Outsourcing is a business practice of hiring a third party to perform services or create goods that otherwise could be performed in-house by the company’s existing staff. This applies to a wide range of industries and use cases. Examples include marketing efforts, software development, part manufacturing, and more.
Within the scope of risk management, its important to fully understand what outsourcing brings to the table in terms of benefits and risks so that you can properly evaluate its position within your organization. Below, we highlight some of these major considerations.
The first thing to mention is that there are different classifications of outsourcing based on the location of the third party, each having its own benefits and risks. These include:
- Local Outsourcing – contracting a provider within the same country as your business.
- Nearshore Outsourcing – contracting a provider in a neighboring or nearby country.
- Offshore Outsourcing – contracting a provider far away, often in another continent.
There are also different kinds of outsourcing dependent on what is being outsourced. This also needs to be considered when calculating risk, and carries different levels of impact for each organization. These types typically boil down to:
- IT Outsourcing – web development or hosting, database management, help desk, infrastructure.
- Operational Outsourcing – outside personnel utilize internal servers, software, machines.
- Project Outsourcing – blog posts, website redesign, software feature development, campaigns.
- Process Outsourcing – payroll, social media marketing, accounting, customer support.
- Manufacturing Outsourcing – part manufacturing for physical goods.
- Professional Outsourcing – accounting, administrative support, purchasing, legal.
Benefits of Outsourcing
Outsourcing started to become popular in the 1970s and has grown to standard practice today due to its numerous benefits. Collectively, these benefits help an organization to grow and prosper more than it would be able to on its own. These largely boil down to the simple factor of finances and how outsourcing can reduce costs. Outsourcing cuts labor costs in the form of employee salaries, equipment, technology needs, office spaces, etc.
In addition to extra finances, outsourcing allows company executives to spend more time elsewhere, focusing instead on improving core tasks, developing internal staff, and planning growth. In addition to internal focus, you now have access to whole new skill sets through outsourcing. Utilize this to innovate and excel beyond competition.
Risks of Outsourcing
Despite the benefits of outsourcing, there are various risks to be considered. This is not meant as a deterrent to utilizing outsourcing, but rather information to help create awareness of how to best utilize outsourcing and prevent unnecessary risk.
One of the largest risks organizations face is the lack of control over processes and services that are no longer internally managed. This is especially true for organizations that are offshore outsourcing, or outsourcing to a location that is beyond in-person audits or walkthroughs. You then have to verify that your new partner is compliant with all regulations and contract terms, which can be a difficult task at a distance. Privacy and security concerns must be addressed ton confirm that your and your customers data is properly protected. Any data that your partner has access to is at risk and can create a vulnerability in your own security efforts as well.
Other risks include a vendor simply failing to meet obligations. You could have completed all due diligence in ensuring that you would not have any issues with outsourcing, and yet your partner simply fails to deliver what was expected or has delays. Your customers do not hear excuses and will blame you if the delays trickle into their experiences. This holds true for issues with quality as well. Ultimately, risks with third parties are going to be risks faced by your own company.
In order to complete this outsourcing process, there are also some challenges that will have to be overcome. This includes unforeseen costs in your agreement or onboarding process, such as any training time, software upgrades, troubleshooting, after-hours service if you don’t have a 24/7 support agreement, etc. To help combat this, make sure you plan for possible issues, thoroughly review your contracts, and leave room in your budget for unforeseen circumstances. You will also face challenges vetting potential partners. This includes performing audits that determine if your outsourcing to an organization that is financially stable, appropriately secure, has the necessary equipment and staff to fulfill obligations, and is excited about working with you.
Managing Outsourcing Risk
The key focus of managing outsourcing risk is communication. Many issues can be resolved by setting clear deadlines, expectations of business, and conveying any unsatisfactory performance so it can be remedied. This involves establishing communication between key staff members of the outsourcing company and a management team internally.
Draw up an airtight outsourcing contract that has been reviewed by a legal team to ensure you’re protected. This includes an NDA for any confidential information the outsourced partner may become privy to.
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