outsourcing: the rise of fragmentation

Ernst & Young’s 2008European outsourcing survey

Outsourcing:the rise of fragmentation

Outsourcing: the rise of fragmentation2

Business models are currently undergoing adeep-seated restructuring as the traditionalvertically integrated model that has beenthe norm for over 100 years is beingbroken up. Historically, companies thathadn’t mastered the complete range ofbusiness processes grew by focusing ontheir core business skills. A network of sub-contractors and outsourcers was used for arange of non-core processes and “make orbuy” analysis assisted the businessdecision-making process.

Today, technological advances, such as theconnected economy, together with trendsin privatization, globalization andderegulation, are encouraging theemergence of alternatives to traditionalbusiness organizational models. Via aprocess of fragmentation, specialists areentering each layer in the value chain anddestroying the competitive advantage ofthe typical hierarchical organizationalstructure. Each individual element in thevalue chain is now required to be profitablein its own right if it is to provide resistanceto outside intervention.

Through exploiting the use of thesespecialists, previously vertically integratedplayers can increase their level of flexibilityand lower their administrative costs. Theycan make use of each of the key elementsin the value chain without owning them. Atthe same time customers and suppliershave an unprecedented opportunity tocollaborate, share information, processflows and cohabit in a virtual organization.

Editorial

Thierry MullerPartner, Ernst & Young et Associés

Paul WoodPartner, Ernst & Young Advisory

The key to success, however, is tounderstand which activities to outsource,which to retain and how to increase thebenefits from this externalization process.

In terms of human capital, these businessmodel transformations are resulting insignificant change in managementresponsibilities. The role of managers ischanging from one of overseeing a highlyintegrated organization with a clear andconsistent culture and values, to a role ofguiding a linked network of specializedcontributors to the value chain. Thisguidance role encompasses a number ofkey decisions:• Which activities are to enter into the

fragmentation process? • What form is the fragmentation to take,

depending on the level of control to bemaintained?

• What impact will information technologyhave on the individual linkages betweenthe fragmented elements?

• What level of guidance is required of thedifferent elements of the value chain?

• What level of autonomy is required toensure the efficient management of anindividual fragment?

• What use can be made of the increasingsupply of qualified resources in the newgeographic business zones, notably Indiaand China?

Ernst & Young’s 2008 Europeanoutsourcing survey aims to put theoutsourcing process into its wider contextof business model fragmentation.

Various studies to date have explored theoutsourcing environment, but we believeour analysis is the first to examine the issuein the context of a fundamental change intraditional business models. Our study aimsto guide business leaders through thelessons to be learned from the outsourcingprocess. Are we seeing a wholesaleadoption of outsourcing as firmsrecognize that they have to mutate tosurvive, or are some firms resistingexternal pressure as just a trend? Whattypes of functions are leading theoutsourcing trend and what are thelikely growth markets for providers inthe future? What are the lessons tobe drawn from this outsourcingexperience?

We have gathered the opinions of aselected panel of Europeanobservers, from the businesscommunity, leading institutionsand the Ernst & Young network,and interviewed 600 decision-makers in European businessesto provide a detailed analysisof current outsourcing trendsacross this continent. Wewould like to extend ourwarmest thanks to all thedecision-makers aroundEurope who have taken thetime to participate in thisstudy, the success ofwhich is directlyattributable to theirvaluable contribution.

Ernst & Young’s 2008 European outsourcing survey

ContentsPreface 4

Survey highlights 6

Outsourcing puts down roots 8

Outsourcing refines its image 16

Outsourcing spreads its wings 26

Conclusion 36

Methodology and sources 38


Writing is a solitary profession. Few writersare specialists in how companies organizethemselves. Yet I have been struck by twoexperiences, both of them distant, in timeand space respectively.

In the late ‘70s, I joined a small publishinghouse set up by Jean-Pierre Ramsay.What is a publisher? Put simply, someonewho produces good books from the ideasor manuscripts he has chosen – thendefends these books to others.

And yet we only spent one-third of our timeat the most actually doing our work aspublishers. The other business activities(finance, distribution, production) tookup too much of our time. Is the role of apublisher to be also that of a van driver?I didn’t know the word “outsourcing” atthe time, but it was a dream of mine – tofocus on the fundamentals, my so-calledtalent, at least my passion: publishing.Later, when my publisher, the HachetteGroup, as often happens, started to thinkabout “streamlining”, I championed

We are very grateful

to Erik Orsenna,

who kindly agreed

to share his views

on the impact of outsourcing

in the wider context

of increasing globalization.

Erik Orsenna is a French politician and novelist.A close collaborator of François Mitterrand,Orsenna held several government positionsin the 1980s and 1990s. He has been a memberof the Conseil d'État since 1985 and was electedto the Académie Française in 1998. He has writtennumerous essays and novels, the latest of which,Voyage au pays du coton, achieved the second prizeof the Lettre Ulysses Award in 2006.

Preface

Not losing sight ofthe trees for the forestErik Orsenna

Ernst & Young’s 2008 European outsourcing survey 5

“Outsourcing: to stay true to oneself for the essential elements,to keep the core source for oneself, but go and search elsewherefor the other, less important elements or those richer in rarer minerals.”

Erik Orsenna

Outsourcing

the following two causes: firstly, havepublishers stick to publishing and nothingelse; and secondly, keep the variouspublishing houses alive (Fayard, Stock,Grasset). Good books are made inworkshops, not in huge designer officespaces.

For my book about cotton, I visitedDatang in China, south of Shanghai,where every one of the 60,000 inhabitantsmanufactures socks… in factories orin their kitchens, in the city center or inthe surrounding countryside. Most theoristspromptly jeer at this fragmentationof production. And yet the result is thereto behold: over one-half of the world’ssocks come from this tiny region with anunparalleled capacity to adapt to variationsin demand and economic conditions.

The market may be global, but the demandis diverse and the supply fragmentary inthe extreme.

Water, cotton… I have traveled in differentcountries and known different sectors

of activity and the same could be said.I could cite Formula 1, aeronautics,French or Australian wine…

As we know, teleworking did not developas much as was originally thought. Thereare many reasons for this. Nevertheless,it must be said that techniques do allowdistancing activities.

What counts are skills, wherever they maybe found. It is manifestly true that to besuccessful, it is necessary to gather skillstogether. But do they have to be physicallyin the same place? If it weren’t for the veryhuman need to keep one’s world nearby,the answer to that question would beresoundingly clear.

The presumption of proximity is not theonly principle to falter. The sacrosanctprinciple of vertical hierarchy is quaking inits very foundations. In both practice andtheory, the internet has opened our eyesand given us access to a horizontal world: aworld of boundless supply, a world averseto all rules, costs, sanctions, subordination.

