Is outsourcing profitable?

After a couple of months announcing new contracts, extended deals and additional maintenance outsourcing projects; Transfield Services Ltd  has recently booked a 25% drop in profits. They maintain that they can achieve in the lower end their initial year end targets provided the economy doesn't deteriorate any further.

There doesn't seem to be much chance of that.

I worked for Transfield before they had their IPO and as such I have followed their performance and their growth. And one thing it has shown me is that if you think outsourcing contractors make healthy profits - think again! .

In a piece in the Wall Street Journal Transfield noted that the US economy was very tight which was having a dramatic impact on their bottom line. And analysts are quick to point out that the Infrastructure Fund has been a draw on their P&L also. From their share price you can see  that their stock took a downward turn at the same time as everyone else.

So that alone is probably not a good measure of their future viability, or of the continued trend towards outsourcing. But have a look at this.

Transfield runs a profit margin of around 2 - 3 %. So for all the revenue, all the people, all the work, sales and contracts that they are winning - they make $2 on every $100 dollars they spend. No wonder they need large scale contracts to maintain afloat. 

This is no unusual for maintenance providers. Some other examples from listed companies would include MasTec  - under 5% and Programmed Maintenance Services  - under 4%.

As always the big winners in the outsourced deals are the companies who are their clients. Increased access to specialist expertise, reduced costs, increased efficiency and a hands off approach to HR and industrial relations mean that there will be no end of opportunities for these listed companies to continue making their <5% margins.

But if things get much worse then they may release yet another wave of skilled crafts people and technicians onto the market.