Offshoring of Back-office Functions Could Generate $58 Billion in Annual Savings for Fortune 500

Hackett research estimates 1.47 million employees may be directly impacted as companies take advantage of global labor

By Editorial Staff

Atlanta — November 9, 2006 — The Fortune 500 could potentially save $58 billion annually, or over $116 million on average per company, by offshoring many of their back-office activities, according to research from The Hackett Group, a strategic advisory firm and an Answerthink company.

Advances in technology, along with increasingly educated global work forces, enable the portability of business support activities across information technology (IT), finance, human resources (HR) and procurement to take advantage of labor arbitrage. Hackett estimated that the increased use of offshore resources may impact up to 1.47 million general and administrative (G&A) jobs, or nearly 3,000 at a typical Fortune 500 company.

According to Hackett's research, globalization has created an environment where executives must constantly re-evaluate their cost structures for G&A operations against a new host of emerging global resources. Hackett also found that the best companies are strategically improving performance in finance, IT, HR, procurement, working capital and other areas in ways that help them respond to the pressures of globalization.

However, many companies are relying on outdated sourcing analysis techniques that lead them to materially underestimate the benefit available through off-shoring back-office operations. With labor arbitrage savings nearing 60 percent, Hackett finds that executives must analyze their process optimization opportunities to capture the potential value of centralization. Many organizations fail to examine the characteristics of business processes, allowing activities that provide no competitive advantage to remain decentralized in industrialized countries at a higher cost. Distributed activities are generally not portable, and therefore not included within the scope of a globalization initiative. The education base and skill sets available in India, China, The Philippines, Pakistan, Eastern Europe, Brazil and other emerging countries continues to expand, offering a new level of savings combined with improved quality and talent, significantly strengthening the business case for globalization.

"Companies have long been aware that they can take out cost and improve back-office efficiency by streamlining businesses processes, improving the way they use technology, and centralizing operations, either in a shared service center or with an outsourcer. But over the past few years, the resources available offshore have matured rapidly, creating immediate opportunities to materially reduce companies' cost structures," said Hackett Managing Director Julio Ramirez.

According to Hackett Managing Director Michel Janssen, "Today, companies can turn to established offshore resources that deliver labor costs reductions while maintaining or even improving the skill level of staff. The potential savings of up to $116 million annually for a company are simply too compelling to ignore. Yet most executives will miss the potential impact of service globalization due to the under-scoping of initiatives. Taking full advantage of service globalization requires a deep understanding of the nature of business processes and how they can be optimally organized and delivered."

Having said this, companies still must use a well-balanced assessment methodology that fully considers the business' strategy, culture, transactional characteristics and readiness for change. By taking the broadest logical view of the processes in scope combined with a holistic evaluation methodology firms can ensure that they are maximizing the benefit opportunities available through global markets while managing the risk associated with these progressive transformation initiatives.