Only 43% of CIOs and CFOs Try to Quantify Financial Benefits of Outsourcing

18 August 2009

Less than half (43%) of chief information officers (CIOs) and chief financial officers (CFOs) surveyed have tried to quantify the financial contribution of outsourcing to their businesses, according to research by Warwick Business School and Cognizant. The study found that more than a third (37%) simply do not bother and 20% cannot remember if they have tried or not. Of those who have tried, only 19% are very confident in their calculation.

The survey of 263 CFOs and CIOs from large European corporates across five regions (the UK, Germany, Switzerland, Benelux, France and the Nordics) found that the majority of respondents spend between US$5m and US$100m annually on outsourcing (29% over US$50m). Of the 40% of companies which cut back on outsourcing last year, over three-quarters (78%) cited 'unclear value for money', but without any clear evidence or means to quantify the decision.

"[The results are] quite striking because the outsourcing industry as a whole is growing very fast," said Dr. IIan Oshri, fellow at Warwick Business School, professor at the Rotterdam School of Management in the Netherlands, in an interview with gtnews. "The overall revenues are in excess of US$250bn in revenues for ITO [information technology outsourcing] and US$150bn for BPO [business process outsourcing], and yet only 57% actually try to find out if there is any financial benefits involved."

The survey also found:

CIOs get vote of 'no confidence' from finance: only 37% of CFO respondents rate their CIO's ability to communicate outsourcing's benefits to the business.
37% believe that the business value of outsourcing cannot be assessed beyond the one-time cost saving.
Only 8% are very confident that they know what their companies are spending in terms of time and money on their outsourcing arrangements.
61% plan to either maintain or increase their outsourcing investments in the coming months.
51% want to see return on investment (ROI) from outsourcing arrangements within the first year; 13% in six months or less.
37% do not believe outsourcing's financial contribution to the business can be properly assessed beyond a one time cost saving, while 29% believe it can.
42% of all respondents believe outsourcing strategies are effective to dealing with the challenges of the economic environment ahead.

"The second important angle uncovered by this survey is the CFO's perception of CIO when it comes to bringing the business value of an outsourcing activity to the board," said Oshri. "Here we find that over 60% of the CFOs believe that CIOs are not doing a good job in conceptualising the financial benefits that can be gained from outsourcing activity and then delivering that to the board. The outsourcing industry as a whole, in our opinion, is showing that they need to do better in promoting the benefits and helping CIOs articulate them."

In addition to reporting the findings of the survey, the study highlights seven questions for firms that are pursuing the outsourcing path, particularly if they consider that the CIO is a central figure in this activity. "They need to think of the CIO as a strategist and there are additional tools than just trying to figure out a one-off cost saving. A number of the CFOs we talked with pointed out that one of the real challenges for CIOs is to move beyond the one-off cost saving. That is not to say that all companies doing outsourcing do not understand this message, but the majority of them don't and there are outsourcers out there that can help them improve their performance," said Oshri.

The seven questions are:

1. What are you trying to achieve with outsourcing? What services do you want to outsource and how critical are they for your competitive advantage?
2. What kind of metrics are you going to use and how precise are they?
3. What type of sourcing model are you going to apply and do you have the in-house capabilities to support that?
4. What are you benchmarking against? Benchmarking is about understanding the critical business factors in the industry and then a company can outline its service level agreement (SLA) with a service provider.
5. How will your business grow and what changes will need to be made in the SLA?
6. What do you focus on: IT continuity or improvement and innovation?
7. What can you learn from your outsourcing vendor?

Commenting on the last point, Oshri said: "This is where clients should be heading - they should be looking into learning from their vendors and should be focusing on those vendors that can provide them with advanced methodologies to help them to measure the financial benefits from the interactions they are getting into, as well as how to divert resources from focusing on service performance to improvements in innovation performance."

First published on www.gtnews.com