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PricewaterhouseCoopers: Less than Half of Large U.S. and European Companies Say Outsourcing is Cost-Effective

  Industry Statistics published in DM Direct Special Report
November 16, 2004 Issue
 
  By DMReview.com Web Editorial Staff

Seventy-five percent of U.S. and European multinational companies now use outsourcing or shared services to support their financial functions and will continue to do so over the next 12-24 months, although less than half consider outsourcing to be cost effective, according to PricewaterhouseCoopers' Management Barometer Survey.

Seventy-two percent of European multinational companies have outsourced financial functions over the past two years compared with 77 percent in the U.S. Additionally, 71 percent of European companies and 78 percent of U.S. companies plan to use these services in the next 12-24 months. Product sector companies (80 percent) are more focused on using these services over the next 1-2 years than service companies (63 percent).

Overall, 29 percent of U.S. and European companies expect to increase their use of outsourcing of financial functions, with spending expected to be nearly 16 percent higher than current levels.

"Many multinational companies that outsource financial functions do not find it to be cost effective, " said Dan DiFilippo, global leader for Performance Improvement and U.S. leader for Governance, Risk and Compliance, PricewaterhouseCoopers. "Companies that turn to outsourcing for cost savings should conduct comprehensive feasibility studies to better understand their potential return on investment. Many companies enter outsourcing arrangements without conducting a proper cost-benefit analysis."

According to the survey, nearly a third (31 percent) of companies see limited or very little benefit to outsourcing, nine percent feel they are breaking even, and four percent believe they are actually losing money, but say they are achieving other benefits. Nearly half (47 percent) of combined U.S. and European executives who have outsourced financial functions report that their company has been saving either a moderate amount (44 percent) or a great deal (three percent).

The survey also shows that a majority of those with difficulty estimating ROI said they would have benefited from monitoring process improvement, or conducting an initial feasibility study with cost-benefit analysis. Fifty-four percent of Europeans report that their company correctly estimated its ROI from outsourcing most of the time. An additional 23 percent, however, say they have done so only some of the time, and seven percent say "very rarely." More U.S. executives reported problems estimating ROI, with only 33 percent correct "most of the time," and 53 percent some of the time or rarely.

While U.S. and European executives agree that outsourcing or shared services are important to their company's growth, they are divided about its effectiveness.

Thirty-eight percent of Europeans report the benefits their company derives from outsourcing are better than initial expectations and 46 percent rate them about on par; only 8 percent rate them worse. Twenty percent of U.S. executives believe the benefits are better than expected, 61 percent rate them on par, and ten percent consider them worse.

"U.S. and European executives have contrasting views when it comes to the types of financial functions they look to outsource," said Andrea Samaja, European Performance Improvement Leader, PricewaterhouseCoopers in Italy. "Far fewer European companies outsource benefits and claims administration than U.S. companies."

The survey shows a marked difference in the financial functions that these multinationals have, or are planning to outsource, within the next 12-24 months. For example, in the U.S. the top two outsourced financial functions are: payroll/billing/accounts payable (74 percent) and benefits/claims administration (70 percent). In Europe, however, the top two functions are: IT/systems support (70 percent) and tax services (59 percent) with payroll/billing or accounts payable services trailing (48 percent).

Overall, use of IT/systems support is higher in Europe than in the U.S., as are accounting services and human resources/hiring. European companies, however, make far less use of most other outsourcing services, including payroll/billing/accounts payable, benefits/claims administration, internal auditing, and risk management.

At the same time, the European and U.S executives disagree on which financial functions have reaped the greatest benefits from outsourcing. A majority of Europeans gave ratings of "highly effective" for the following attributes: security/privacy; timing/timeliness; advisory competencies; competence of outsiders; control; and compatible IT/systems support. But only 40 percent described cost savings benefits as "highly effective," versus 38 percent "mixed," and nine percent "less than effective."

A majority of U.S. executives rated security/privacy; control; timing/timeliness; and ability to deal with compliance issues "highly effective." Yet overall quality and cost-saving benefits received predominantly mixed ratings.


Figure 1: Outsourced Services

PricewaterhouseCoopers' "Management Barometer" is an established quarterly survey in the U.S. These surveys are developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.

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For more information on related topics visit the following related portals...
Outsourcing.

This piece has been brought to you by the DMReview.com Web Editorial staff.

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