What is the web if not global knowledge,endlessly and joyfully fragmented?

Outsourcing goes right to the core ofthe issue of flexibility, so sought after byentrepreneurs who are forced to continuallyadapt; so dreaded by employees, afraid tosee their rights gradually eroded as a resultof the fragmentation of the structures thatemploy them. Where there is no structure,there can be no rights; where there is nobusiness, no possible employment rights;just as without a country of reference,no democracy is possible.

We know the tricks and ruses of history.The “global” world excels in fragmentation.Is it the fault of the sea that it will rise asa result of global warming? The numberof islands will continue to multiply.We are going to have to find a better wayof living with the archipelagoes.


Fragmentation overview(characteristics by fragmentation type)

Survey highlights

Outsourcing is thriving.With an overall take-up rate of 70% acrossthe European countries surveyed,outsourcing is increasingly integrated intomany organizations’ business models.However, significant variations in the levelof adoption of outsourcing exist betweencountries. French companies, with a loweradoption rate (63% of respondentscurrently outsource at least one function),show some reluctance to incorporateexternal providers in their businessactivities. By contrast, Belgian and Spanishorganizations (with adoption rates of 81%and 77% respectively) widely embrace theconcept.

Outsourcing:By outsourcing, we meandelegation of certain functions,for a long period, to serviceproviders outside a company.

Partial relocation:Allows the company to exploitlocal benefits such as cheaperlabor or access to special skills.

Subsidiary:The parent company retainslegal control, while allowingincreased autonomy for aparticular section of thebusiness.

Subcontracting:A third party is delegated some,or all, of the work that aparticular company has beencontracted to do.

Joint venture:New legal entity createdbetween two organizations tocreate a physical organizationheld legally by both parties.

Shared services center:Administrative functions thatwere once performed inseparate divisions or locationsare centralized. Partnershipmay also represent theformation of separatebusinesses to enable a companyto access to services that wouldotherwise be unavailable.

Carve out:A parent company sells aminority share of a subsidiarycompany, usually in an IPO. Thechild company has its ownboard of directors and financialstatements, but benefits fromthe parent company's resourcesand strategic support. Usually,the parent company willeventually sell the rest of thechild company in the openmarket.


Support functions are the mostfrequently outsourcedactivities.Maintenance, distribution/logistics andIT/Telecoms are the most typicallyoutsourced functions, reflecting anunsurprising lack of willingness toexternalize core decision-makingoperations.

Cost savings are cited as theprincipal advantage, but accessto new labor and skills are alsokey drivers.The ability to reduce costs is the mostsignificant advantage of outsourcing, yetoutsourcing can achieve benefits waybeyond simple cost savings. While a numberof providers are perceived to be simply low-cost providers of commoditized services,others are fully appreciated for the accessthey provide to skills unavailable in-house.Improvements in quality, however, getample recognition, cited by a third ofrespondents.

Outsourcing is criticized for theresulting loss in autonomy.Although acknowledging the advantages ofgains in efficiency, decision-makers areconcerned about a loss of autonomy and aperceived lack of reactivity to in-housedemands by their outsourcing provider.These preoccupations are of particularconcern to French and Belgian companies.

Clients are satisfied withtechniques for monitoringprovider’s performance.In general, outsourced operations areclosely monitored, with over half ofrespondents having established a set ofperformance indicators, mainly relying oninternally generated information.

Of business fragmentationpossibilities, outsourcing is theclear favorite, adopted by 70%of respondents.Other fragmentation possibilities: creating ajoint venture or subsidiary, relocation, useof shared services and subcontracting areused by around a quarter of thosesurveyed. A full scale carve-out ofoperations has a low take-up rate (12%).

Future growth seems assured.Despite the current relatively high take-uprate, companies intend to continue toexpand their outsourcing requirements.Almost a quarter (23%) of all Europeancompanies surveyed announced anintention to outsource, or enlarge the scaleof their outsourcing, over the next twoyears. The most frequently cited activitiesare maintenance functions andadministrative/finance operations.

What is fragmentation? The term “fragmentation” is used todescribe a concerted organization method,involving the breakup of traditional valuechains.

Business leaders must decide betweeninternalization and externalization, that isbetween integration and disintegration oftheir different activities, involving theadoption of different management styles(e.g. externalization, sub-contracting,shared services center) that are availableto them.

For multinationals, this evolution representsone of the most strategic moves a companycan make; giving the piloting, or guidanceof activities a key role in the value chain. Inthis deconstructed environment, thesynergies and coordination of differentactivities become primordial and keydeterminants of the success of these newdeconstructed business models.

Outsourcingputs down roots

Outsourcing has come of age.As the process of fragmentationof traditional verticallyintegrated business modelscontinues, outsourcing isbecoming widespread and is nowfirmly established in the business

practices of Europeancompanies. From a relativelyrestricted number of applicationsinitially, its use now extendsacross a broad range of businessfunctions.


Seven out of tencompanies outsource

Almost three-quarters of all Europeancompanies surveyed currently outsource atleast one function. General Europeantrends, however, mask considerablevariation in the level of adoption betweencountries. Belgian companies recorded thehighest rate of externalization at 81%, whiletheir immediate neighbors, the French,recorded the lowest rate, at 63%.

A low level of adoption of outsourcingdoesn’t necessarily mean that a limitedrange of activities is outsourced. In France,although the rate of externalization is thelowest of any European company surveyed,outsourcing is permeating a wide range ofbusiness processes. The country has one of

the broadest ranges of outsourcedfunctions, with an average of five functionsoutsourced. The UK by contrast, seems lessprepared to accept a deep-seated shake-upof its traditional business models. Althoughoutsourcing is a common business practice,its use remains restricted to a relativelynarrow range of business processes, withan average of only three functionsexternalized. Belgian companies not onlyopenly embrace the outsourcing conceptacross a wide range of companies, but alsogo beyond this to outsource a wide range offunctions within each company (average of5.3 functions outsourced).

0% 20% 40% 60% 80% 100%

European average

Belgium

Spain

UK

Germany

Italy

France

70%

81%

77%

71%

70%

67%

63%

4.1

5.3

4.6

3.0

4.3

3.6

5.0

% response rate1

Average numberof outsourced functions2

Could you tell me if your company or one of itssubsidiaries currently outsources at least onefunction?

Outsourcing by country

1.Basis: all.2.Basis: companies outsourcing at least one function.


At an industry level, the finance industryis the most mature in terms of its adoptionof outsourcing, with 88% of companiesexternalizing at least one function.Companies within the sector arecharacterized by their focus on a narrowrange of business processes that can berelatively easily outsourced, such as IT andaccounting operations. Such servicefunctions, being centered on the electronictransmission of information, and locationindependent, lend themselves more easilyto the externalization process.

