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| Sunday, June 01, 2008 | |
| Five Most Popular Outsourcing Risks | |
| As the practice of outsourcing matures, new risks would emerge. Some call it next generation outsourcing risks. A relook at the topic of managing risks in an outsourcing engagement | |
| Imrana Khan | |
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 In 2006, Barclays Bank, which had outsourced its services to 14 key service providers, announced its plan to establish a specialist audit team to control and manage outsourcing risks. The audit team was also responsible to respond to situations like a key service provider going insolvent or the company getting locked in a dispute with the provider.
The bank’s move immediately caught the sourcing world’s attention. However, what Barclays Bank did is not anything very unusual. It was a move that is essential for next generation outsourcing: Engagements that entail more strategic relationships and models such as ‘multisourcing’ to make their business cost-effective and successful. Globalization has not only spawned several new business and economic issues that many of us may not even be aware of, but has also helped in defining risks in the outsourcing space clearly.
 “I recently advised a company that had failed to control the extent to which their provider was permitted to sub-contract services, and then went very close to sustaining significant losses as the sub-contractor sought to conduct some routine maintenance on services that would have led to severe business interruption for the customer. Retaining control of the services that are outsourced is critical to minimizing the risk of the deal failing.”
Peter Brudenall, Partner, Global Technology and Outsourcing Group, Hunton & Williams
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 “In part, customers can mitigate these risks through due diligence on the provider, as well as the jurisdiction from which the vendor will perform the services. The other way the customer can mitigate risks is through strong contractual provision in the agreement.”
Robert M. Finkel, Global Corporate Group, Milbank, Tweed, Hadley & McCloy
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 “I would not say that because of the risks associated with outsourcing companies should not opt for it. I would rather say, the key is: Doing it the right way.”
Daniel A. Masur,
Partner, Mayer Brown
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“At a macro level, risks in outsourcing are often defined as the potential for the relationship to break down, leading to reputational damage and replacement services having to be procured or services brought back in-house,” defined Peter Brudenall, Partner, Global Technology and Outsourcing Group, Hunton & Williams. “As a business model, outsourcing has a disproportionately high failure rate, often arising from a lack of alignment between the expectations of the customer and the service provider; a lack of appropriate due diligence by the customer on the service provider’s business; or a failure by both customer and service provider to manage the service delivery effectively. At a micro level, there is also the potential for problems such as security failures, poorly delivered service leading to damage the reputation or the failure to achieve cost savings — all of which are clearly risks that need to be managed as part of the contractual process as well as the governance framework between the parties,” he added.
The next generation outsourcing relationships require robust plans to mitigate such risks. Barclays’ plan to establish an audit team is one of the smartest proactive measures taken by any customer to mitigate risks and to counter threats related to outsourcing. Unfortunately, there are many instances when most of the companies forget to take any proactive steps. As a result, they leave their businesses on a fatal edge. Here are the most pertinent risks in next generation outsourcing:
NextGen Outsourcing Risk 1: Reputational Damages
When a company decides to offshore its jobs, one can expect unwanted chitchat around the decision. And, as the outsourcing relationship — as well as the industry — gets matured, the frequency of rumors making headlines are no less. The most recent one being CBS’ plans to outsource its news gathering operation to CNN. After a day, the company denied the news. But the good thing in this case is that CBS didn’t get hurt.
| Reputational Damages: Best Practices |
- While it is inevitable that the outsourcing initiative will ultimately become public, companies may wish to avoid unnecessary publicity because it often tends to be unfairly negative
- Companies must be sure that their senior executives are supportive of the outsourcing initiative and are aware of the possibility of negative
publicity and employee reactions, so that they aren't caught by surprise when the information leaks out and don’t back away from the project in the face of criticism
- Companies must have internal and external communication plans developed ready-to-execute so that they can proactively manage the flow of information
- Companies should keep their employees informed so that rumors don’t lead to unnecessary reputational damage and employee unrest.
Source: Mayer Brown
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Unfortunately, such rumors not only leave the company awry, but they can also affect their earnings, stock prices, and valuation. For instance, in the beginning of Q2 ’08, a rumor that negatively affected the stock prices of one of India’s leading service providers, Wipro, was badly hit by rumors of mass exodus amongst its top brass. This resulted in a near 2 percent decline in its stock price. Other than the newly promoted joint CEOs, nearly every senior management officials’ names were bandied about. Eventually, the rumor became more serious for the company.Practically, “companies have to understand what they are doing should be in public knowledge because now even the politicians in the U.S. are well aware of the importance of outsourcing to low-cost destinations for the non-core functions. Even they don’t want to interfere with that. So, there is no harm in making things public. However, companies should try to avoid unnecessary publicity, which is unfortunately tends to be unfairly negative,” said Daniel A. Masur, Partner, Mayor Brown.
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