Strategically Outsourcing

CFOs say outsourcing increases shareholder value, though few measure ROI

LINCOLNSHIRE, IL  April 29, 2002  Nine out of ten U.S. CFOs believe using outside resources to perform non-core functions of their business increases shareholder value, yet few measure the return on the investment (ROI), according to a new study by global outsourcing and consulting firm Hewitt Associates.

What's more, due to current economic conditions, interest in outsourcing has grown. 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.

Hewitt's study of more than 500 CFOs and senior finance executives of large companies found that nearly all (90 percent) believe outsourcing enhances shareholder value, yet just 17 percent have measured the return on investment in outsourcing. 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.

"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."

CFOs also say that they are heavily involved in deciding what to outsource and to whom, with 36 percent advocating the idea of outsourcing, 41 percent evaluating outsource vendors and 25 percent approving the hiring of the outsource provider.

So what's driving the decision to outsource? Seventy percent of CFOs report that they decided to outsource a company function to tap outside sources of talent or expertise that don't exist within their firm. Meanwhile, 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.

CFOs report that they have partially or completely outsourced in the following areas: information technology (57 percent), human resources (41 percent), facilities management (40 percent), and finance and accounting (20 percent). Forty percent say they don't know what company functions are being outsourced.

Among those HR functions most frequently outsourced are defined benefit and defined contribution plans at 64 percent. The second highest function is health and group benefits at 49 percent. Payroll ranked as the third highest outsourced HR function (out of 14 HR functions listed in the survey), at 35 percent. After retiree administration (23 percent), areas such as staffing and recruiting (16 percent) and organizational development (15 percent) were of interest.

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

The Hewitt CFO study was conducted via e-mail with senior financial executives in companies with $1 billion or more in annual revenue.