What would a company do if it realized that by changing the way information technology and business process outsourcing delivers services, it could contribute returns greater than the stock price growth?

Over the past three decades the role of the CIO and IT department has matured from a non-valued, added cost incidental that supports company operations to having a partnership relationship with the core business. Even the finance and accounting functions have been transforming to a similar model. However, these functions are generally the first to see staff cuts when companies begin to experience financial challenges.

The outcome of immediate cost cuts without a plan are typically:

• Degradation of service levels
• Identification of areas where organizations can hide expenses
• Lowered employee morale
• Placing the company in an at-risk position in which it is unable to respond to future opportunities

This approach lacks cost-cutting measures necessary for competitiveness and investment in technology updates. Additional barriers exist for global organizations where budget management responsibility resides at the central corporate office but authority, allegiance and delivery occur at the business unit or geographic region.

Normally, internal delivery organizations have less stringent service levels than outside providers, therefore, motivation to improve processes lags behind and individual incentive is based solely on overall company performance, an area addressed only in the short term. By keeping some functions in-house, rather than outsourcing them, achieving economies in mergers and acquisitions becomes difficult because individuals do not have experience determining best-of-breed applications. Even reducing staff becomes more challenging in an economic downturn.

With outsourcing, there are misconceptions that internal organizations not owning the entire process are losing company and industry knowledge as well as the hand-holding that would be expected during changes in business and applications projects. This is not the case since the company maintains control over provider direction with an effective vendor management organization and strong project management office.

Companies embracing continuous improvement identify opportunities for competitive reasons and avoid the pitfalls of reactionary management.

The Hidden Gem

There lies the hidden gem of using an outside provider or setting up a shared service operation. By planning and implementing these viable alternatives, companies experience internal rate of returns upward to 90-100% over a five-year period while decreasing departmental costs 35% annually. This exceeds almost every return on investment that an organization can pursue, though it is often overlooked until trouble is lurking.

The advantages include:

• Lower cost to deliver services
• Decreased capital investments
• Flexibility to downsize costs when company business dictates
• Increasing service costs at decreasing rate as core business expands
• Identification and elimination of non-value added activities in IT and BPO delivery
• Market-based pricing through competition and benchmarking
• Economies of scale for acquisition opportunities
• Improved service delivery
• Access to industry experience without fear of losing people
• Quicker reaction to implementing regulatory changes through larger knowledge base
• Leaner IT and BPO organization focused upon provider management and working with business units to deliver solutions to opportunities more rapidly
• Company change agent for delivering internal services

In addition, by working with outside providers in an outsourcing arrangement, they are positioned to assist the client in remaining cashflow and/or budget neutral in the first year, minimizing tax impacts of delivering services to localities and creating billing mechanisms to invoice the beneficial user of services. The outsourcer can identify the low-cost geographic delivery locations while the client still maintains decision control where its organization may be impacted due to cultural differences or service level delivery.

Summary

CFO and CIO functions are constantly stretched to deliver the same level of service as companies expand and contract their core business. Central support’s elasticity with continual ability to deliver internal services at a high level is essential to growing company business and shareholder value.

“Reduction in force” sends a message to the market that a company is experiencing challenges within that are typically bad news. Outsourcing or setting up a shared service environment for IT and/or F&A provides a different message to the financial community, and achieves cost savings results.

The reality is the return actually exceeds most investments and product decisions made by a company at a reduced risk with limited capital investment and positions a company to rebound quicker when opportunity presents itself.