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BPO Journal

Sunday, October 07, 2007

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.

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