Does outsourcing really save money?
According to a new survey, nine out of ten CFOs say outsourcing non-core functions increases shareholder value.
An impressive number, to say the least. There’s just one hitch: most of those surveyed finance chiefs seem to have based their assumptions on gut feelings, not quantitative analysis. Only 17 percent of the finance chiefs actually measured the return-on-investment associated with the outsourcing projects.
Those that actually indicated they measure the ROI on outsourcing said they the identified an average 17 percent reduction in pre-outsourcing expenses over the last year. That group also expects to reduce expense by the same amount by the end of 2002.
The survey, conducted by — big surprise — outsourcing consulting firm Hewitt Associates, included 500 CFOs and senior finance executives at large companies ($1 billion or more in annual revenues).
The study found that information technology was the most frequently outsourced function. Human resources services (41 percent) and facilities management (40 percent) came in second and third on the list.
Like other studies, the Hewitt survey concluded that the most frequently outsourced HR function is defined benefit and defined contribution plan administration (64 percent).
A similar trend is found in joint research from the Society for Human Resource Management and the Bureau of National Affairs. The report, “2000-2001 Human Resource Activities, Budgets & Staffs,” found that 31 percent of the executives polled said that they outsourced all or part of their pension and retirement plans, up from 27 percent in the 1999-2000 survey. Only employee assistance programs ranked higher (47 percent) as a candidate for outsourcing.
So why do so many companies outsource pension and retirement plans? As plans grow, they need more professional management, says Roger Williamson, vice president of finance at Sun Chemical Corp. But budget constraints make it hard to get approval for an employee whose sole job would be to serve as administrator.
Having the function under one roof — albeit somebody else’s roof — makes plan administration more controllable and efficient, claims Williamson.
Williamson began outsourcing the defined benefit portion of Sun Chemical’s pension plan to Chicago’s Northern Trust Global Advisors Inc. last November. But he says his move was not related to the Enron pension fiasco. Mostly, he says the urge to outsource was triggered by the souring economy. In fact, the process of outsourcing plan administration had been in the works for close to two years at Sun.
In general, industry watchers say managers at small and midsize companies are more inclined to outsource their pension and defined benefits administration. “Defined benefit plan outsourcing has been around for about four years,” says Mike Meegan, a senior vice president at Northern Trust.
At first, says Meegan, managers at small companies began to outsource the plans so they could focus on their core businesses. But with the ongoing economic slump, executives at larger companies are considering outsourcing as a way to relieve cost pressures and reduce risk.
Sun’s Williamson says executives who are considering outsourcing their pension plans need to make sure a vendor will be in business next year. And Keven Rochford, managing director at Northern Trust, says that outsourcing pension plan administration does not relieve a company of all its fiduciary responsibilities. While some types of risk, such as custodial, can be shared with an outside administrator, the bulk of fiduciary responsibilities are still shouldered by a plan sponsor, he says.
(Editor’s note: To read a related story on how companies are dealing with the decline in pension plan investment gains — and hence a decline in corporate earnings — click here.)