A study launched today by LogicaCMG reveals, for the first time, the macroeconomic impact of outsourcing in the UK. The study reveals British business could see 1.7 billion pounds in additional profits while GDP could rise by 16 billion pounds if more companies outsourced over the next five years.
The findings illustrate that UK companies have the potential to outsource 46 per cent more than current levels by 2008. If they do so, the UK's historic 28 per cent productivity gap with its main global competitors could be cut by 10 per cent, increasing productivity levels by 2.7 per cent. Overall, the study indicates that increased outsourcing would have a positive impact on the UK economy and that UK plcs have an ideal opportunity to capitalise upon the benefits it would create.
The study, titled "The Potential Economic Impact of Increased Outsourcing", was conducted by the Centre for Economic and Business Research (cebr), one of the UK's leading independent commentators on economics and business trends, and was commissioned by LogicaCMG.
The findings show that real consumer expenditure could be boosted to 4.4 billion pounds by 2008, equating to an extra pounds 177 per household, per year, in the UK.
Kirk Smith, outsourcing strategist, LogicaCMG, said: "Today's economic climate demands that companies that want to exceed shareholder expectations must improve their utilisation of capital, achieve cost reductions and pursue valuable growth opportunities. Success in today's fiercely competitive global market is about finding and fully exploiting a company's core talent. The critical long-term benefit of outsourcing is in enabling a business to focus this core talent on where and how it can create the greatest value."
Douglas McWilliams, chief executive, cebr said, "The study explores for the first time the extent to which outsourcing services can affect the UK economy. Government data shows that UK productivity grew at 1.9 per cent per annum between 1995 and 1999. This study suggests that if companies in the UK were to take advantage of the opportunities made available from outsourcing, the rate of productivity growth could increase to 2.4 per cent per annum. Overall, the benefits of outsourcing for individual companies and their shareholders have been well documented, but I think a lot of people will be surprised to see how the benefits could extend across, and strengthen, the entire economy over the longer term."
The study further outlines the key contributors to the UK productivity gap. Under-investment in fixed capital accounts for nearly half of the productivity gap, whilst nine per cent can be attributed to skills shortages. If outsourcing increases to the levels predicted by the cebr in this study, this could overcome eight per cent of the UK's productivity gap from under-investment and one-sixth of the gap attributed to skills.
The study outlines the positive opportunity for outsourcing across the UK economy but individual businesses may question the relevance of these findings to their specific markets. The rise in popularity of outsourcing, beyond the early adopters among the blue-chip companies, will alter the business landscape. In the future, where services are delivered from will be of very low significance providing the economics are attractive and the risks manageable. Of key importance will be the management of geographically distributed service networks.
Kirk Smith added, "Outsourcing is fast becoming an intrinsic part of how we do business globally. In five years, we could see the terms 'business process outsourcing' and 'offshore' becoming standard business practice and we will no longer have to label them. The increased use of outsourcing will lead to the development of global service networks. Companies will no longer be preoccupied with where services are delivered from, as long as the supplier (or chain of suppliers) meets their current and changing business requirements. We believe LogicaCMG will play a key role in the development and delivery of these emerging business networks."
About the white paper
LogicaCMG has prepared a white paper entitled "Fit for Business" to coincide with today's launch of the cebr study. The paper guides organisations through the critical issues for consideration in successfully implementing a business model supported by outsourcing.
About the study
The cebr conducted the study in November 2003 using varied statistics from the DTI, the National Statistics "input-output" tables and the cebr's own UK MOD model.
Productivity measures the relationship between the output of an economy and the inputs that went into producing that output. There are several measures of this relationship: output per worker -- the productivity of each person in active employment; output per hour -- which also take account of part-time work and time spent not working; and total factor productivity (TFP) -- this takes account of labour inputs and capital inputs. However, capital inputs and capital stock are often difficult to measure accurately. These measures allow for inter-industry and inter-country comparisons. The Government's central measure is output per worker. However, on all of these measures UK productivity lags behind that of other industrialised countries -- "the productivity gap".
Total outsourcing cebr has used the UK "input-output" tables published by National Statistics to gauge a measure of the value of operating expenditure on services in the UK a broad proxy for outsourcing. The "input-output supply and use" balance displays the transactions of all goods and services in the UK economy each year. Transactions are presented in matrix form showing expenditure by each of 123 industry sectors in each industry (123x123 matrix). The sector expenditure can then be broken down into operating expenditure on products, operating expenditure on services and capital expenditure. Operating expenditure on services by one industry sector in another (across the matrix) is used to approximate the level of total outsourcing by UK plc.