SOURCE: AlixPartners

June 08, 2007 09:30 ET

Outsourcing Not Effective at 38% of Mid-Sized Companies in New AlixPartners Survey

15% of Companies Actually Worse Off

Key to Successful Outsourcing: Internal Preparation

SOUTHFIELD, MI--(Marketwire - June 8, 2007) - An astonishing 38 percent of all mid-sized companies report that their SG&A* (selling, general and administrative) outsourcing projects are less than fully effective, with 15 percent reporting they are now "worse off" after outsourcing. That's according to a new survey of CFOs and other senior financial executives at 35 blue-chip North American companies and divisions released today by AlixPartners LLP.

The survey, which focused on SG&A outsourcing trends at companies and company divisions of $5 billion and under in annual revenues across multiple industries, including automotive, consumer goods and retail, and industrial, shows that outsourcing is no longer the purview of just large companies, as 55 percent of respondents reported SG&A outsourcing projects already going on at their companies and a total of 74 percent reported either continued or planned outsourcing in one to two years. One big reason for that: Respondents reported their total SG&A costs across the three industries average a hefty 9 percent of sales.

However, while more and more mid-sized companies have made the move to outsourcing, 60 percent surveyed also said their companies were not enjoying a hoped-for combination of high cost savings (savings of 15 percent or more of total SG&A costs) coupled with high operational improvement (such as enhanced flexibility, access to best practices, etc.). This was despite the fact that 48 percent of those surveyed rated expertise and stability on the part of outsourcing vendors as being more important than pure low cost, at just 16 percent.

"The overriding reason companies aren't getting the returns they want," said Neal Ganguli, co-leader of the survey and a director at AlixPartners, "is that while companies rightfully devote a lot of energy to looking 'outward' as they outsource -- working to select the right vendors, etc. -- they all too often don't also look 'inward' enough, in order to adequately prepare themselves for all that successful outsourcing demands inside their own companies."

For instance, when asked to list reasons outsourcing projects were ineffective, the top reason given was "internal resource issues." This placed well above "poor vendor performance." By the same token, when asked why effective projects were effective, "management effort" (internal to the company itself) led the way.

The issue of internal preparation also manifested itself in terms of the time it takes to implement outsourcing projects. Troublingly, the survey revealed that more than half of outsourcing projects are taking six months or more to implement -- and revealed that there's a direct correlation between the speed of implementation and actual savings realization. In fact, among the companies taking six months or more to implement their outsourcing programs, 40 percent realized savings only after two years or more, while 20 percent realized no savings whatsoever. By contrast, among companies that carried out their implementations in six months or less, a full 100 percent realized their expected savings.

"This survey proves, conclusively, that when it comes to outsourcing the old adage 'haste makes waste' just doesn't apply," said Suraj Krishnan, the other survey leader and also an AlixPartners director. "At the same time that they are preparing themselves internally for outsourcing, successful mid-sized outsourcers are also moving very rapidly to effect the outsourcing itself -- doing whatever is necessary to remove roadblocks along the way."

In terms of outsourcing models, 50 percent said that shared service centers (SSCs) are their preferred model, followed by third-party outsourcing at 33 percent and hybrid models at 17 percent. For all, on- or near-shore models far outweighed preferences for off-shore ones.

However, in terms of effectiveness, third-party models -- which are often also off-shore models -- far outstripped the other models, with 78 percent of respondents rating them effective. That compares with 25 percent who rated hybrid models effective and a total of 50 percent who rated SSCs either effective or highly effective.

The survey also found that the top two reasons for not outsourcing SG&A functions today are mission-criticality and the perceived risk of losing confidential information. However, interviews with survey respondents revealed that even these deterrents may be decreasing, thanks to recent advances in security technology.

Interviews also revealed that, while IT, HR and F&A (finance and administration) lead all other functions in outsourcing today (with engineering following in the survey, at 22 percent), more "knowledge-intensive" functions could well be outsourced in the near future. As one senior retail executive put it in the interviews: "Pre-production design and product development outsourcing are our most significant efforts now, and moving forward."

About the Survey:

The 2007 AlixPartners Outsourcing Survey surveyed CFOs and other senior financial executives about SG&A (selling, general and administrative) trends at 35 blue-chip mid-sized companies and divisions (generally $5 billion and under in sales) across multiple industries, including automotive, consumer goods and retail, and industrial, in the first quarter of 2007. The survey consisted of 25 questions about outsourcing practices across multiple categories, such as economics, provider- and contract-model preferences, and implementation successes and failures. The overall AlixPartners study also included follow-up interviews with ten companies, to obtain further insight into success factors and problem areas. The survey was conducted with the assistance of Outsource Partners International Inc., a leading SG&A outsourcing provider. An executive summary of the survey is available at www.alixpartners.com.

About AlixPartners

AlixPartners is a global restructuring, consulting and financial advisory services firm, with offices in Chicago, Dallas, Detroit, Dusseldorf, London, Los Angeles, Milan, Munich, New York, Paris, San Francisco, Shanghai and Tokyo. It is on the Web at www.alixpartners.com.

*SG&A is defined as IT, HR, F&A, Engineering, Purchasing, Other
 Administrative functions.

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