Non finance activities, on the other hand,show a stronger preference for maintainingin-house control of their activities.Outsourcing rates are typically below 70%.

Such industries are less IT intense andexternal management of certain operationsmay involve complex logistics issues andadditional transportation costs.

Analysis by company size indicates thatoutsourcing is of interest to a broad range,from medium-sized companies to majormultinationals. While smaller organizationsmay not have the critical number ofemployees to justify, for example, recruitinga team of maintenance experts, a largercompany may have such a sizeable ITinfrastructure that it is no longer able toensure an adequate standard ofmaintenance by in-house personnel, andoutsourcing is a realistic alternative.

“We need to adapt all our services,even support activities, to be asprofessional as those of individualservice providers. This is why theservices are either outsourced orcarved out in a dedicated subsidiary.

By reaching out to the market we gainin quality, transparency of cost and,

more importantly, autonomy thatenables us to invest in adequateimprovement projects. At the sametime, the positioning strategy of thesubsidiary has to be carefully defined,with a reporting line directly to theexecutive board.”

COO of a major European airline


Breadth of outsourcingapplications is under-exploited

The range of functions entering into theoutsourcing equation can be divided intothree main types:

• Ancillary functions: these may be treatedas a commodity and a decision tooutsource them is based largely on cost.The search for a provider centers onoperational excellence: the provision ofstandardized quality at the best possibleprice. Functions in this category requireskills that are widely available, themanagement of which can easily bedecentralized. Such functions includemaintenance and catering activities.

• Specialist non-core functions: theserequire specialist skills that may not beavailable in-house, due to the size of thecompany (the critical size necessary tojustify managing them in-house not beingattained), skills that may be required onan ad hoc basis, or skills that do not formpart of the core business of the company.Such functions include training andrecruitment and IT support. The decisionto outsource these functions is based lesson cost and more on the need to obtain aspecialized skill, otherwise unavailable.The flexibility and depth of optionsprovided by outsourcing is one of the keyattractions to managing these functionsexternally.

“We wanted to focus on ourcore business activities. Wewanted to cease all activitiesthat could be better done byanother company. Costconsiderations were notparamount. Although costconsiderations may makeoutsourcing seemappealing, it is important toconsider the possibledisadvantages, such asloss of know-how orflexibility.”

German CFOof a leading Europeanoptician

Corebusinessfunctions

Specialistnon-core functions

Ancillaryfunctions

• Core business functions: these representthe intellectual capital of the business.A decision to outsource them is rarer,but an outsourcing relationship may beentered into if it is undertaken more on apartnership basis, where the contractualterms are strictly defined and a companyretains control of its key businessresource – its intellectual base.


0% 20% 40% 60% 80%

Maintenance functions

Distribution/logistics/transport

IT/telecommunications

Human resources

Administration/finance

Product development/manufacturing

Sales/marketing/communication

76%

73%

68%

59%

56%

46%

29%

Which functions are currently totally or partiallyoutsourced by your company or one of itssubsidiaries?

Outsourcing by function(% response rate)

Basis: companies outsourcing at least one function.

Despite an increasingly wide range ofoutsourced activities, the main focus ofoutsourcing remains the first category ofancillary functions, where the decision tooutsource is driven by cost. Our panel ofdecision-makers cited maintenancefunctions at the top of the list of outsourcedfunctions, with 76% of respondents claimingto outsource them. Distribution, logisticsand transport functions also feature highly,outsourced by respondents in 73% of cases.

Specialist, non-core functions are lessfrequently outsourced, but nonetheless areexternalized by over half of the companiessurveyed. Within this category,IT/telecommunications topped the list, citedby 68% of our panel. Some aspect of thehuman resources function was outsourcedby 59% of respondents, whileadministration/finance functions wereoutsourced by 56% of those surveyed.

Core business functions, as expected, wereplaced at the bottom of the list. Productdevelopment/manufacturing andsales/marketing/communication functionswere outsourced by 46% and 29% ofrespondents respectively.


There is a marked difference in thefunctions outsourced according to the typeof business; however, to a large extentthese differences reflect the nature of theparticular industry. The banking industryfor example is very heavily focused on ITand telecommunications outsourcing, witha 75% take-up rate (vs. an average 68%).However, for all other functions the sector’soutsourcing rate is below average: logistics,distribution and transport functions areoutsourced by only 51% of respondents inthe sector (vs. an average of 73%), while45% of banking companies outsourcehuman resources functions, compared witha European average of 59%. Similarly,product development outsourcing rates forthe sector are significantly below average(23% vs. an average 46%). These lowadoption rates are likely to be related to thespecific industry focus and the level ofspecialization in the industry, resulting in alack of availability of the necessary skillsoutside the company and a preference forin-house training and recruitmentprocesses.

Drilling down to examine the types offunctions outsourced in more detail revealsthat among distribution/logisticsfunctions, the most commonly providedexternally are transport-related functions,while property maintenance and cateringtop the list among maintenance functions.Within human resources, although finalhiring decisions will most likely be made in-house, some aspect of the recruitmentprocess is outsourced in 28% of cases, whileexternal providers are used for someelements of staff training by 28% ofrespondents.

“I imagine a more efficient company,totally focused on core businessprocesses. This could mean a strongeruse of externalization of non-corefunctions, such as legal,administrative and accountingservices.”

CFO of an Italian aircraft handlingservices company


0% 20% 40% 60%

Property maintenance

Transport

Catering

Application maintenance

Automotive fleet

IT software and hardware management

Network and server management

Logistics

Pay management

Legal

Maintenance

Recruitment

Training

Stock/storage

Telecommunications management

Document management

Insurance

55%

53%

51%

48%

44%

42%

41%

36%

35%

34%

33%

28%

28%

26%

25%

25%

25%

Which sub-functions are currently totally orpartially outsourced by your company or one ofits subsidiaries?

Outsourcing by sub function(% response rate)




Human resources



Outsourcingrefines its image

Outsourcing means differentthings to different people. Aboveall, to many it conjures up animage of cheaper labor.Increasingly, however, it is beingvalued for its ability to provideadditional flexibility and

workforce skills.Some reticence remains amongbusiness leaders, linkedprincipally to fears of a loss ofautonomy, flexibility and control.


A sustainable costreduction benefit is oftendifficult to attain...

Costs savings are the most frequently citedadvantages gained by outsourcing.However, the cost-saving equation is morecomplex than the straight differencebetween the cost of a service internally andexternally. In order to achieve an overallreduction in costs, employers must be ableto either successfully reallocate internallythose staff whose operations have beenexternalized, or carry out redundancies.The options available to employers varyaccording to each country’s legalframework. European countries such asFrance and Germany have less room formaneuver than countries such as the UK,where labor laws are more liberal. GivenGermany’s highly controlled laborenvironment, with more limited possibilities

for staff layoffs, the fact that 70% ofrespondents cite cost savings as anadvantage of outsourcing is a clearindication of the integral way outsourcing isdestined to be built into the future businessplans of many large multinationals.

