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.