Hackett Research Alert: Offshoring of Back-Office Functions Could Generate $58 Billion in Annual Savings for Fortune 500
November 08 2006 - 1:40PM
Business Wire
The Fortune 500 could potentially save $58 billion annually, or
over $116 million on average per company, by offshoring many of
their back office activities, according to research from The
Hackett Group, a strategic advisory firm and an Answerthink company
(NASDAQ: ANSR). 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. Hackett estimates that the increased use of offshore
resources may impact up to 1.47 million general and administrative
(G&A) jobs, or nearly 3,000 at a typical Fortune 500 company.
The Hackett Group is a world leader in best practice research,
benchmarking, and business transformation services that enable
executives to achieve world-class enterprise performance. According
to Hackett�s research, globalization has created an environment
where executives must constantly re-evaluate their cost structures
for general & administrative (G&A) operations against a new
host of emerging global resources. Hackett also found that 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 many
companies are relying on outdated sourcing analysis techniques that
lead them to materially underestimate the benefit available through
off-shoring back office operations. With labor arbitrage savings
nearing 60%, Hackett finds that executives must analyze their
process optimization opportunities to capture the potential value
of centralization. Many organizations fail to examine the
characteristics of business processes, allowing activities that
provide no competitive advantage to remain decentralized in
industrialized countries at a higher cost. 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 continues to expand,
offering a new level of savings combined with improved quality and
talent, significantly strengthening the business case for
globalization. �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,� said Hackett
Managing Director Julio Ramirez. According to Hackett Managing
Director Michel Janssen, �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 $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.� Having said
this, companies still must use 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 the processes in scope 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. Opportunities Extend Well Beyond IT
Hackett�s 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 G&A areas, including finance, HR, and
procurement. Hackett�s 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 offshoring by process
group. The table below provides a summary of the functional
analysis: � Annual Savings (millions) # of Staff Impacted
Functional Activities Offering Largest ROI Opportunities IT $58.5�
1,223� Application mgmt; Technology infrastructure Finance $32.1�
1,045� General accounting & external reporting; Cash
disbursements; Revenue cycle activities Human Resources $15.6� 390�
Data mgmt reporting & compliance; Total rewards admin; Payroll
admin Procurement $9.9� 275� Purchase order processing; Sourcing
execution � � � � Total per Co $116.1� 2,933� � Total for entire
Fortune 500 $58 billion 1.47 million � To see the full version of
this research, please click on the following link for the Hackett
Research Insight Center: www.thehackettgroup.com/insights/116M.
More information on The Hackett Group is available: by phone at
(770) 225-7300; by e-mail at info@thehackettgroup.com; or on the
Web at www.thehackettgroup.com. About The Hackett Group The Hackett
Group (www.TheHackettGroup.com), a strategic advisory firm and an
Answerthink company, is a global leader in best practice research,
benchmarking and business transformation services that enable
world-class enterprise performance across selling, general and
administrative (SG&A) and supply chain activities. Through the
acquisition of REL Consultancy Group, we offer Hackett-REL Total
Working Capital services to liberate cash flow from operations.
Hackett provides strategic insight, best practice advice and
implementation services grounded in performance metrics obtained
through 14 years and 3,500 benchmark studies at 2,100 of the
world�s leading companies. Our clients comprise 97% of the Dow
Jones Industrials, 77% of the Fortune 100 and 90% of the Dow Jones
Global Titans Index. The Fortune 500 could potentially save $58
billion annually, or over $116 million on average per company, by
offshoring many of their back office activities, according to
research from The Hackett Group, a strategic advisory firm and an
Answerthink company (NASDAQ: ANSR). 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. Hackett estimates that the
increased use of offshore resources may impact up to 1.47 million
general and administrative (G&A) jobs, or nearly 3,000 at a
typical Fortune 500 company. The Hackett Group is a world leader in
best practice research, benchmarking, and business transformation
services that enable executives to achieve world-class enterprise
performance. According to Hackett's research, globalization has
created an environment where executives must constantly re-evaluate
their cost structures for general & administrative (G&A)
operations against a new host of emerging global resources. Hackett
also found that 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 many companies are relying on outdated
sourcing analysis techniques that lead them to materially
underestimate the benefit available through off-shoring back office
operations. With labor arbitrage savings nearing 60%, Hackett finds
that executives must analyze their process optimization
opportunities to capture the potential value of centralization.
Many organizations fail to examine the characteristics of business
processes, allowing activities that provide no competitive
advantage to remain decentralized in industrialized countries at a
higher cost. 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 continues to expand, offering a new level of
savings combined with improved quality and talent, significantly
strengthening the business case for globalization. "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," said Hackett Managing Director Julio Ramirez.
According to Hackett Managing Director Michel Janssen, "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 $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." Having said this, companies still must
use 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 the
processes in scope 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. Opportunities
Extend Well Beyond IT Hackett's 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 G&A areas,
including finance, HR, and procurement. Hackett's 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
offshoring by process group. The table below provides a summary of
the functional analysis: -0- *T Annual Savings # of Staff
Functional Activities (millions) Impacted Offering Largest ROI
Opportunities ----------------- --------------- ------------
----------------------- IT $58.5 1,223 Application mgmt; Technology
infrastructure ----------------- --------------- ------------
----------------------- Finance $32.1 1,045 General accounting
& external reporting; Cash disbursements; Revenue cycle
activities ----------------- --------------- ------------
----------------------- Human Resources $15.6 390 Data mgmt
reporting & compliance; Total rewards admin; Payroll admin
----------------- --------------- ------------
----------------------- Procurement $9.9 275 Purchase order
processing; Sourcing execution ----------------- ---------------
------------ ----------------------- -----------------
--------------- ------------ ----------------------- Total per Co
$116.1 2,933 ----------------- --------------- ------------
----------------------- Total for entire $58 billion 1.47 million
Fortune 500 ----------------- --------------- ------------
----------------------- *T To see the full version of this
research, please click on the following link for the Hackett
Research Insight Center: www.thehackettgroup.com/insights/116M.
More information on The Hackett Group is available: by phone at
(770) 225-7300; by e-mail at info@thehackettgroup.com; or on the
Web at www.thehackettgroup.com. About The Hackett Group The Hackett
Group (www.TheHackettGroup.com), a strategic advisory firm and an
Answerthink company, is a global leader in best practice research,
benchmarking and business transformation services that enable
world-class enterprise performance across selling, general and
administrative (SG&A) and supply chain activities. Through the
acquisition of REL Consultancy Group, we offer Hackett-REL Total
Working Capital services to liberate cash flow from operations.
Hackett provides strategic insight, best practice advice and
implementation services grounded in performance metrics obtained
through 14 years and 3,500 benchmark studies at 2,100 of the
world's leading companies. Our clients comprise 97% of the Dow
Jones Industrials, 77% of the Fortune 100 and 90% of the Dow Jones
Global Titans Index.
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