The numbers don’t lie: Organizations with highly effective globalization strategies also report greater revenue growth and shareholder value.
We’ve all heard stories about how the most successful companies are the ones that have successfully leveraged services globalization. In fact, my past seven columns were about how to be a successful globalizer, and how being a successful globalizer is now a business imperative.
But what evidence do we really have demonstrating that successful companies are successful globalizers?
neoIT recently set out to answer that question. Our researchers gathered information about companies’ performance on three financial metrics: shareholder value, profitability, and revenue growth, as well as information about each company’s level of offshore activity. Mapping companies’ performance data with their offshore activity data, we were able to confirm what we’ve long believed: The most financially successful companies are engaged in higher levels of services globalization than less successful companies.
Specifically, four powerful conclusions can be drawn from the research:
• A large majority of Fortune 500 companies are engaging in services globalization. Of the Fortune 500 companies that we analyzed, more than 80 percent have engaged services globalization to some degree; that group is led by the technology and banking, financial services, and insurance (BFSI) industries, where more than 90 percent of companies have engaged services globalization. Companies in the infrastructure industry have the lowest levels of globalization engagement overall, with only 74 percent of companies engaging in services globalization.
• Companies that globalize services create more value for shareholders than companies that don’t globalize. To test the performance of globalizers versus non-globalizers on shareholder value creation, we compared the neoIT SGI (Services Globalization Index) of the 30 most globalized companies against the S&P 500. Companies in the neoIT SG Index reported a 41.3-percent increase in shareholder value in 2004 and 2005, compared with a 13.1-percent increase for companies in the S&P 500. In other words, companies highly engaged in services globalization increased shareholder value three times more than companies in the overall market.
• Companies that globalize services are more profitable than companies that don’t globalize. In 2005, profitability at companies highly engaged in services globalization was 15 percent, compared with 6.5 percent at companies that are not engaged, or engaged at a very low level. Especially in industries where profit margins are razor-thin, a 9.5-percent profit difference can put a company above the competitive edge, or far below it.
• BFSI companies that globalize see higher revenue growth than BFSI companies that don’t globalize. While our research findings of increased shareholder value creation and improved profitability held for active globalizers in all industries, our finding of higher revenue growth for companies that are highly engaged in services globalization held only for the BFSI industry.
It also makes sense that companies in the BFSI industry would be the first to realize that positive correlation between globalization and revenue growth because many early adopters of services globalization fall into that industry group. Yet the fact that BFSI has been the first industry to see increased revenue growth alongside successful globalization doesn’t mean that other industries can’t do the same.
While neoIT’s analysis focused on large firms—Fortune 500 companies—services globalization can benefit smaller firms as well. Among all sizes of companies, I expect to see firms becoming more sophisticated about services globalization and leveraging it to a greater extent in the near future. Firms in the banking, financial services, and insurance industry—already services globalization pioneers—will lead that trend.
I also expect that as more companies begin seeing the tangible financial benefit of engaging services globalization—the kinds of benefits I’ve pointed out here—top management’s interest in services globalization will increase dramatically. As that evolution progresses, I expect to add another tier to neoIT’s services globalization maturity categories: very high. Today no company has perfect globalization strategy, but there are a number of top 100 companies that may soon graduate to that level, the level of the truly mature global organization.