Software Outsourcing benefitsTuesday, September 13, 2005
A recent report by LogicaCMG shown that, outsourcing a way by which UK based companies can increase their profit margins and corporate value. The report mentioned that companies that are outsourcing are outperforming their competitors and they can create a shareholder value of around 25 billion dollars. The report also mentioned that companies may not explain investors about the long term advantage created by outsourcing, which may result in an under-representation in share valuation. This LogicaCMG study which is called Outsourcing of Corporate Value analyzed historical stock market data of companies that have announced outsourcing deals with companies that have not announced any deal or not outsourcing.
Offshore Outsourcing to India
Result analyzed the relation between the announcement of an offshore outsourcing deal by the company and its stock valuation after 1 month of the announcement of the offshore outsourcing deal. The result showed that, companies that have done offshore outsourcing deal perform average 1.7 percent higher int he stock markets benchmark against other companies in the same sector and not doing offshore outsourcing to India. In five out of seven sectors, companies that do offshore outsourcing is outperforming their competitors.
Benefits of Offshore Outsourcing for Inventors
LogicaCMG mentions that in spite of increase in profit margin, the number underestimates the opportunities offshore outsourcing provides to increase the corporate value. It mentions that shares are priced based on the expectation of free cash flow a company ahs and the effect of outsourcing on free cash flow. But companies need to explain to their stockholders what the are planning to achieve with outsourcing and where they will reinvest benefits of outsourcing. Another part of this report studies analysis and forecast on the economic impact of corporate value. It shows that, if UK companies increased outsourcing by 52 percent by 2010, it will create $17.3 billion in additional stock value. Chief executive of LogicaCMG mentioned that outsourcing is enabling organizations to reap benefits in addition to cost reduction such as releasing capital and human efficiencies and using savings for reinvestment. Outsourcing is not just about reducing cost and increasing profitability but also to enable organizations to improve their utilization of investor’s capital.
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