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BPO Journal

Wednesday, October 26, 2005

Of Outsourcing and Financial Performance

A recent LogicaCMG study investigates the correlation between the announcement of an outsourcing deal and a company's market valuation one month after the announcement. The findings show that companies that have announced an outsourcing deal perform on average 1.7 per cent higher in the stock markets benchmarked against others in their sector that have not announced outsourcing deals. In five out of seven sectors, companies that outsource outperform peers. In certain sectors, companies are realizing upwards of an 11 per cent increase in share value.

If markets are truly efficient and rational, I don't understand how the increase in share value accounts for the increased failure of outsourcing to meet business expectations. If outsourcing is adding cost, friction and complexity to organizational operations as the recent Deloitte study and others would have us believe, and thereby, failing to meet the fundamental value premise of increased efficiency at reduced costs of ownership, why are markets rewarding the decision to outsource? Perhaps, because markets believe that managers are not off base regarding the expected value of outsourcing and that failed outsourcing relationships are a result of management competencies that are a function of an individual organization. And these inefficiencies will eventually be punished when they reflect in poor operational performance.

Yet, this is an interesting result. It may result in organizations pursuing outsourcing, not as a means to increase efficiency, but as a part of herd behavior directed at increasing organizational legitimacy that is rewarded by the financial markets.

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