By Sanjiv Gossain, UK managing director of Cognizant Technology Solutions
Published: October 22 2009 11:42 | Last updated: October 22 2009 11:42
From IT maintenance to CRM and business process automation, outsourcing is firmly ingrained in company culture and is central to the smooth operation of the world’s biggest and most renowned businesses.
The benefits are supposedly clear, with cost-reduction typically the number one goal. However, despite vast sums spent on outsourcing contracts each year – more than $42.2bn in 2008, according to Gartner – it appears many companies are failing to keep track of their outsourcing investments and are subsequently missing out on the major benefits of outsourcing.
Cost saving, of course, is not the only desired outcome when entering into an outsourcing relationship. According to Gartner research, organisations still outsource for “efficiency, access to skills, focus on core business, innovation, modernisation and even business transformation”.
Yet the demand for cost reduction remains high and research recently conducted by Cognizant, in partnership with Warwick Business School, finds that a proven return on investment is required in a very short time.
Over half of more than 250 European chief information and chief finance officers surveyed are demanding ROI within the first 12 months of an outsourcing agreement being confirmed. The current economic situation has no doubt intensified this need, with outsourcing providers under increasing pressure to drive more value with their clients and deliver longer-term business benefits.
Whether an outsourcing agreement has saved money over the short term isn’t too difficult to measure; in the simplest terms, it boils down to whether the new supplier can do the task more cheaply than it was done previously in-house or with an alternative outsourcing supplier.
However, given that many of these relationships can stretch over a considerable length of time – the BBC recently extended one of its contracts for a further nine years – companies expect to profit from the additional benefits outlined above.
It goes without saying, therefore, that every business has a solid methodology and auditing process in place to measure the benefits of their outsourcing investment. Or does it?
Our research suggests that business leaders are failing to get to grips with measuring the full financial impact of the outsourcing contracts they commission. Perhaps the most alarming discovery is that fewer than half of CIOs and CFOs have even tried to quantify the financial contribution of outsourcing to their business.
There is a widespread belief that the long-term value of outsourcing cannot actually be measured. More than a third (37 per cent) admit they do not try to measure the return, while a further 20 per cent do not even know whether they have tried.
This is perhaps unsurprising when considered that only 29 per cent believe that the contribution can be properly assessed beyond the one-time cost saving.
So what methods are being used to track and prove the value of these huge investments? The CIOs and CFOs surveyed provided several answers and in some cases, it seems the methods are vague at best.
Some show a degree of methodology, even if they couldn’t quite articulate what it was. Others amount to little more than “back of an envelope” sums. Examples included “Manual calculation”; “You know what it costs but you don’t really know the value”; “The accountants will use some formula for calculating ROI”.
Just 7 per cent of respondents were very confident that they know what they are spending in terms of time and money on their outsourcing arrangements.
Companies undertake outsourcing initiatives for a wide range of disciplines. So while a one-size-fits-all method for measuring value may not make sense, it is imperative to have some method to indicate what has been gained and at what price.
To measure outsourcing’s impact, businesses require a form of Return On Outsourcing methodology that includes benefits along three dimensions: innovation (the basis of future benefits, valued financially), process optimisation (quantified and valued over time) and total cost of ownership (reflected in IT budgets and IT accountability).
Value along all three of these dimensions should be addressed as part of the planning process and tracked through the life of the initiative. This should enable both the client and the vendor to see the business value and cost advantages from the outsourcing investment, understand the operational conditions and best practices that lead to long-term success, and compare projected financial returns with other companies within an industry peer group and beyond.
The evolution of an outsourcing project can and should, in many cases, begin with cutting operational costs through labour arbitrage. Over time it should gain operational flexibility, adding and subtracting third-party resources as needed, delivering additional cost savings.
As financial performance improves, the cost savings can be reinvested in strategic initiatives that enable even greater operational efficiency and support future growth initiatives.
This insight into outsourcing performance is crucial in determining future decisions. The research suggests that C-level executives are making such decisions on future business and outsourcing strategies without knowledge of the financial benefits: 78 per cent of those who cut back on outsourcing last year cited “unclear value for money”.
Yet many do not actually have any clear evidence or means to quantify this.
Senior executives, therefore, appear to be making outsourcing decisions based upon short-term cost-cutting – which remains crucial – without measuring outsourcing’s impact beyond the initial labour, skills and cost advantages.
Key business benefits such as innovation and transformation are being ignored by many. Given that outsourcing should be delivering significant operational flexibility and business process improvements, its true value is clearly being missed by many organisations given the widespread lack of measurement practices.
Without clear ways of measuring and monitoring their outsourcing arrangements, company executives could, in effect, be tying up costs that could be released to drive additional initiatives.
The practice of outsourcing IT and business processes is mature, yet the research suggests that the way in which companies measure the positive impact of these arrangements needs to be addressed.
More on the Cognizant and Warwick Business School research report on attitudes to outsourcing can be viewed at http://www.quantifyingoutsourcingbenefits.com/
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