Business Outsourcing Risks

There are certain business outsourcing risks when companies decide to let another company take care of their business operations. When companies make a decision to outsource some of their services to an outsourcee, they have basically concluded that their companies are better off letting someone else do the job for them. Although their assumptions may be true when we look at specific benefits, it may not be true when we look at the entire picture.

Data protection and business risks of outsourcing business functions and services

There are sometimes good reasons to outsource which we will cover later, and companies may outsource some business operations such as customer service or call centers, certain aspects of their system security management specially if the outsourcee offers independence and state of the art technology, IT operations, marketing, etc. However, outsourcing decisions are sometimes based on myths and lack of awareness of the risks. A myth is a false belief and there are a few of them when it comes to outsourcing business operations.

Outsourcing Myths

Myth #1) We will save money – this is actually far from the truth when we look at the big and entire picture. What happens when you decide to bring the outsourced process or function back in-house one day? You will incur huge costs associated with hiring, training, and productivity, that is if your outsourcing contract allows you to easily reverse your past decision and, if the other company supports your decision since they have no incentive to cooperate.

Myth #2) It’s less headache for us – the reality is that when it comes to outsourcing, less is more because when  you have less control over the process, you have more problems and less flexibility to address those problems efficiently and effectively. Remember, when you outsource, you are at the mercy of the other company to solve your problems and manage your risks. The risk significantly increases when the outsourcing company directly deals with your customers and appears to be an extension of you in the marketplace.

Myth # 3) They have better skills – this may be true and is often the basis for outsourcing thinking that they can do a better job. But, it comes at a cost. Your company can also hire and retain the best skilled staff at a higher cost. Nothing is free and some skills like IT are even more expensive no matter who employs them.

Business Outsourcing Risks

Risk #1) Service Level Agreements or SLAs may not be clear enough – sometimes there is a lack of understanding regarding service agreements or responsibility assignments. Roles and procedures may also not be clear or properly defined and communicated. This can lead to a complete breakdown in the business operations initially and slow recovery in operations efficiency and effectiveness which can take months and years affecting productivity and morale which is another component of business outsourcing risks.

Risk #2) The outsourcing project may be poorly planned – one of the consequences of poor planning is fully trusting the outsourcee and letting knowledgeable employees leave the company before their knowledge is adequately transferred. This cost saving error ends up in service delivery delays in the short run and costing companies even more in the long run.

Risk #3) Lack of control over outsourcee staff – usually, firms have bad apples in their pool of employees for good reasons; to bring costs down and not be detected while doing that. When we have control over staff, we can tie their job retention to their job performance but not when the staff is an outsourcee employee who may also be overworked and engaged in serving other customers with or without your knowledge. Remember, the outsourcee objective is to make money by serving as many clients as possible. And when they have too many clients, they can take the risk of losing one client for poor services.

Risk #4) Contracts may not allow early and easy exit – can you imagine waking up one morning, realizing that your company has made the mistake of outsourcing some functions, and yet also realize that you can not easily reverse your decision while the service renewal contract is staring you in the face? If you discover early on that you made the wrong decision, you may be obligated to abide by the contract and even when the contract ends, it will be a huge undertaking to bring the task back in house depending on the scope which will require the cooperation of the outsourcee which will have yet another opportunity to squeeze in more money.   

Risk #5) Transition back to in-house is costly and can take time – remember the myth about saving money on labor cost when your company first decided to outsource? Now think again about bringing the outsourced functions back in house with the unimaginable cost of re-hiring skilled staff and training. That is if your company reputation is still good enough to attract past or new employees. Having an exit strategy is and should be part of the plan for managing business outsourcing risks.

Risk #6) You may be liable for data breach – if you are sharing personal and confidential data with the vendor as part of the outsourcing arrangement, the vendor may sell or use the data for other reasons, and, may not protect the data as well as necessary to comply with the regulations. If the vendor experiences a data breach, your company will be liable and suffer the consequences as noted in risk #7. To reduce the data security and compliance risks associate with business outsourcing, Henry Bagdasarian, founder of Identity Management Institute suggests that companies establish solid data protection SLAs with their vendors and require independent audit reports to confirm compliance with the SLAs and appropriate regulations.

Risk #7) Your company reputation may be at risk – depending on the type of function outsourced and its nature, the outsourcee can be viewed as an extension of your company which can either directly affect your image if they interact with your customers, or, reflect poorly on your outsourcing decision and planning if they don’t perform well.

On the bright side, outsourcing is not all that bad and it may even make sense in some cases. For example, outsourcing is a great option when the skills needed for the project are not immediately available in-house or the skills needed are just temporary, part time, or for a special project which means that you can easily change vendors or bring the function back in house if needed. Managing business outsourcing risks is critical from the start which includes a complete risk assessment and oversight of the vendor and the project.