However, the importance of costs shouldnot be overestimated; perhaps morenoteworthy is the fact that only half (49%)of respondents identified them as anadvantage of the outsourcing process. Thetide may be changing, with companiesrevaluating their priorities in theoutsourcing arena, linked to a realizationthat cheaper isn’t always better, togetherwith the incorporation of outsourcing intothe key elements of business strategy.

“Productivity in Germany is very highand process quality is really verygood. If companies consideroutsourcing, it is not because theywant to enhance process quality, butbecause, ideally, they want to havethe same process quality at a lowercost.”

CFO of a leading Germanlogistics company


0% 20% 40% 60% 80% 100%

At least one advantage

Cost savings (and increase in productivity)

Better quality (including specific skills)

Improved strategic organization/alignment

More flexibility

94%

49%

33%

28%

25%

What are the advantages of outsourcing for yourcompany?

Outsourcing advantages(% response rate)


...and rates as only oneof many advantages

Having back-office functions outsourced toa low-cost location, or finding a providerable to deliver for a reduced cost, is onlyviable if the business process is seamless,homogenous and the same standard ofservice is assured by the outsourceprovider. A number of companies arerealizing that it makes more sense to optfor a less cost-intensive solution, in orderto facilitate effective management, qualityassurance and operational excellence.

Alongside this revaluation of outsourcingcosts, many executives are realizing thatoutsourcing is about corporate growth andleveraging available resources. The laborsavings from global sourcing can besubstantial, but form only part of the biggerpicture that also encompassesimprovements in quality through the use ofspecialist skills (cited by 33% ofrespondents), improved strategicorganization (28% response rate) andincreased flexibility (25%).

Further analysis of the advantages obtainedby outsourcing reveals that for the majorityof European countries surveyed, the costadvantage is less marked than it firstappears. The results are heavily skewed byGermany’s high level of satisfaction withthe obtained reduction in costs. Less than40% of those surveyed within the UK, Spainand France cited cost savings as anadvantage.

French companies attribute less importanceto cost-saving benefits, with improvementsin quality and strategic organization beingthe key advantages identified (for 47% and48% of respondents respectively). Belgiancompanies are also strong proponents ofthe improved quality brought byoutsourcing (40% citation rate), while inthe UK, quality considerations are rated ona par with cost savings.

“There were two reasons we chose tooutsource. Firstly, we hope to savecosts – a direct wage-cost advantage.Our second reason is more crucial; wewant to use a shared service center toconsolidate, standardize and automate

our processes. This is what drives us.Apart from saving costs, through aconsolidation of processes we canmake our organization fit for furthergrowth.”

CFO of a Belgian logistics company


France +++ Organization+++ Quality++ Cost++ Flexibility

-- Reactivity

Germany

+++ Cost-- Autonomy

Belgium

++ Cost+ Quality- Autonomy- Control

Italy++ Cost+ Quality- Timing

United Kingdom

+ Quality+ Cost-- Control

Spain

+ Cost+ Flexibility- Control

Overall, a mapping of countries against thequalitative objectives shows cost, expertiseand flexibility repeatedly occur at the top ofthe list. However, some differences exist: inFrance, outsourcing is more confined tocore business skills, while access toexpertise is less of a primary goal in Spain.In all cases, cost reduction is a key target,but never the sole motivation.

These same qualitative objectives werehighlighted in our individual interviewscarried out as part of this survey.Regardless of the type of fragmentationmodel adopted – shared service centers,carving out an activity within a dedicatedsubsidiary, partial relocation oroutsourcing – business leaders appear tohave the same overall strategic objectives.Cost savings are a key criteria, but a searchfor greater flexibility and access to specificskills unavailable in-house also form anintegral part of the fragmentation equation.

Outsourcing advantagesand drawbacks by country


Loss of autonomy leadslist of drawbacks

The primary disadvantages shown by thisEuropean survey mirror those of ourprevious surveys of outsourcing in France.The greatest disadvantage experienced bybusiness leaders when outsourcing certainactivities is the loss of autonomy andassociated leakage of know-how (cited by17% of respondents). Related to this is theloss of control of their operations –perceived or real (15% citing).

Despite common fears of externalizationresulting in a reduction in the quality of theservice provided, our survey suggests thatthis is not the case. Quality issues werecited as a disadvantage by only 10% ofbusiness leaders. Equally experience ofexcessive costs surfacing afterwards hasnot been a major problem (10%).

0% 20% 40% 60% 80%

At least one drawback

Loss of autonomy/know-how

Loss of control

Lack of reactivity

Too expensive

Services performed are of inferior quality

Problems of timing

Other reasons

None

74%

17%

15%

13%

10%

10%

8%

25%

17%

Once established, what are the drawbacksof outsourcing for your company?

Outsourcing drawbacks (% response rate)


The outsourcing drawbacks experiencedare similar across Europe. However,Belgian and German companies noted more of a negative impact from the loss ofknow-how, than their French, Italian or UKcounterparts.

The UK and Spain clearly indicate that aculture fit is important in the outsourcingrelationship. Qualitative interviews reaffirmthat this element could be a driver in thedecision to opt for an internalfragmentation solution, rather than havingrecourse to an external provider.

These drawbacks can be aligned with theadvantages gained. In Germany, forinstance, the greatest advantage cited wasa reduction in costs. In order to achievesuch cost savings, contracts tend to strictlydefine the terms of the agreement, whichcan lead to a loss of autonomy. In Francethe focus is more on the quality andefficiency gains; while these are stronglyperceived as advantages, the corollary isthat higher expectations in these areasmean that outsourcing is more likely todisappoint in terms of a lack of reactivity.

In general, the outsourcing experienceappears to be positive, with the ratings forthe advantages exceeding the rating for thedisadvantages – 49% and 33% ofrespondents respectively cite cost savingsand quality improvements, while the top-rated drawbacks of loss of autonomy andcontrol only achieve scores of 17% and15%.


Outsourcing transitionexperience generallypositive

Despite highlighting a wide range of issuesrelating to the set-up process, themajority of respondents report a positiveexperience.

Of those that cite problems, staff issuesfeature at the top of the list, cited by 12%of respondents. Such staff problems maybe at the buyer or provider end of theequation. For the buyer, there may beproblems of an employee backlash, withfears of job losses and internalreorganizations. On the provider side, staffproblems may arise due to the lack ofphysical proximity, which may make staffrelationships more challenging. Differentcorporate cultures may also result incommunication issues. For both the buyerand the provider, such problems may beovercome by improving communication. Itmay also be that a different form ofcontract is necessary, with the preferencegiven to more of a partnership type ofrelationship, rather than a completedelegation of responsibilities. What is clearis that, to be successful, the outsourcingrelationship needs to be actively managedand communication is key.

