| | A study released by
LogicaCMG reveals that
outsourcing is one means
by which UK companies
can increase corporate
value.
The report, conducted
by the Centre for
Economic and Business
Research (cebr), shows
that companies that
outsource outperform
peers and could create
an equivalent GBP20
billion of additional
shareholder value.
However, companies may
be falling short in
communicating to
investors the long-term
dividends created by
outsourcing, resulting
in an
under-representation in
share valuations, says
LogicaCMG.
The LogicaCMG study,
"Outsourcing for
Corporate Value",
analyses historical
stock market data of
companies that have
announced outsourcing
deals against companies
in the same sector that
have not announced
deals. The report
further explores the
total potential value
outsourcing can release
for UK industry,
including the public
sector.
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| | Cash Flow a business is
expected to generate and
the effect outsourcing
(and related initiatives
e.g. refocusing for
growth) can have on Free
Cash Flow generation.
Given this, intuitively,
outsourcing should
positively affect
company valuations.
However, this can
only be achieved if
companies communicate to
investors what they plan
to do with the
cost-savings and
opportunities for
re-investment that
outsourcing creates.
The second part of
the study uses analysis
to forecast the economic
impact on corporate
value from outsourcing.
The analysis calculates
that if UK companies
increased outsourcing by
52 per cent by 2010,
over GBP9.9 billion in
additional stock market
value would be created.
Guy Warren, chief
executive, UK,
LogicaCMG, said:
"Outsourcing enables
organisations to reap
benefits in addition to
cost-reduction, such as
releasing capital and
human efficiencies and
using savings for
reinvestment. We have | |
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| | proved that successful
companies do outsource
and that more
outsourcing would create
greater corporate value
across the UK economy.
However, despite this,
UK industry and
financial markets could
be under-estimating the
long-term economic
benefits unleashed from
outsourcing
initiatives."
This economic
forecast shows that
outsourcing has the
potential to be worth
GBP370 billion by 2010 -
up 52 per cent on 2004.
If companies increased
outsourcing at this
level, the following
would be achieved:
- An increase in UK
GDP by more than GBP40
billion by 2010 alone
- A boost to company
investment over the
period 2004 to 2010 to
GBP25 billion
- An additional
average boost in gross
corporate profits over
the period from 2005 to
2010 of GBP698 million
per annum or GBP4.2
billion in total over
the 5-year period
- The increase in
profits equates to an
equivalent GBP9.9
billion of additional | |
|
| | stock market value that
could be created for UK
companies
- It's also
equivalent boost of
GBP184 million per annum
on Economic Value Add
(EVA) (boost to profits
minus cost of capital)
and GBP1 billion on
Market Value Add (MVA)
Mark Pragnell,
managing director at
cebr, said: "Outsourcing
has been proven not only
to reduce costs and
increase profitability,
but also to enable
organisations to improve
their utilisation of
investors' capital,
thereby improving free
cash flow in the medium
to long term. Our
findings indicate that
those businesses that
outsource outperform
peers, significantly
adding to the value of
their owners'
investment. Our
forecasts show that if
UK companies were to
take advantage of the
opportunities made
available from
outsourcing, the economy
would be boosted, making
the UK more
competitive." | |
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