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Study Outsourcing Back-Office Operations Cuts Expenses—but Also Innovation

Less than half of the companies that have begun moving general and administrative work to offshore offices said they were satisfied with the new unit’s ability to innovate, a new Hackett Group survey finds.

September 16, 2011
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Companies that rush to move their finance and other back-office operations to low-cost countries may cut expenses—only to find that they are paying an unexpected price in missed opportunities for innovation.

In a new study, the Hackett Group, a consulting and advisory firm, found that businesses that have already begun to move their general and administrative functions offshore will likely pick up the pace over the next three years.

Indeed, by 2010, these companies will have outsourced or transferred offshore an average of 16 percent of these back-office operations—an increase of more than 50 percent from the current level.

Of note to finance executives: Businesses that send back-office functions overseas will have transferred, on average, about half of their accounts-payable work to low-cost labor markets within three years, the study found.

Not surprisingly, cost savings drives most companies to shift back-office work overseas. Whether businesses outsource the work to specialist firms in cheaper locations or set up their own captive offices abroad, the Hackett Group found that most companies save 25 to 50 percent on back-office work that’s shipped outside the United States.

The catch? Less than half of the companies that had begun moving general and administrative work to offshore offices said they were satisfied with the new unit’s ability to innovate. In fact, only about one in six of the companies in the study were satisfied with so-called business process outsourcers’ innovation ability.

This may explain, at least in part, why a clutch of U.S. companies—including Dell Computer and Apple—have shuttered captive operations in India.

“The weakness of BPOs in particular in this area is something we’ve seen for several years, and it hasn’t improved,” said Julio Ramirez, head of Hackett’s globalization and outsourcing practice, in a news release.

Filed by Tim Catts of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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