November 28 2006 - New research from The Hackett Group, a strategic advisory firm and an Answerthink company, estimates that Fortune 500 companies could potentially save US$58 billion annually, or over US$116 million on average, by off-shoring many of their back office activities. 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. Increased use of offshore resources may impact up to 1.47 million general and administrative jobs, or nearly 3000 at a typical Fortune 500 company.
The report concludes that globalization has created an environment where executives must constantly re-evaluate their cost structures for general and administrative operations against a host of emerging global resources. 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However, the report argues that many companies are relying on outdated sourcing analysis techniques resulting in an underestimation of potential benefits of off-shoring back office operations. With labor arbitrage savings approaching 60 per cent, executives should analyze their process optimization opportunities to capture the potential value of centralization. Failure to do so risks allowing activities that provide no competitive advantage to remain decentralized in industrialized countries with associated higher costs. 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 continue to expand, offering a new level of savings combined with improved quality and talent, significantly strengthening the business case for globalization.
Hackett managing director Julio Ramirez said:
"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."
Hackett managing director Michel Janssen added:
"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 US$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."
The report recommends use of 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 relevant processes 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.
Current analysis of the Fortune 500 draws upon ongoing benchmark studies that have captured outsourcing costs since 1992. While IT represents the largest functional opportunity, significant savings can be generated in other general and administrative areas, including finance, HR, and procurement.
Annual Savings (millions)
- IT $58.5
- Finance $32.1
- HR $15.6
- Procurement $9.9
Analysis of the savings opportunity breakdown for a typical Fortune 500 company is based upon the median number of FTEs per process group, labor arbitrage cost differential, and the potential degree for off-shoring by process group.
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