0% 10% 20% 30% 40% 50%

At least one difficulty

Staff-related problems

Finding the proper partner

Change management problems

IT and technical problems

Legal problems

Other

None

44%

12%

9%

8%

6%

5%

15%

45%

What are the difficulties and/or obstaclesyou encountered at the time of setting upthe outsourcing process?

Outsourcing setup difficulties(% response rate)


“One challenge is knowing how tocommunicate with the employeesaffected. In our view, it is important tospeak openly with employees rightfrom the start and to prepare them forchanges, such as a new service-provider environment.”

Managing director of a Spanishoutsourcing company


Somewhat inevitably it takes time for theoutsourcing process to be up and runningsmoothly: 8% of respondents cited changemanagement problems, while 6% cited ITand technical problems. Problems in findinga suitable outsourcing partner wereidentified by 9% of those surveyed.

The setup experience varies across thedifferent European countries.Implementation problems are particularlywidespread in France and touch all the keyproblem areas, with change managementproblems particularly strongly felt (23%).

The regulatory environment in France,complex labor laws and powerful laborunions combine to make fundamentalorganizational changes difficult toimplement. In Germany and Belgium, whichhave similar business regulatoryenvironments to France, staff-relatedproblems rated highly (21% and 18%respectively), although general legalproblems were less of an issue. The UK,which has relatively flexible labor laws bycomparison, showed the lowest level ofimplementation problems, with issues beingconcentrated more on finding the rightoutsourcing provider, rather than resolvinginternal change management concerns.

“People need to accept that the levelof service they receive will varydirectly as a function of their financialinvestment in the project. That is tosay those that are prepared to investonly a minimal financial amount mustaccept that they will receive asimilarly minimal level of service. Anoutsourcing arrangement should beviewed as a two-way relationship.

Service level agreements are neversimply standardized. Agreements arecustomized for each individual clientdepending on the level of involvementdesired by the client. The client is thenable to evaluate and control thequality of service provided throughimplementation of his ownperformance measurements.”

CFO of a global consultingand IT services firm


Monitoring of providersis low

Once the outsourcing procedure isembedded within an organization, buyershave a surprisingly hands-off approach,with a relatively low level of monitoring ofits performance.

Measurement performance indicators havebeen established for only 58% ofoutsourcing contracts entered into by ourinterview panel, a ratio that seemscomparatively low. Where monitoring is inplace, in the majority of cases a variety ofsources are used, combining in-houseinformation, with provider raw data andinternal verification of outsourcer statistics.

Direct feedback from companies, however,indicates that monitoring within other typesof fragmented organizations, such asinternal shared service centers, dedicatedsubsidiaries or even a structured network ofsubcontractors is even less structured.Such operations typically use a documentedservice level agreement and performanceindicators, but have better strategiccontrol, especially concerning medium-termdecisions and investment strategy.

58%34%

YesNoDon't know

8%

Have you set measurement performanceindicators?

Measurement of performanceindicators


However, the Italian CFO of anaircraft handling services companysays: “The service level agreementsare of limited use and we are thinkingof creating an internal reference foreach of the outsourced functions tomonitor the quality of the service.”

“The only structured information weuse for monitoring purposes are theservice level agreements, defined inthe contracts with service providers.”

Italian CFO of a public sectororganization


...but those that domonitor are generallysatisfied with controls

Of those companies that have establishedtechniques for monitoring their providers’activities, 92% declared they were eithergenerally satisfied, or very satisfied with thecontrols in place. Spain attained the highestoverall score, while business leaders in theUK had the most positive experience (30%very satisfied). The level of dissatisfactionwas minimal, with the only notableexception being the Italian companiessurveyed, where the general dissatisfactionrate was 9%.

Despite the general level of satisfaction withtheir monitoring controls, the majority ofcompanies feel further improvement couldbe made and intend to reinforce theirtechniques and processes for managingservice contracts. This perception isstrongest in France where a full 37% ofrespondents identified a definite intent tostrengthen performance monitoring. UKcompanies, with their identified high level ofsatisfaction, understandably do not feel ageneral need to reinforce the measuresalready in place.

42%

28%

19%

DefinitelyProbablyProbably not

5%6%

Definitely notDon't know

In the future, are you thinking of strengtheningthis control?

Intention to strengthen performancemonitoring

“Companies no longer want to knowspecific details, but to be giveninformation in a way that makes sensefor their processes, so they canconcisely and clearly see the impactfor their business.”

Spanish outsourcing provider

Basis: companies having set performance measurementindicators.

Outsourcingspreads its wings

Outsourcing is here to stay.Further business opportunitiesexist, both in countries withcurrent high adoption rates,where further diversification ofthe process can be expected,and in those countries whereuptake to date is relativelylimited. More customization can

be expected, as contracts arerefined to meet individualcustomer requirements,permitting closer cooperation forclients concerned aboutreactivity and a loss ofautonomy. In addition, moredetailed monitoring shouldenable increased cost savings.


Futuredemandassured

Across Europe, companies continue toforesee a demand for outsourcing servicesover the next two years. A currentrelatively high take-up level is notnecessarily an indicator of a potentialslowing down in business levels forproviders. Belgian companies, 81% ofwhom currently outsource at least onefunction, are top of the list of European

countries with further outsourcingrequirements over the next two years,along with their German counterparts. TheUK, however, where 71% of respondentscurrently outsource at least one activity,has limited plans for further outsourcingexpansion, with only 12% of respondentsidentifying new demands over the shortterm.

0% 10% 20% 30%

European average

Germany

Belgium

Italy

France

Spain

UK

22%

28%

28%

24%

22%

20%

12%

Is your company planning to outsource other/certain functions within the next two years?

Future outsourcing plans:new/additional outsourcing demandsover the next two years(% response rate)

Basis: all.


20% 30% 40% 50% 60% 70% 80%

10%

20%

30%

40%

50%

60%



Humanresources

Maintenancefunctions



Ou

tsou

rcin

g d

eman

d r

ate

over

th

e n

ext

two y

ears

Current outsourcing rate

Key market

Active market

Dormant market

Outsourcing trends mapping

The diagram below maps currentoutsourcing patterns against respondents’identified future outsourcing intentions inan attempt to identify those functions thatare likely to have the greatest potential forproviders. Maintenance functions representthe market with the most outsourcingpossibilities (the key market). Functionsthat currently have a low outsourcing rate,

but are identified as having a high demandfor externalization in the future, shouldprovide strong possibilities for outsourcingproviders. These can be considered asactive market. By contrast, functions withcurrent low externalization rates and forwhich limited future growth has beenidentified represent relatively dormantmarkets.


