Outsourcing risks and control measures
The Deloitte Global Outsourcing and Insourcing Survey report (2014) shows that the outsourcing market is expected to grow in various dimensions such as functions, services and locations. Geographic barriers are being broken down by technology, and service quality is being enhanced by close collaboration between outsourcing suppliers and buyers.
The primary motive for outsourcing has long been cost savings. But outsourcing increasingly offers scope for greater focus on one's own core competencies, improving competitiveness and decisiveness, and access to new products, (market) knowledge, expertise and innovations (Deloitte, 2018).
The possible disadvantages for the buyers of outsourcing services are seen as the loss of their own innovative capacity, providing the supplier with access to intellectual property such as detailed knowledge of the products, possible issues with regard to maintaining the level of product quality, and higher overhead costs that have to be passed on to the products and services that are left behind, which leads to lower margins and could possibly lead to the outsourcing of even more products and services.
Entering into an outsourcing relationship comes with risks, for example, with regard to the mutual relationship and service quality. These risks need to be managed in order to make the partnership a success and realize additional benefits on top of cost savings. This management focuses on two main categories: managing the partner and managing the collaboration.
An important reason for managing the risks associated with having a collaboration is that not all problems can be foreseen in advance and therefore not all can be mitigated in advance with measures.
Anderson et al. (2014) argue that risk management capabilities are critical to the success of the outsourcing collaboration. In this regard, management controls are considered the primary mechanism for managing these risks in which aligning the interests of the partners, and coordinating actions across the boundaries of both organizations, are key elements (Anderson et al., 2015).
In their comprehensive research study, Anderson et al. (2014, 2015) identified 19 alliance risks, 18 of which may be applicable to an outsourcing relationship. These risks are listed below:
Case study
What are the main risks associated with an outsourcing relationship? And what control measures are desirable with those risks? Based on a 2015/2016 case study within the financial services industry, these questions are answered. Here, risks and control measures are highlighted from the perspective of both the supplier and the buyer of outsourcing services.
Key risks
The case study shows that the main risks (in decreasing importance) associated with an outsourcing relationship from the combined perspective of the supplier and outsourcing service buyer are: Quality performance; Compliance & regulatory; Innovation; Product/service failure; and Verification & evaluation.
Key control measures
The main control measures (in decreasing importance) deployed in an outsourcing relationship, from the combined perspective of the supplier and the buyer of outsourcing services are: Trust between partners; Contractual performance measures; Provide/require SAS 70/ISAE3402 report; Standard contract terms; Interactive feedback between partners; and Methods for managing contract failure.
The key control measures deployed for multiple risks from the buyer's perspective are: Standard contract terms; Trust between partners; Methods for managing contract failure; Ongoing review of nonfinancial performance measures; Exit clause in contract; Announced audit Require SAS 70/ISAE3402 report, and Segregation of duties within the alliance.
Mix of measures
It is clear that both partners want a combination of controls that are in place prior to the conclusion of the outsourcing agreement (ex-post) on the one hand and controls that are in place after the conclusion of the outsourcing agreement (ex-ante) on the other. In addition, it is also clear that it is a combination of hard and soft controls.
Based on the results of the case study, a risk-control framework can be established of the five main risks from the combined perspective of the supplier and the buyers, with the related control measures from the suppliers and from the buyers.
The above results support the management of both parties in deciding which combination of control measures best suits the risks of the outsourcing relationship while doing justice to the interests of both parties. Management thus has a clear guideline for discussing and designing risk management as part of the mutual cooperation in both current and future outsourcing relationships.
drs. Arie Pronk RA RC RE EMFC CIA CISA
Alúmina GRC
Bibliography:
- Anderson, S.W., Christ, M.H., Dekker, H.C., & Sedatole, K.L. (2014). The use of management controls to mitigate risk in strategic alliances: Field and Survey Evidence. Journal of Management Accounting Research, Vol. 26(1), 1 - 32.
- Anderson, S.W., Christ, M.H., Dekker, H.C., & Sedatole, K.L. (2015, April). Do extant management control frameworks fit the alliance setting? A descriptive analysis.Industrial Marketing Management, 46, 36 - 53.
- Deloitte Development LLC (2014); Deloitte's 2014 Global Outsourcing and Insourcing Survey: 2014 and beyond.
- The Deloitte Global Outsourcing Survey 2018: Disruptive outsourcing trends, technology, and innovation Retrieved from https://www2.deloitte.com/us/en/pages/operations/articles/global-outsourcing-survey.html
- Hansen, Z.N.L. & Rasmussen L.B (2013, December). Outsourcing relationships: Changes in power and dependency. European Management Journal, Vol. 31(6), 655-667
- Rajan, R.S. & Srivastava, S. (2007). Global Outsourcing of Services: Issue and Implications. Harvard Asia Pacific Review - Governance in Asia, vol. 9(1), 39 - 40. Retrieved from http://www.hcs.harvard.edu/~hapr/winter07_gov/rajan.pdf