Outsourcing tipped to give UK Plc £4.2bn profit boost

IT outsourcing could boost UK Plc share prices by £10bn and add £4.2bn to company coffers over the next five years, according to new research.

The study analysed historical stock market data of companies that have publicly announced an IT outsourcing deal against companies in the same industry sector who either don't outsource or haven't announced it.

It found that companies who announced an outsourcing deal boasted on average a 1.7 per cent increase in share price in the first month. Based on projections of a 52 per cent increase in UK outsourcing by 2010, the research claims this could boost company profits by £4.2bn and add almost £10bn to stock market values.

The study was compiled by the Centre for Economic and Business Research (CEBR) and sponsored by outsourcer LogicaCMG.

Performance was not even across all vertical industry sectors. In five out of seven sectors, companies that used outsourcing outperformed their peers. The best performing sector was retail and distribution with an 11 per cent increase, while banking and finance and telecoms both showed a negative share price reaction.

Mark Pragnell, managing director of the CEBR, acknowledged there was no way of directly correlating the share price increase to the outsourcing announcement but said well-performing businesses generally outsource some of their functions and that it is good for the wider UK economy.

"Companies that perform well in the stock market are companies who announce outsourcing deals. But we haven't looked at the very long-term impact," he said.

The research said key metrics which organisations should be shouting about when announcing any IT outsourcing deal are: predicted annualised savings, any service level improvements and what the company is going to do with the money it saves.

Phil Morris, director at independent outsourcing advisors Morgan Chambers, agreed with the short-term financial impact of an outsourcing deal but warned that organisations need to focus on the longer-term benefits to avoid problems further down the line.

"In the short-term after announcement there is an increase in share price. But it is not just about doing the deal and announcing it. It is about making it sustainable," he said.