NextGen Outsourcing Risk 2: Geopolitical & Economic Instability

When the year 2008 began, media reports in India were filled with news about job cuts, salary deductions, and such due to the prevailing sub-prime crisis and expected recession in the U.S. Interestingly, it’s now the second quarter of the year, and the headlines continue. Of course, the impact was severe whether it’s the announcement about cancellation of salary increments at eFunds, a payment-solutions company with an employee base of about 1,500 people in call-center operations in India, or the revelation made by IBM India that based on their performance in aptitude tests, it has asked number of programmers to quit the company. Even though IBM decided to be silent on the actual number of trainees dismissed, the total was estimated to be in excess of 700 across in the country. In another incident this year, TCS announced a cut in variable salary component by 1.5 percent. However, many said that the variables were chopped by 19.5 percent.

In fact, tsunami, flood and drought, are no longer concerns for the sourcing companies because almost all old players in this industry have ready made business-continuity plans to tackle such natural disasters. The main worry now is to make their rehab plan ready for man-made disasters. For example, on December 27th, 2007, when Benazir Bhutto, the former two-time prime minister of Pakistan, was assassinated, the business world was affected badly due to the chaos created after the assassination. At that time, Pakistan, which just started getting all media attention and was being referred to as a potential outsourcing hub, lost its reputation and soon seemed to be in a real mess. The country’s ambitions to provide services to the world were always thwarted because of frequent terrorist attacks; unstable political conditions; and civil unrest against the present government, but Benazir’s assassination pulled the noose on a fledgling industry. It was in 2005 when journalists first began to write about the country’s potential to be developed as an outsourcing hub.

This instance raised several questions — such as will Pakistan ever be seen on the sourcing radar? Will it ever be discussed as an offshoring destination in the forums? Will the country ever be able to prove itself as a potential sourcing hub? — against the Pakistani sourcing industry.

Geopolitical & Economic Instability: Best Practices

Companies must perform significant due diligence with respect to both the suppliers being considered and the countries from which the services are to be provided Among other things, companies must look at the geopolitical risks in the region, the stability of the government, and the robustness of the local infrastructure Companies can mitigate any perceived risk by insisting on geographic dispersion and redundancy of service locations, by utilizing multiple providers and countries, and by emphasizing disaster recovery and business-continuity planning Companies should consider engaging multiple providers, in order to add flexibility Companies must pay particular attention to their service providers' disaster-recovery and business-continuity plans. Source: Mayer Brown

“The best way to mitigate disaster-related risks is to evaluate ways to structure your outsourcing deals such as engaging with multiple suppliers so that if one supplier has difficulty because of natural or man-made disaster, you can quickly shift to another supplier,” adds Masur.

In fact, “if a material risk turns into an actual problem, a company can suffer significant losses. Take data thefts for example. The simple fix would be to recreate in some way the lost data, which if backups are in place ordinarily should not be that difficult. The much more serious issue is the damages that a company could incur,” said Robert M. Finkel, Global Corporate Group, Milbank, Tweed, Hadley & McCloy. “There might be legal liability for disclosure of confidential or private information. And, a company could suffer loss to its reputation, if sensitive or personal information is disclosed.”