Oct 01, 2009
By Pharmaceutical Technology Editors
Volume 21, Issue 10

Outsourcing undervalued

Despite spending billions of dollars on outsourcing deals last year, most European CIOs and CFOs don't bother measuring the financial impact of the outsourcing contracts they commission. This is one of the many revealing outcomes of a major research report investigating C-suite attitudes to outsourcing.

In today's market place how quickly do you believe it is important to demonstrate a financial return on investment from your outsourcing arrangements?
The study, conducted by Warwick Business School and Cognizant during April to July this year, surveyed more than 250 European CIOs and CFOs from some of the world's largest companies (all had revenues of more than $500 million) across various sectors. From the results obtained, it appears that businesses are neglecting to measure the real value of outsourcing:
  • Less than half of CIOs and CFOs (43%) have tried to calculate the impact of outsourcing to their business.
  • More than a third simply do not bother and one fifth cannot remember if they have tried.
  • Of those who have attempted to quantify outsourcing's benefits, only 19% are very confident in their sums.
  • CIOs get a vote of no confidence from finance — only 37% of CFOs rate their CIO's ability to communicate outsourcing's benefit to the business.
  • More than half expect to see ROI from their investment in outsourcing within one year (see figure).

So, what's going wrong? Are CIOs and CFOs incompetent or simply not bothered? In an interview with Pharmaceutical Technology Europe (PTE), Matt Havens, Director of Europe for Cognizant's Business Consulting Group, attributed these failings to companies' lack of solid methodology: "Without clear tools and ways of measuring and monitoring their outsourcing arrangements, company executives could effectively be missing out on some of the benefits they planned when they embarked on their outsourcing journey."

Perhaps more important is the apparent "widespread belief that the long-term value of outsourcing cannot actually be measured," added Havens. "There are some methods currently being used to assess the value of outsourcing investments; however the CIOs and CFOs surveyed provided several variations and in some cases it seems the methods are vague at best. Some clearly show a degree of methodology, even if they couldn't articulate quite what it was, but others amount to little more than 'back of a cigarette packet' calculations. Examples included 'Manual calculation'; 'You know what it costs but you don't really know the value'; 'The accountants will use some formula for calculating ROI'," said Havens.

Although pharma has contributed to this rather gloomy picture (6.15% of the total sample), the industry takes the lead in its other attitudes to outsourcing:

  • Pharma companies are much more confident in the effectiveness of outsourcing strategies.
  • They value access to innovative processes and practices as one of outsourcing's main benefits.
  • It's the highest scoring industry when measuring satisfaction with contribution of outsourcing to the business.
  • Far fewer pharma companies are planning to reduce headcount than other sectors (13% versus 32%).

If management are not/cannot quantify the financial contribution of outsourcing to their business, it begs the question 'What are CIOs and CFOs basing future outsourcing decisions on?' The next issue (November) of PTE will continue its focus on Cognizant's survey and discover the answer to this question and advise on best practice for assessing the value of outsourcing in the pharma industry.

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