Top 10 Risks of Outsourcing and How to Mitigate Them

Outsourcing business processes to BPO firms have been gaining popularity among companies based in developed countries over the last two decades.  It not only aids in escalating the profit by cutting staff & overhead costs but also helps the company to align its focus on the core business activities. When an organization outsources its business processes it tends to climb up the ladder of financial gains as outsourcing to low-cost countries like India aids in saving up a lot of money in terms of staff costs and related overheads. Outsourcing to India is said to reduce the manpower costs by more than 50% and higher in some cases.

Each and every aspect has some pros and cons just like heads and tails being two sides of the same coin. With the advantages of outsourcing services to an outsourcing partner comes the risks which cannot be spurned upon albeit there are ways that can mitigate their impact. Companies with the attitude of “we’ll cross the bridge when we come to it” often face the severity caused by the risks related to outsourcing services. The appropriate management of the said risks is significant as it puts the values of the company at the stake along with a bump on the financial performance of an organization. Read on to find out various risks and the ways by which they can be mitigated.

THE RISKS COMPANIES OUTSOURCING FACE

• DATA CONFIDENTIALITY

Does your outsourcing partner have a well-defined security system?

A company sharing its confidential data with the outsourcing partners has the involvement of high risk. There is a famous saying “an ounce of prevention is worth a pound of cure” which fits in best to describe this risk for the companies. Adding up any extra user to your company’s IT infrastructure puts up the challenge of data breach specifically when the user is based out of any other country than the parent company.

• ALIGNMENT OF RESOURCES

Are your company’s outsourcing goals aligned with the outsourcing partner’s business strategy? The alignment between the prime objectives of outsourcing and the overall strategy of the business ensures the development of a good operating model targeting the client’s requirements.

• LOSS OF BUSINESS KNOWLEDGE

As they say, a little learning is a dangerous thing. It is important that the company makes sure that its outsourcing partner has the required skillset and knowledge required to carry out the project successfully. The assessment of the business knowledge in the required field and make sure that coming up in a contract with them will not hamper their company’s values.

• INTEGRITY

Where the company outsourcing your services does stands on the level of integrity?

With the company sharing its confidential data, it is crucial for an organization to understand that the tower of successfully achieving goals is to build upon the strong base of integrity. It is the responsibility of the outsourcing partner to make sure that there is no misuse or inappropriate disclosure of the data.

• UNKNOWN COSTS AND UNCERTAINITY

The cost involved in outsourcing is like an iceberg.  Companies usually tend to overlook the unknown costs and the uncertainty just like people neglecting the fact that the other part of the iceberg is present beneath the water. The uncertain cost usually consists of the costs that are not tangible along with some other costs which are practically not possible to quantify. While on the other hand there can be some easily definable costs which are not certain. For instance, the outsourcing company can predict the costs in case the outsourcer fails to do justice to the project but the probability of the outsourcing partner not able to do justice to the project is uncertain. Apart from these, there are some costs that can be hidden thus; these can easily be neglected by the outsourcing company which can occur due to the inexperience or analyst’s ignorance.

• LEGAL AND REGULATORY MATTERS

The regulatory bodies are responsible for making sure the smooth flow of the customer’s data have been assigned to manage the risks related to data protection. In the long run, this organization’s major motive is to cut down the list and make sure that it contains only the major players which will be able to serve the markets that are highly regulated. The regulations recommend certain globally recognized certifications for the service providers in maintaining certain standards of doing business.

• TIME ZONE DISCREPENCIES

Outsourcing the services from a country that has a different time zone sometimes adds up to the risk of unsuccessful delivery of the project to the client from the outsourcing partner. This can occur if the partner requires clarification about a certain problem which further can lead to resisting the outsourcer’s work until the required area is well-clarifies by the outsourcing company. In this case, setting up appointments can be a big task too. For instance, in a company, the working hours are quite flexible but despite that where there is difference of 10-12 hours between the customer and the service provider which makes it difficult to schedule a meeting at normal time. In this case, the timing which suits everyone’s timetable is chosen.

• WORKFORCE TURNOVER

The percentage of companies outsourcing their services to India has increased drastically in the last decade. Companies’ lookout for the Indian workforce for their brand-new high profile projects as the employees in India are in high demand among the offshore vendors. These vendors usually quote really low key personnel turnover whereas the essential area to manage is the workforce turnover on an account. The workforce turnover levels are usually placed somewhere between 15-20%

• CULTURE

Despite English being one of the essentials to communicate, its accent and pronunciation largely vary a lot. Various companies provide culture training to their outsourcing partner in order to make sure that there are no discrepancies and the key personals are able to carry out their tasks without any said difficulties. For instance, a company outsourcing the call center services from another country will provide cultural training to the workforce like what is the best way to give the answer when a customer brings up any question and to make sure that the personals are well acquainted with the customer’s culture. It is important for companies to not neglect the importance of cultural training sessions.

• SCOPE GLIDING

What are the chances that your outsourcing partner will deliver the project to the client as promised? Clearly, no certainty of the successful completion of the project. Due to the uncertainty of the project being effectively and efficiently finishing up, there is no fixed contract between the outsourcing parties. In case the client is not satisfied with the delivery of the project or finds out any discrepancies, they tend to pay the difference. Usually, there is a probability of almost 15-20% that the current project which the outsourcing partner is working on might change during its developmental cycle. 

WAYS TO MITIGATE THE RISKS

• Companies tend to create a list of all possible valuable outsourcing partners. During this step of the casting of the outsourcing partner, it’s important for the company to analyze the financial position of the outsourcing company and in case there is any uncertainty relating to the finances, the name of that company should not be included in the shortlisted finalist’s list.
• Both the outsourcing company and the outsourcing partner should have a clear understanding of the rules and regulations related to working with the service provider in order to make sure that the compliance is unified into the processes which will be outsourced and the operations at different stages of its lifecycle.
• Feedback from the ex-clients of the company goes a long way. This allows you to peek into the positive and negative aspects of outsourcing services to that particular company.
• Walking through the social media account of the company allows you to take a glance at the presence of the company in various social events.
• Inspecting the company’s website always adds up to the current information available about the company. The website sometimes might donate to the situation of getting in or out of the contract with the outsourcing company.
• While outsourcing companies can create common workplaces that will help the workers from around the globe to connect, engage, and elaborate in order to deliver the project effectively and efficiently. There a variety of cloud tools like Google drive available which can be used to allow the workers to collaborate to edit and work upon the project. It’s important that the communication between the team remains open and transparent.
• The workforce turnover levels are placed somewhere between 15-20% while making sure to prepare contractual terms near the required level which are regarded as a reasonable request. The result of high turnover is claimed to have an indirect cost on the organization due to which the organization should aim to put more emphasis on increasing the total time spent training new individuals and transfer of required knowledge.

References:

1. https://deloitte.wsj.com/riskandcompliance/files/2014/03/Outsourcing-risk-considerations_mitigation-strategies2.png
2. https://www.csoonline.com/article/2117420/top-10-risks-of-offshore-outsourcing.html
3. https://cdn.ttgtmedia.com/searchSecurity/downloads/Axelrod.pdf
4. https://indiarep.co/advantages-and-disadvantages-of-outsourcing/