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August 12, 2009

Euro business execs blind to outsourcing cost benefits

ROI and ongoing value of deals not being properly assessed

By CBR Staff Writer

Most CIOs and finance directors think the outsourcing of IT services can help them reduce costs but fewer than half of them could actually prove it, since they do not try or find it difficult to quantify its impact on the bottom line.

More than a third simply do not bother to assess the financial contribution to their businesses and 20% cannot remember if they have tried, Sanjiv Gossain VP and head of Cognizant in the UK told us, as he talked through the findings of a new study.

A third of CIOs and CFOs polled for the sentiment study believe that the business value of outsourcing cannot be assessed beyond a one-time cost saving alone.

“Those savings are all well and good, but most outsourcing vendors will tell you that we should be looking for ongoing value in an outsourcing arrangement, not just a one-time gain,” commented Gossain.

The research was carried out in conjunction with Warwick Business School to assess attitudes to outsourcing and the impact of the current economic climate on IT and business decisions. The researchers polled executives in some of Europe’s biggest companies.

The businesses reached across the UK, Germany, Switzerland, Benelux, France and the Nordics and a majority of the 263 respondents were reported to be spending between $5 and $100 million annually on outsourcing.

“They seem to believe outsourcing will save money, but fewer than 20% of the CFOs and CIOs had any confidence in their quantification,” Gossain said.

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The study also showed that CFOs feel CIOs need more help to communicate the full benefits of outsourcing but only 37% of CFO respondents rate their CIOs ability to do this.

“There is a need to look beyond costs, and look at how productivity efficiency improvements and process change refinements and innovation can drive incremental gains throughout the contract term,” Gossain added. This can be challenge, when it comes to the quantification and sizing of the financial gains that could stem from those enhancements.

One recommendation is to have structured and formal periodic reviews where views can be aired on the business benefits that are being derived from an arrangement, or if the benefits expected of a contract could be better delivered.

It is easier to see and measure the bottom line in some areas of outsourcing than it is in others. “Outsourcing applications development or support will lead to productivity improvements which come from industrialisation of the processes and process knowledge,” he said. There are metrics that work in that arena, which can be tied back to financial gains and business benefits.

In the main though, Cognizant has revealed that European CxOs lack the tools needed to measure the full ROI of their outsourced business arrangements, despite commissioning millions of dollars on outsourced operations each year.

Its report concluded, “Senior executives appear to be making outsourcing decisions based upon short term cost cutting – which remains crucial – but outsourcing’s impact stretches well beyond the initial labour, skills and cost advantages.”

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