

The UK-based management consultants warned CIOs not to put too much of a budget squeeze on outsource service providers as it could end in "contract failure".

Compass Management Consulting conducted a global survey of listed companies over 12 months, and analysed 120 deals worth over £30 million each.

Price pressures on outsource service providers has substantially increased during the first two months of this year, according to the research. British companies are opening negotiations with demands of 15 to 23 percent discounts, Compass said.

“Although the broader economic signals are mixed and senior managers are 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," said Geraldine Fox, leader of the global sourcing service line at Compass.

Compass believes that these discounts will end up in contract failure. “It depends on whether the exiting price is competitive, and that can only be clear after due diligence,” she said, adding that the due diligence process is being “skipped” by organisations that rush into deals. Of most concern is that organisations are signing long term deals now with a hefty discount to meet short term budget concerns, she said.

At the heart of the problem, according to Fox, is the relationship between CIOs and outsourcing providers. In too many cases, outsource providers are not partners or even service providers, instead Fox describes them as being “out task providers”.

“They are being micro-managed too much and the relationship and service does not develop.”

This attitude towards tasking is affecting the way outsource budgets are treated. “In some cases, managers are beginning to treat outsourced service providers as a discretionary spend that can be cut at will. In fact, outsource providers are delivering a core service to the business.”

This short-term budget fixation will cause long-term problems for the industry according to Fox, who fears a general decline in the quality of outsource providers.

“If the outsource provider is delivering a good service already, these negotiations can have a negative impact. If the discount puts the deal into loss mode for the outsource service provider, it will cut corners to deliver the service for the price agreed.”

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