Beware of attempting to force outsourcing prices too low in the economic downturn warns new research.

A report from Compass Management Consulting finds that some companies are demanding discounts of up to 23 percent from providers when renegotiating contracts.

The company scrutinised 120 deals worth over £30 million apiece over a 12-month period and found substantial downward pressure on prices in the first two months of this year.

The research sounds a note of caution to executives about squeezing outsource service providers in a quest for a short-term financial gain, as doing so carries a strong risk of contract failure in the longer term.

Geraldine Fox, leader of global 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.”

Fox said that due diligence is often being skipped in the rush to secure a swift and aggressive deal.

The root of the problem is companies' micro-management of outsource specialists, who are regarded less as partners or service experts and more as low-cost task providers, she said.

“In some cases, managers are beginning to treat outsourced service providers in the same way as a discretionary spend that can be cut at will. In fact outsource providers are delivering core service to the business.

“If the outsource provider is delivering a good service already, these negotiations can have a negative impact... they will cut corners to deliver the service for the price agreed.”

As reported on sourcingfocus.com last week NelsonHall has been advising businesses to seek “transformational deals” when renegotiating contracts, but this refers to seeking less rigid and inflexible terms rather than merely driving prices down to the wire.