Risk Areas in Outsourcing

Outsourcing can be defined as giving contracts out of a business process to a third-party. Outsourcing sometimes involves transferring employees and assets from one firm to another. Outsourcing can be either foreign or domestic and sometimes includes offshoring or relocating the businessto some other country.Outsourcing can turn out be an effective cost-saving strategy if used properly. It is sometimes more affordable to purchase a commodity from a different company with comparatively less cost than it costs the firm to produce it internally.

By adopting Outsourcing the organizations has more opportunity to gain efficiencies, improve its performance, lower the costs, and focus on core competencies and functions. But many companies fail to keep a check on the outsourcing front and as a result of the negligence the business may start to suffer losses. Successful outsourcing is no different from any other business relationship — it requires nurturing and management of both the parties. It is important that both the purchaser and the supplier involved in the outsourcing processes understand each other’s expectations and focus on maintaining a strong communication. Regular monitoring and reporting is required. The organization needs to carefully consider the risks involved in the outsourcing engagement and perform necessary up-front planning in advance of vendor selection. The internal auditors play an important role and they make sure that the risks have been addressed to see that the necessary steps have been taken to ensure the outsourcing relationship is successful. The key risk factors are as follows:

Security/Confidentiality of data – The organization should be very careful about the confidentiality and security of the data. The responsible people should take care of some things to ensure the security and confidentiality of data like:

• Access to all information is limited or not
• Is every storage location know if the data is stored at the vendor side
• What controls and security practices does the vendor need to enforce for assurances that critical information is handled appropriately?
• How does the vendor handle sensitive information

Reputation of the Firm- When a problem occurs, it will be the organization and not the outsourced firm who will have to bear the responsibility no matter where that problem lies or who created it. If the organization has staked its reputation on exceptional customer service and satisfaction then it should consider how these areas might be affected when direct control is outside the core business. When providing back-end processing, the provider can access the customer data on the organization’s behalf which can be harmful if not tracked properly. In such cases, the customer agrees to a relationship with the organization and so the reputation is on stake

Strategy for Outsourcing – The outsourcing process should meet the company’s objective for the process to be successful. The process should comprise of back-office activities and be performed by a vendor with greater expertise and resources, so the outsourcing may allow the organization to focus on its core strengths. If it involves a key business process, those responsible for the decision need to understand how outsourcing fits with company strategy. The organization needs to determine the level of training and management that may be required to make sure the outsourced process works effectively and continues to support the strategy.

Organizational Structure and Composition – The organization’s structure, size, and staffing play a critical role in the success of an outsourcing relationship. We should find a vendor who can react to critical situation quickly. However, this same nimbleness of response can be detrimental if solid controls and activity reporting are required for regulatory purposes, as the vendor may compromise in these areas to achieve efficiency. In addition, differences in internal reporting structures between the company and the outsourcing provider can lead to long-term conflicts if not recognized and addressed early in the process.

Key Processes for Outsourcing process – A key process is one which is central to the services for all business delivers and that has a direct effect on organization’s success or failure, such as transaction or claims processing. There are many potential advantages if we outsource to a BPO, like improving client service, turnaround time of tasks, and profitability. Outsourcing helps the company to focus on more strategic objectives and allow the BPO to handle day-to-day processes. The potential risks is when outsourcing a key process are greatly increased because the outsourcing company has a significant amount of control over how that service is to be delivered to the customers.

About Author:
Shailesh Nambair  is consultant and part of Systems Plus Pvt. Ltd. think tank. He actively contributes to information technology and VMO. He can be contacted at: shailesh.n@spluspl.com