Companies Look Outside Themselves

Companies are finding increasing value in outsourcing non-core business functions, according to a study conducted via email of more than 500 chief financial officers and senior finance executives of large ($1 billion or more in annual revenue) companies by Hewitt Associates.

In fact, 90 percent of the respondents believe that outsourcing enhances shareholder value, and 70 percent report that they decided to outsource a company function to tap outside sources of talent or expertise that don’t exist within their firm.

“As companies face increasing competitive pressures, they are searching for ways to remain focused, flexible and technologically competent,” said Mike Wright, global practice leader, HR Effectiveness, Hewitt Associates. “Outsourcing addresses these needs in addition to giving organizations access to specialized talent. And, outsourcing adds strategic value, particularly by instilling best practices and improving quality and service.”

Hewitt cites current economic conditions as the reason for growing interest in outsourcing. One-third (33 percent) of respondents report that their interest in outsourcing has increased very much or somewhat, while nearly two-thirds (62 percent) say that their interest has remained the same.

Cost-cutting doesn’t seem to be the primary motivation for outsourcing as only 17 percent have actually measured the return on investment. However, CFOs who have measured the return report that they reduced pre-outsourcing expenses in the past year by an average of 17 percent and expect to reduce 2002 pre-outsourcing expenses by the same percent in 2002.

So why do companies outsource? More than two-thirds (64 percent) say concentrating their resources on the core business is most important, followed by more than half (53 percent) who say that reducing headcount and related expenses is also an important factor.

The top outsourced business functions are information technology (IT) at 57 percent; human resources (HR) at 41 percent; facilities management, 40 percent; and finance and accounting at 20 percent. Four-in-ten say they don’t know what company functions are being outsourced.

“The evolution of HR outsourcing is moving along a similar road as it did with IT a decade ago,” said Wright. “IT used to be focused on keeping computers working. Today, in large organizations you’ll find chief information officers helping to shape the business direction with strategic decisions about technology. We see that same shift – moving from transactional to strategic – occurring in HR.”

In a Hewitt survey of 14 HR functions, those most frequently outsourced are: defined benefit and defined contribution plans – 64 percent; health and group benefits – 49 percent; payroll – at 35 percent; retiree administration – 23 percent; staffing and recruiting – 16 percent; and organizational development – 15 percent.

Healthcare organizations (HCOs) are also seeing increased benefits from outsourcing, particularly in the area of IT.

According to Gartner Dataquest, many hospitals and managed-care organizations are spending more than one third of their IT budget on IT consulting, outsourcing and support services. Furthermore, the research firm predicts that 60 percent of all HCOs will likely spend more on external IT support, consulting and outsourcing services than on internal staff by 2007.

Suresh Gunasekaran, principal analyst for Gartner Dataquest’s IT services group, says, “The reality is that no HCO can afford to develop and manage all IT assets with internal resources. Quite simply, as IT penetrates all departments and business functions of the enterprise, it does not make sense for HCOs to manage all assets and resources internally.”