The Fortune 500 could potentially save $58 billion annually or over $116 million on an average per company, by offshoring many of their back-office activities, according to research by The Hackett Group, a strategic advisory firm. 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.
According to Hackett’s research, globalization has created an environment where executives must constantly re-evaluate their cost structures for 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However, many companies are relying on outdated sourcing analysis techniques that lead them to materially underestimate the benefit available through offshoring back-office operations.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.
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 full-time employees per process group, labor arbitrage cost differential and the potential degree for offshoring by process group.
Hackett estimates that each company, on an average, will save $58.5 million in IT; $32.1 million in Finance; $15.6 million in HR; and $9.9 million in procurement, resulting in a total cost saving of $116.1 million per annum. The report says that the initiatives will impact, on an average, 1,223 staff in IT; 1,045 in finance; 390 in HR; and 275 in procurement — 2,933 per company.
