The Hindu Business Line : Renewals under pricing pressure, says Compass

Mumbai, March 27 Concerned about a looming economic downturn, client organisations are pressing outsourcing firms for price reductions of up to 23 per cent as they negotiate extensions of long-term deals. A reduction of this quantum could result in the failure of many outsourcing contracts, suggests a study by UK-based Compass management consulting.

The research states that pricing pressure is increasingly driving renewal renegotiations. Companies are demanding rate cuts of 15 per cent to 23 per cent across-the-board, without consideration of whether existing services are being delivered at a fair market price, Compass said. These findings are the result of a 12-month analysis of 120 global deals worth over $60 million each by Compass.

Of significance

The findings assume significance as majority Indian IT vendors such as TCS, Infosys, Hexaware and BPO firms such as Firstsource, EXL, HTMT and others have been talking about their ability to increase billing rates in new engagements with clients, enabling them to counter the double whammy of the rupee appreciation and a recession in the US.

For their part, vendors are, in many cases, agreeing to price discounts upfront – in exchange for long-term agreements, according to 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,” said Ms Geraldine Fox, Director of sourcing services at Compass.

losing proposition

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, the study said.

By comparison, between 2005 and 2007, clients were significantly less inclined to focus solely on cost reduction when renegotiating contracts, said Ms Fox. With 8,000 engagements in 32 countries, Compass is a global management-consulting firm specialising in business and IT performance improvement for Fortune 1000 organisations.

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