For many businesses the decision of outsourcing is made off the back of process redundancies and inefficiencies that adds to runaway overhead costs and the fact that the areas to be outsourced normally detracts attention from core business activities. Although there are many benefits to outsourcing, managing the risks associated with outsourcing remains with business, who has the responsibility to oversee the outsourcing contract.

The mitigation strategies for the following outsourcing risks needs to be considered:

Risk

Loss of control

Risk Description

Loss of control over the company’s / business unit’s own process technologies and quality standards

Risk Drivers

Ambiguous work specifications / scope
Geographical locations
Service provider staff resourcing

Risk Consequence

Poor quality, disrupted production schedules, contractual disagreements
Loss of innovation
Impairment of innovation strategies
Service Provider staff qualifications
Corporate culture
Long standing cooperative work patterns are interrupted
Loss of organisational
trust
Loss of organisational trust due to uncertainty as to which functions/departments are to be outsourced next
Employer-employee relationship
Lack of transparency / communication with staff
Conflicting loyalty of employees displaced into an outsourced organisation
Cost of outsourcing risk
Higher-than- expected transaction costs as well as unknown costs
Known costs captured by the accounting system
Other decision-relevant costs and benefits not part of the accounting system.
Tax consequences
Repatriation of profits (Off shore outsourcing)
Currency and political risk (Off shore outsourcing)
Management and coordination in different locations
Lost synergies with other elements of the company’s overall strategy
Poorly executed exit from outsourced relationship (Planned or unplanned)
Transitioning business from one service provider to another are poorly executed
Exit plan / strategy existence
Service provider performance
Service provider going concern status
Disrupted continuity of service
Impact to end investors
Reputational damage

The responsibility to ensure that envisaged outsourcing outcomes are achieved and that high-quality service delivery are maintained, remain with business and require the development and implementation of an oversight model. This is required in to the normal contract management mitigation strategies.

A suggested oversight framework are built using the following four principles

  • Principle 1: Know your outsourcing – Understand the scope, nature, locations and contractual terms surrounding the outsourced services and that this understanding is reflected in the designed outsourcing model.
  • Principle 2: Risk based Assessment – Perform a risk-based assessment of outsourced arrangements, including understanding of the impact of those activities on the end client and the company / business unit itself, periodically and in response to significant events.
  • Principle 3: Ownership – Establish an appropriate level of ownership at a senior (internal) level for the outsourced activities, reflecting the size, nature and scale of the Asset Manager and the activities outsourced.
  • Principle 4: Governance framework – Establish an appropriate framework of oversight.
outsourcing-principles

The development of such a oversight framework should commence as soon a business strategy to outsource has been defined, ad continue through-out the period of transition to the preferred service provider and should furthermore include defining an exit strategy with related timelines. The following key areas of oversight should also be focused on:

  • Governance – internal and external
  • People and organisation
  • Oversight change management

These principles have been defined by the Financial Services Industry regulators but can be easily applied to businesses in other industries.

Adept Advisory has developed an Outsourcing Maturity Assessment Diagnostic tool and, through our experienced model, is able to assess the level of outsourcing risk in your business as well as to recommend solutions (e.g. Oversight Model) to assist with outsourcing risk mitigation.

Reference

  1. South African Reserve Bank – Guidance Note 5/2014 issued in terms of section 6(5) of the Banks Act 1990 – Outsourcing of functions within banks
  2. FCA Thematic Review (TR13/10) – Outsourcing in the Asset Management Industry: Thematic Findings Report – November 2013
  3. FCA (Financial Conduct Authority) Dear CEO Letter – Review of Outsourcing Arrangements in the Asset Management Sector
  4. OWG (Outsourcing Working Group) An industry response to the FSA’s Dear CEO Letter on Outsourcing – December 2013

 

Prepared by: Joey Kemp (Engagement Professional)