Extending contracts in order to get discounts with no detailed understanding of where the fat lies in a deal is bad practice - and is likely to lead to unsustainable pricing. That in turn will generate a de-motivated suppler, a poor working relationship and poor service quality. There are simply no bargains to be had over a five-year outsourcing contract.

Studies of contracts by Compass show that while outsourced service providers can offer discounts of up to 18 per cent below the in-house operation they replace on day one of a deal, they will claw back this differential over the term of the contract. Compass has observed pricing in the final years of a deal running at 36 per cent above comparable top quartile internal operations by year three of a five year contract.

Instead of pressing for blanket discounts, Compass sees the best performing companies are entering into dialogue with their suppliers to identify how they work together to achieve top performance and a fair market price. This often includes collaborations such as rationalising applications, standardising business processes and consolidating sites.

Personnel costs account for up to 80 per cent of a call centre or business process outsourcing contract. The outsourcers' freedom to cut costs in this area is limited a many of these staff have been transferred from the client company to the outsourcer under the terms of the 2006 Transfer of Undertakings (Protection of Employment) legislation which protects the working conditions of outsourced workers.

Compass points out that with predicted wage inflation of three per cent or more it is hard to see how outsourcers will achieve savings without a detailed understanding of how they and their client's operations are performing in relation to the market price for comparable services.

Geraldine Fox is global serviced lead for outsourcing at Compass Management Consulting.