CFOs struggle to measure outsourcing ROI

Despite the amount businesses spend on outsourcing increasing as a result of recession, a recent study suggests that European CFOs and their CIOs are frequently unable to quantify the return on investment (ROI) from outsourcing arrangements, which reflects badly on their ability to see where group expenditure is.

Of 263 CFOs and CIOs at companies across the Benelux region, France, Germany, the Nordic countries, Switzerland and the UK surveyed by IT outsourcing consultant Congnizant, less than half have tried to quantify the financial contribution of outsourcing to their bottom line. Of those who have tried, just 19% are ‘very confident’ in their calculations.

This is despite the average outsourcing spend coming in at anywhere from $5m to $100m each year among European businesses, with nearly 30% spending over $50m each year.

Businesses in the UK spent 12% more on outsourcing contracts in 2008 than in 2007 according to the National Outsourcing Association and Cognizant’s research found that more than half of respondents expect to see ROI on their outsourcing investments within the first year.

But CFOs say assessing the value of these contracts is difficult because that value is not found in a one-time cost saving ­ a fact borne out by the finding that, of the CFOs that cut back on their outsourcing, 78% cite “unclear value for money” but could not quantify this further.

The long-standing fracas between CFOs and CIOs came up in the study as a factor in the lack of understanding around the value in outsourcing contracts and in the wider businesses’s understanding of the benefits; just 37% said they were happy with their CIO’s ability to communicate the benefits back to the business.

“Senior executives appear to be making outsourcing decisions based on shot-term cost cutting, but outsourcing’s impact stretches well beyond the in i tial labour, skills and cost advantages,” says Sanjiv Gossain, Cognizant’s managing director for the UK and Ireland.

“Outsourcers need to work with the CIO, CFO and their teams to reduce maintenance budgets and apply them to the proactive, revenue-generating activities the business demands.”