Financial Value of Outsourcing - III

In early 2003, HRO Today reported on the top 24 IT outsourcing transactions implemented over the past 15 years. These transactions amounted to over $100 bn in outsourced services. For my third post on the financial value of outsourcing, I've selected one off this list - the $3 billion / 10-year IT outsourcing agreement between General Dynamics (GD) and CSC that was inked in May 1998. Again, I've compared the firm's post-outsourcing returns with the closest size and book-to-market matched firm in the same industry that has not engaged in an outsourcing initiative of significant value - Magna International, Inc. (MGA). As shown below, GD outperformed MGA by over 100 percent. The abnormal returns are consistent with the respective increase in operational performance of the two firms.

Financial Value of Outsourcing - II

The second example of the financial value created by outsourcing is presented in the context of Best Buy, Inc. In late January 2004, the company signed a seven-year outsourcing agreement with Accenture HR Services. As per the contract, Accenture would provide a range of services that included compensation, payroll, benefits, bonus administration, and performance management, among several others. Best Buy retained overall HR strategy, guiding employees to achieve its customer-focused transformation. The details of the deal can be found in this release here.

As in the previous post, I compared the three year post-outsourcing stock performance of Best Buy (BBY) with its closest size and book-to-market matched competitors that have not engaged in an outsourcing initiative of significant value (this rules out Circuit City) - Bed Bath and Beyond (BBBY) and Radioshack (RSH). As shown in the graph below, BBY outperformed BBBY by over 45 percent and RSH by over 80 percent. The comparison is based on historical stock price information obtained from Yahoo Finance. As in all analyses, while the difference in stock performance may be attributed to other strategic choices of the firm, comparison with a firm from the same industry and with similar size and book-to-market adjusts for industry shifts and response to competitive pressures. Again, the financial performance of the companies is largely consistent with their respective gains in operational performance.

The Financial Value of Outourcing - I

I had earlier blogged about introducing a series of posts that compare the overall financial value of companies that have outsourced a critical business process or function with similar firms (in terms of market size) in their industry that have retained that function in-house. Much like my post on Boeing and Airbus. Considering that 177 visitors on BPO Journal believe that there is a spike in their stock price surrounding an offshoring agreement (I should have attempted to capture how many of these were clients versus service providers since in the case of the latter, the offshoring announcement represents a clear tangible increase in revenue), I thought it's time I start the series. Every week, I'll examine one or two deals. Of course, only contracts of significant value may be directly linked to increases in firm efficiency and ensuing investor response.

The first on offer is Metlife. In July 2002, Siemens Business Services signed a major IT outsourcing contract valued at nearly $180 million with New York-based insurer MetLife for services within SBS's SieQuence solution methodology. The details of the deal can be found in this release here.

Below is a comparison of Metlife's three year post-outsourcing stock performance versus its closest size and book-to-market matched competitor that has not engaged in an outsourcing initiative of significant value - Allianz Insurance. As shown below, Metlife outperformed Allianz by nearly 60 percent. The comparison is based on historical stock price information obtained from Yahoo Finance. While the difference in stock performance may be attributed to other strategic choices of the firm, comparison with a firm from the same industry and with similar size and book-to-market adjusts for industry shifts and response to competitive pressures. Moreover, if you examine the accounting statements of the two companies, you'll find that the financial performance of the two companies is consistent with their respective gains in operational performance.

An Uneventful Summer

The writing's back. Not counting the climb of the rupee from 40.85 to 39.49 to the dollar and India's triumph in a hip and swift version of cricket, it was a fairly uneventful summer. Wrote up most of my dissertation, decided this is a good year to graduate, and learnt from Harold Bloom how to read and why.