"Exporting jobs is not without its risks for a corporation's relationship with its client base as well as its profitability."
Newsday, 12/21/03: A Growing Export: White Collar Work. But Outsourcing Risks Seen; Some Jobs Return
Seeking to reduce costs and/or improve efficiencies and thus improve their competitive position, many American-based companies are outsourcing part of their operations to vendors located in emerging markets. However, the risks associated with outsourcing can be considerable and frequently are unappreciated when the decision is made. Oftentimes, they are based solely on financial considerations that may appear enticing initially but sour after the outsourcing engagement has commenced. In fact, according to the Gartner research firm, corporate satisfaction with outsourcing deals is running at approximately 50 percent (gartner.com 11/3/2003). Why the mixed results?
Decisions to outsource operations often fail to consider a variety of factors that can become crucial to the overall success of the effort. These include the political stability of the host country and the development level of communications and infrastructure there, employment practices, the legal structure of the host country, possible language barriers, and the ability of the outsourcing company to monitor work product to assure quality and production standards. Making a decision to outsource without fully understanding these risks ultimately can prove costly.
"Adapting to the India effect will be traumatic, but there's no sign Corporate America is turning back."
BusinessWeek Online, 12/8/03. The Rise of India
Today's business operations are highly complex, involving intertwined networks that reach beyond the four walls of an organization. Organizations are heavily dependent upon the smooth operations of other companies as well as different internal resources. Outsourcing all or parts of a company's operations adds to this complexity — and increases associated risks.
As executives consider outsourcing strategies, or re-evaluate their current outsourcing arrangements, they should be asking themselves questions such as:
- Are outsourcing decisions conducted at the strategic level or are they siloed within our organization?
- Have we identified all of the possible risks associated with outsourcing and determined the financial impact of each?
- Have we based the decision to outsource solely on financial considerations?
- How do we select our outsourcing partners? Do we have the tools and knowledge to successfully manage our outsourcing relationships?
- Do we understand the implications to our supply chains if and when any of our suppliers move to an outsourcing model?
- What is the status of our outsourcing partner's business continuity plans? What is their contractual obligation to us in the event their business is interrupted?
- How do our business continuity plans interface with our outsourcing partners? Are our outsourcing partners fully compliant with the regulatory requirements that impact us, such as FFIEC, HIPAA, the Sarbanes-Oxley Act, etc.?
- Do we have a contract in place with our outsource provider that provides a degree of assurance that our needs will be met in the event of a disruption?
- How will the decision to outsource be perceived by employees, customers and stockholders?
"The math of looking only at salaries is just wrong. And it is a prevalent misconception."
Joseph Feldman, Gartner Analyst. The New York Times, 12/22/2003, Offshore jobs in Technology: Opportunity or Threat?
To help assess the relative merits of outsourcing, executives should consider the following services to help deal successfully with the risks associated with outsourcing:
Business Risk Consulting — Identify, prioritize, and assess critical enterprise-wide business risks associated with outsourcing to ensure an effective corporate-wide strategy. Assess the long-term viability of your partners and try to identify potential conflicts of interest.
Supply Chain Risk Consulting — Identify critical risks that impact your ability to produce or deliver products to customers and develop strategies to help minimize, transfer, or eliminate potential supply chain disruptions.
Business Continuity Management — Identify risks, quantify their potential impact, and develop recovery and restoration strategies to help ensure business continuity. Assess the business continuity capability of your overseas partners and determine if they are sufficient.
Risk Technologies — Develop technology and provide related services to help companies reduce the cost of risk associated with outsourcing and improve overall risk management strategies.
Strategic Risk Communications — Develop effective strategies to communicate to internal and external audiences.
Marsh's Risk Consulting practice has the tools and solutions to assist you in proactively assessing the costs and benefits associated with outsourcing.
If you have any questions or would like additional information, please contact us.
