How's this for a sobering statistic? A PricewaterhouseCoopers survey released last month revealed that 75% of U.S. and European multinational companies now use outsourcing or shared services to support their financial functions—and they'll continue to do so over the next year or two—but fewer than half consider their outsourcing efforts to be cost-effective. These financial functions include accounting tasks, such as accounts payable, benefits administration, billing, and payroll.
The problem, says Dan DiFilippo, global leader for performance improvement as well as PwC's U.S. leader for governance, risk, and compliance issues, is that "many companies enter outsourcing arrangements without conducting a proper cost-benefit analysis." Optimize contributing Web editor Howard Baldwin sat down with DiFilippo to find out why outsourcing results weren't matching expectations.
Q: There's obviously a disconnect between what companies expect and what they get when it comes to this kind of outsourcing. Did people think they'd get immediate savings?
A: Yes, some had a sense that they could have immediate savings. Others thought it would take a few years. Overall, companies are struggling with this. They're not getting the kind of uplift they thought they would, but you can't realize all your savings in the first wave.
Q: Did people think outsourcing was oversold?
A: We didn't ask that question explicitly, but you could interpret that some of it's happening. However, that's a gray area: Was there overselling, or did they not properly analyze the costs up front? I'd say most of them didn't do enough of the right homework, because 51% said they would've benefited from a feasibility and cost-benefit analysis ahead of time.
But we were more interested in what functions they were outsourcing, what experience they had, and whether they were saving money. We also asked if the functions were being handled effectively, or if there were areas that the outsourcers found difficult to respond to. We also wanted to know whether companies would continue outsourcing or pull back.
Q: What results were most interesting or surprising?
A: There are areas that are simply harder for outsourcers to handle. If you're looking at how to process an invoice, that's one thing. But if you're looking at compliance regulations as part of a particular transaction, that's more complicated. People felt there was a bigger learning curve on the outsourcing side than they'd expected.
For instance, 72% of the companies we surveyed felt their outsourcer was highly effective in managing security and privacy issues, but 55% felt the company was effective in compliance controls and timeliness. Only 39% said their outsourcers could handle complex issues, and only 38% reported saving money. That was a bit of a surprise. Given that these companies were looking to really save money, I would've expected them to do more analysis on the expected return.
Q: So what advice would you give companies at the front end of this process?
A: Understand up front where you think the savings will come from. Find out how the outsourcer is prepared to achieve those savings. And make sure it shows those measurements as you enter into these contracts.
On the complex issues, I'd advise companies to understand that some support costs are part of the contract. Remember, whatever issues of complexity you're struggling with will be a struggle for the outsourcer as well. CIOs should explore those difficult areas at the beginning of the deal to understand how the outsourcer can avoid them. The complexity issues are more qualitative than quantitative, so understand how the outsourcer approaches quality. How is quality embedded in its day-to-day operations?
Q: What should you do if you're already in an outsourcing contract?
A: The opportunities to change are still there. If companies are looking to expand their outsourcing relationship, they can still do the proper analysis. It's never too late to put the proper stipulations into a contract.
For more Q&As with industry experts, see When Bad News Is Actually Good and Changing Your Relationship With Your CEO.
