Outsourcing Valuable to Biz

Many enterprises looking to cut costs are considering e-sourcing as an option, but the process may not significantly increase return on investment. Using Web-based applications, decision-support tools, and associated services, Aberdeen Group expects e-sourcing to flourish from $820 million in 2001 to approximately $3.1 billion by 2005 in the U.S. and Europe, representing a compound annual growth rate of 39.8 percent.

“Facing an unstable economic environment, enterprises have been allured by e-sourcing ability to rapidly deliver significant cost savings and return on investment (ROI),” says Tim Minahan, vice president of supply chain management research, Aberdeen Group.

Overall, 84 percent of early e-sourcing adopters described benefits achieved as either inline or as expected. Key advantages to e-sourcing include the ability to negotiate a 14.3 percent reduction in goods and services costs, on average; it cuts sourcing cycles in half; reduces sourcing administration costs by nearly 60 percent; and shortens time-to-market cycles by 10 percent to 15 percent.

Despite such benefits, Aberdeen research uncovered flaws with early e-sourcing strategies. Specifically, while e-sourcing technologies have proven effective at enabling enterprises to negotiate significant cost savings, 60 percent of e-sourcing users indicate that they have not been able to fully recognize these savings on the bottom line. Additionally, the percentage of savings achieved through online negotiations will inevitably decrease over time.

As a result, enterprises will be forced to turn to more advanced sourcing processes that can improve visibility into spending, enhance market intelligence, standardize processes, and capture innovation in the supply base.

Minahan notes,

…to sustain savings and drive continuous improvements; enterprises will need to adopt functionality that supports sourcing collaboration, knowledge and project management, and advanced analysis to drive common and repeatable sourcing processes across the enterprise.

Many companies are still choosing to conventionally outsource certain business functions, and META Group predicts that by 2005 nearly all North American IT organizations will outsource at least one mission-critical technology operation, making successful outsourcing partnerships (or decisions) a core competency for IT organizations.

“Outsourcing can enable business to move faster, become more efficient, or sometimes reduce support costs, but vendor choice and contract structures must be carefully calculated and negotiated,” says Dean Davison, vice president with META Group’s Service Management Strategies service.

While META Group expects the North American outsourcing market to grow at 15 percent to 20 percent annually, Gartner Dataquest said business process outsourcing (BPO) is the fastest growing component of the IT services and sourcing market in Europe, resulting in a compound annual growth rate of 14.7 percent between 2000 and 2005. Gartner expects BPO in Europe to reach €43.1 billion (US $38.3 billion) in 2002 and grow to €72 billion (US $64 billion) by 2005.

BPO is a highly strategic undertaking, and more than 70 percent of decisions for BPO in Europe are made by the CEO or CFO, said Robert Brown, senior analyst at Gartner. “European companies are motivated to outsource business processes in order to cut costs, but also to be able focus on their core business, gain access to ‘best-of-breed’ processes and to improve service levels.”

Gartner found human resources, payment systems, and warehouse/inventory management to be the three largest BPO markets in Europe in 2002. Within human resources BPO, the primary processes outsourced are payroll, hiring and recruiting, as well as education and training.

For payment systems BPO, financial services companies have been able to achieve savings through centralized transaction processing. The warehouse/inventory management BPO market is important to the manufacturing sector in Europe, as well as the need for just-in-time inventory management to deliver to multiple countries with fluctuating demand.

Posted by on September 25, 2002