Future outsourcing intentions generallyreflect current patterns. Functionsidentified as key priorities for outsourcingover the next two years are the same asthose with current high outsourcing rates.Maintenance functions therefore retaintheir position at the top of the list (cited by52% of respondents as likely to beoutsourced over the next two years). Otherfunctions, however, show variations in theirfuture popularity compared with theircurrent positioning. The logistics/distribution outsourcing market appears tobe relatively saturated: although a currentoutsourcing favorite (placed second amongoutsourced functions), significantly fewerrespondents intend to externalize suchactivities in the future (36%).

Similarly the IT/telecommunicationsoutsourcing market is likely to experience aslowing down – this is unlikely to indicate anincreased tendency towards managing suchactivities in-house, rather that the market isreaching saturation.

Additional scope, however, appearsavailable within administrative/financefunctions and human resources markets.These activities, currently relatively low onthe list of externalized functions, are likelyto incite greater interest for the comingyears. As might be expected, the corebusiness functions of product developmentand manufacturing, together with sales andmarketing, remain low externalizationpriorities.

0% 20% 40% 60%



Human resources





52%

49%

38%

37%

36%

25%

16%

What are the functions your company is planningto outsource within the next two years?

Outsourcing demands by functionover the next two years(% response rate)

Basis: companies planning to outsource at leastone function in the next two years.

A more detailed look at the activitiesreveals signs of a transition within theindustry. Outsourcing demand seems to beshifting from ancillary functions to keybusiness, back-office functions. Although along way from representing the intellectualcapital of the organization, these activitiesare more central to business operations.

In terms of specific subfunctions,respondents cited payroll management,accounting, document management and e-

procurement as top of their list of futurefunctions to be outsourced. One of themost remarkable shifts is the fall from favorof IT software and hardware managementoutsourcing. Similarly, the key role inoutsourcing patterns retained bymaintenance functions masks the sharpdecline in interest for externalizing propertymaintenance, while document managementgains in popularity.


0% 5% 10% 15% 20% 25%

Payroll management

Accounting

Document management

Purchase of stationery, e-procurement

Telecommunications management

Administrative staff management

Logistics

Catering

Property maintenance

Telephone operators

Network and server management

Property management

IT software and hardware management

Purchase administration

Automotive fleet

Recruitment

22%

20%

19%

18%

14%

14%

13%

13%

13%

13%

12%

12%

11%

11%

10%

10%



Human resources



What are the subfunctions your company isplanning to outsource within the next two years?

Outsourcing demands by subfunctionover the next two years(% response rate)

Basis: companies planning to outsource at leastone function in the next two years.

In line with the benefits identified by currentoutsourcing experiences, cost savings arethe strongest motivation for futureoutsourcing decisions, regardless of thetype of function to be outsourced.Nevertheless, variations in the importanceof cost savings in the decision makingprocess are evident. In general, the closerthe link between the outsourced function

and the core business activity, the lower theimportance given to the need to reducecosts. Thus, the decision to outsource sales,marketing and communication functions,while being driven primarily by cost savings,is also strongly influenced by the desire toimprove strategic organization, improvequality and drive business growth.


The BPO market has grown significantly,

but continental Europe is a slow adopter

Overall the business process outsourcing

market has grown significantly over the

past five years, with average annual growth

rates of above 25% for finance outsourcing

for example 2. However, this growth is

primarily driven by large North American

and British firms.

Large US-based corporations have led the

rush to adopt BPO, driven by the potential

cost savings offered in offshore locations.

They have moved significant portions of

their business processes to India initially

and then also to the Philippines, China or

Eastern Europe. A number of these

companies started their own offshore

shared services organization in these

countries and later outsourced it.

The European BPO market originated in the

UK; however, companies in continental

Europe have been slower in adopting it.

Regulatory constraints, cultural fit, ability to

manage different cultures, language

capabilities are the reasons often put

forward to explain this.

I believe that continental Europe is now the

next large growth market. Royal Philips set

the tone last year by signing a seven-year

outsourcing agreement with Infosys BPO to

provide finance and accounting and

procurement services to more than 400

Philips organizations across the globe.

BPO Providers have become mature

Thanks to initiatives in North America and

Europe over the past five years, the key

BPO providers have now reached a scale

and maturity level that enables them to

fulfill more promises of outsourcing and

enhance their value proposition. They are

increasingly positioned to support their

customers in improving their

competitiveness through transformation

and automation of their business processes.

Scale enables investments in quality and

technology that most captives cannot

afford to make. Infosys BPO for example,

has training capacity for up to 10,000

students a day, in all sorts of training

courses that support its outsourcing

business in IT and BPO. Quality processes

and recruitment are other examples of

significant investments that require scale.

The breadth of the service offering is now

wide and expanding from traditional

transactional work to higher value added

services including procurement and

knowledge services. Specific business

models can now address the language

requirements that are so dear to

continental European hearts.

As labor arbitrage may not last forever,

BPO providers have to find new ways of

adding value for their customers. The top

players, including Infosys, are investing

heavily in new talents, technologies, and

partnerships to become true transformation

partners for their customers.

It is time for Europe to grow

Competing in the global economy and

having to deal with a strong euro, European

firms need to be more scalable and more

competitive. Cost reduction and

organizational agility are essential for all

European-based companies willing to

compete on the global market. In addition,

the availability of skilled resources is

increasingly becoming an issue in Europe in

many areas including accounting.

Outsourcing is an answer for business

processes that are not core to the

company’s value proposition.

In particular, the market for small and mid-

sized businesses is due to grow very fast.

Some large players with revenues of

30 billion euros and above have created

themselves captive centers offshore. They

were able to do this because they have

sufficient scale, expertise and presence

offshore to avoid outsourcing. We have,

however, seen a lot of these “captive”

organizations moving to outsourcing after a

few years, as they faced investment issues

and could not offer a long-term value

proposition for their offshore staff.

Smaller international companies do not

have the option to start as a captive and will

have to outsource to continue to reduce

their costs and increase scalability to better

seize global growth opportunities.

Why business process outsourcing (BPO) will grow in Europe

Michel de ZeeuwVice president,

Executive Client Partner EMEA,Infosys Technologies Ltd. 1

Insider’s view

1 Global leader in Information Technology services2 Source: Everest Research Institute


Fragmentation: a key rolein future businessorganization strategy

Firms seem to be taking on board theadvantages to be gained from the currenttrend toward fragmentation of thetraditional vertically integrated businessmodel. While outsourcing is the preferredmethod of fragmentation, widespread use ismade of shared service centers, dedicatedsubsidiaries, relocation of certain activitiesand subcontractors.

