Why change anything if there is no financial benefit? The financial return on investment (“ROI”) needs to justify the sourcing strategy. Financial metrics address more than just ROI.
In developing the financial justification for any outsourcing, the enterprise customer needs to understand its “base case” of existing financial parameters and bottom line for costs and related profitability of in-sourcing. The “base case” requires activity-based costing and evaluation of the “economic value added” (“EVA”) that the particular process contributes to the organization’s financial results.
Financial metrics typically reflect measures of outcome (absolute bottom line costs or profits) or efficiency (ratios of outputs or profits to inputs).
Depending on the nature of the relationship and operational factors, outsourcing contracts may include financial metrics other than a pricing structure. In such event, though, the service provider’s willingness to subscribe to such metrics may depend on its ability to control or otherwise restrict the volatility of the relevant financial metrics.