The preference is for retaining a certainlevel of in-house control over operations,with respondents preferring managementby a subsidiary or a shared services centre(28% and 26% respectively) to carving outcertain functions (12%).

At a country level, there is a markeddifference between those countriesadopting outsourcing and those choosingother forms of fragmentation. While theBelgians feature at the top of the leaguetable for the majority of fragmentationmodes, the French are notable for an aboveaverage use of subcontractors (34%),while their use of outsourcing is below thenorm (63% response rate). Conversely,Spanish companies are relatively in favor ofoutsourcing (77%), but more hesitant intheir adoption of other deconstructedbusiness models.

Adoption rates for fragmentedbusiness models(% response rate)

Interviews with corporations indicate thatthe above modes of organization are alldifferent means of achieving the samestrategic objectives. They are based on thecreation of professional specialized entitieswhich concentrate on their core skills,benefiting from a sufficient level ofdelegation to enable them to be

competitive, while at the same time beingaligned with the strategic objectives of thegroup. In the case of outsourcing, theassociated risks are often more closelymonitored; whereas for the otherorganization modes, the closer relationshipformed between the two entities meansthat the risks are perceived as lower.

Total Belgium France Germany UK Spain Italy

At least one fragmented organization mode 85% 92% 87% 85% 82% 86% 76%

Outsourcing 70% 81% 63% 70% 71% 77% 67%

Management of some function by a dedicated subsidiary 28% 35% 30% 36% 19% 30% 20%

Shared services centers 26% 45% 23% 36% 26% 29% 9%

Geographical relocation of some activities/subsidiaries 25% 42% 35% 15% 29% 33% 14%

Network of subcontractors 25% 34% 38% 21% 34% 19% 8%

Carving out certain functions 12% 20% 14% 4% 9% 23% 15%

Other type of fragmentation 5% 5% 9% 8% 4% 3% 2%

Have you already set up in your company any ofthe following types of organization or are youplanning to do so?


Shared services centers:clear preference fordomestic locations

Respondents planning on setting up ashared services center identify a clearpreference for locating such activitieswithin their own country: over two-thirds(67%) of those surveyed cited a preferencefor a domestic location, compared with 13%for nearshore locations (Eastern Europeand Africa) and a mere 6% for offshore

locations (including China and India).While considerable business expansion isoccurring in these offshore locations,European companies are sending a clearmessage that where close cooperation andsharing of resources is required, proximityis key.

13%

6%

67%

HomelandNearshore (Eastern Europe, North Africa)Offshore (including China, India)

5%

9%

OthersDon't know

What would be your location preferencefor a shared services centers?

Location preferences for potentialshared services centers(% response rate)

Basis: companies having already implemented a SSCor planning to do so.

“German companies are tending toestablish more and more sharedservices functions in Eastern Europe inorder to achieve cost savings and toaccommodate language requirementsfor German and European markets.

However, East Germany and thecapital Berlin still provide acompetitive environment in terms ofinfrastructure, skills, language andcost.”

CFO of a leading German logisticscompany

The preference for proximity is interestingand demands further analysis. Locationdecisions are related to company size andtheir relative positioning down the path toshared services implementation. For a firstwave shared services center (SSC), thechoice is clear with a strong preference forlocal and nearshore operations. However,companies who are evolving an existingSSC strategy, and who entering theirsecond wave, are understandably preparedto look further afield, identifying East-European locations an beyond.


What does the fragmentation of activities

represent?

Fragmentation is a concept that is generally

used in international economics. Its

meaning is simple: it represents a break-up

of production processes – components are

produced in one place, then routed to

another center where they are assembled

to form a sub-system or unit, which is then

transferred elsewhere for a further

assembly step. All without losing the

advantages of geographical concentration

and the associated benefits of critical size.

Hence, we are dealing with a strong intra-

firm dimension.

However, the flows also follow a certain

logic of location: they are dispersed and

broken up according to local constraints

(costs, manpower), regulations, markets

(raw materials, clients), resources,

available skills and production capacities.

The manufacturing economy is therefore

already subject to geographical dispersion

and to complex routing that is relatively

insensitive to the costs of transport per

unit, with the entire production chain

managed by co-ordination centers.

In summary, fragmentation creates flows

and circulation networks. It requires

increasingly sophisticated co-ordination

functions.

Fragmentation and outsourcing of service

activities

Are service activities subject to the same

economic and spatial reorganization? Yes.

Globalization and outsourcing favor the

fragmentation of service activities. Imagine

a service provider that signs a service

agreement with a client located in the West.

The service provider has most of its work

performed in India, for example

(offshoring). Part of its sales and

marketing team is located at the client’s

premises, and teams are based in Central

Europe to deal with emergencies and after-

sales service (proximity or near-shoring).

The services themselves are highly

globalized, with new modes of organization.

The table below gives an idea of the costs

and benefits of fragmentation.

An analysis of fragmentation thus reveals

four dimensions: a) geographical

distancing; b) the multi-polarity of design

and production centres; c) proximity to

decision centres; d) co-ordination and

follow-up of all of these activities.

The production and delivery of elaborated

services, such as the development of

applications or a phase of a research

project, go beyond the company borders

(decision-maker/service provider), national

borders (near-shoring/offshoring) and the

regional borders of vast economic areas,

(exchanges of information and goods,

multi-polarity).

Who is not familiar with the hard disk

defragmentation function on their

computer? It introduces the user to

complexity: on the one hand, an icon or

filename on the screen leads the user to

believe that their files are complete and

fully integrated. On the other hand,

defragmentation implies that one can

reduce the level of dispersion of these same

files on one’s hard drive. What happened?

Saving the files used up the areas remaining

for backup. The system makes a logical

connection between the two, with zero

impact for the user.

Insider’s view

The fragmentation of activities, or how to deal with the mostextreme forms of outsourcing

Bertrand QuélinProfessor of strategyand business policy,Ecole des Hautes EtudesCommerciales (HEC), Paris


Fragmentation and evolution of the role

of management

The economic universe in which companies

operate is characterized by three

phenomena:

1. The increased availability of qualified

labor in new geographic areas;

2. Markets and flows that have become

very significant both in size and in

movement;

3. Networks of trade and resources at a

global level.

With these realities, a new method of

management was inevitable, given the need

to constantly adjust to changes in the

environment. This concerns products as

well as methods of control and guidance.

An increasing level of reactivity is necessary

to ensure the smooth integration of

environmental changes, and incorporate

companies’ new perimeters. The role of

management is thus transitioning from a

move toward concentration, to the

establishment of “concerted networks”.

These “concerted networks” demand not

only an integration of flows and production

centres, but also the need to take into

account the diversity created by distance.

This role of guidance of “concerted”

structures requires several changes in

operating methods and demands the

following decisions:

1. To do the work oneself, contract out,

sub-contract or outsource. Unlike sub-

contracting, an outsourcing strategy

focuses on costs and access to added

value. For these fragmented activities,

organization methods based on

“concerted control” are frequently found

and should become the norm.

2. Which location? To opt for proximity to

the production operation, logistics

functions or the market? Herein lies an

inevitable fragmentation, both in

geographical and cultural terms. How

does one succeed in ensuring the

efficient functioning of externally

managed operations, while retaining a

role of guidance in the management of

operations?

3. What is the impact of technology? How

does one optimize communication

between two points of a fragmented

organization when the exchanges

happen automatically and with an

excessive rapidity? This never-ending

acceleration of exchanges means

management is confronted with an

uncontrolled mass of information. This

can put individuals in a difficult situation

with overly dispersed resources, a real

loss of efficiency, an inability to control

developments, etc.

4. The essential question is: what should

the level of guidance be between the

different locations and/or organizations,

and what type of co-ordination should be

implemented? When and in what form

will the concertation take place?

Structure of the cost and fragmentationof service activities

Service-relatedcosts

Production-relatedcosts

Fragmentation: distanceCosts related togeographicaldistance

Advantages relatedto localization

Fragmentation: controlCosts relatedto weak control

Advantages relatedto internationaloutsourcing


Conclusion

Business organization today is at acrossroads as the traditional verticallyintegrated organization model isincreasingly challenged by a fragmentedstructure that is centrally piloted. Theinformation age is enabling new players toexploit the different stages of the valuechain and new partnerships are coming intoplay as business dynamics undergofundamental changes. In this reconstructedenvironment, opportunities abound, butplayers can also have the feeling of strikingout alone into unknown territory. The onlything that counts is a company’s absolutelevel of competence at each individualstage of the value chain.

Companies are increasingly seekingrecourse to individual segment specialists inorder to maximize their ability to remaincompetitive along the length of the valuechain. The nature of the agreement drawnup between the client and its specialistprovider varies according to the degree ofcontrol the client wishes to retain. Amongthe array of organizational modes available,outsourcing has proved a remarkablypopular tool for a wide variety of businessprocesses.

All the signs are that outsourcing has asound future ahead of it, with its usebranching out to encompass an increasinglywide range of business processes. Forcertain functions, such as maintenanceactivities, the key driver is likely to remainthe search for operational excellence.However, for other functions such as HRand accounting outsourcing, pricing factorswill be outweighed by the search forspecialist skills unavailable in-house.Companies are likely to retain control oftheir core business, which represents theirintellectual capital, but signs are thatbroadening confidence in the outsourcingindustry will lead to its adoption for anincreasingly wide range of businessprocesses as vertically integrated businessmodels are progressively superseded.

Fragmentationincreasingly challenges

vertical integration


Ernst & Young’s outsourcing survey,originally started in France in 1999, aims toevaluate trends in the outsourcing marketand the evolution of stakeholders’ opinions.

Previous surveys have focused on theoutsourcing market in relation to France;our 2008 survey has been extended toprovide a European perspective. Thisenlarged survey sample enables not only ageneral overview of the key trends, but alsopermits a drilling down to compareoutsourcing patterns between differentcountries.

The 2008 survey retains the broadmethodology of previous studies, while atthe same time providing an enlarged surveysample:

1. The countries surveyed were: France,the United Kingdom, Germany, Italy,Spain and Belgium.

2. Over 100 business leaders weresurveyed in each country.

3. To ensure a representative sample,quotas were applied, based on businesssector and turnover.

4. The weighting of each country in theoverall results was calculated accordingto each country’s GDP.

5. Companies included in the survey had aturnover of at least 100 million euros.

6. The executives were interviewed bytelephone at their workplace by thesurvey company TNS Sofres betweenOctober 2007 and January 2008 usingthe CATI (computer aided telephoneinterview) technique.

7. The interviews were carried out in thefollowing languages: French, English,German, Italian and Spanish.

The questionnaire analyzed the entire rangeof potentially outsourced activities:

1. Production.

2. Distribution/logistics/transport.

3. IT/telecommunications.

4. Human resources.

5. Administration/finance.

6. Sales/marketing/communication.

7. Repairs and maintenance.

The telephone questionnaire wassupplemented by qualitative interviews withleading subject matter experts and industrypractitioners across Europe.

Methodologyand sources


Turnover (in million of euros)

<100 7%

100-149 7%

150-499 30%

500-999 11%

1,000-1,500 6%

>1,500 24%

No response 15%

Company status

Parent company 62%

Subsidiary 38%

Number of employees worldwide

<500 21%

500-999 15%

1,000-4,999 27%

5,000-10,000 8%

>10,000 23%

No response 6%

Company quoted on stock market

Yes 29%

No 69%

No response 2%

Sample distribution

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Ernst & Young refers to the global organization of memberfirms of Ernst & Young Global Limited, each of whichis a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provideservices to clients.

Contacts

Thierry MullerFranceTel.: + 33 1 46 93 67 30Email: [email protected]

Richard SandwellUnited KingdomTel.: + 44 20 7951 2116Email: [email protected]

Pedro Arizmendi CarlinSpainTel.: + 34 91 572 74 65Email: [email protected]

This survey was carried out by Ernst & Young, underthe direction of Thierry Muller, with the participationof Paul Wood, Christian Mertin, David Ong,Richard Sandwell, Margaret Mensforth,Andrew Shaylor, Kate Cullum, Mark James,Pedro Arizmendi Carlin, Fabio Laureri, Lena Plas,Sue Litvack, Rudolphe Pennec, Stéphanie Persyn,Sylvie Ferrier and Christophe Matoré.

Paul WoodFranceTel.: + 33 1 46 93 77 22Email: [email protected]

Christian MertinGermanyTel.: + 49 891 4331 13590Email: [email protected]

Fabio LaureriItalyTel.: + 39 066 753 5417Email: [email protected]

Lena PlasBelgiumTel.: + 32 2 774 9564Email: [email protected]

www.ey.com

© 2008 EYGM Limited. All Rights Reserved.0805SG486 - Studio Ernst & YoungPhotos credit: stockxpert.Printed on ecological non-chloride paper.

EYG no. DK0011

This publication contains information in summaryform and is therefore intended for general guidanceonly. It is not intended to be a substitute for detailedresearch or the exercise of professional judgment.Neither EYGM Limited nor any other member of theglobal Ernst & Young organization can accept anyresponsibility for loss occasioned to any personacting or refraining from action as a result of anymaterial in this publication. On any specific matter,reference should be made to the appropriateadvisor.

Tehira ShafiqPress RelationsTel.: + 44 20 7980 0703Email: [email protected]

outsourcing: the rise of fragmentation

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