Outsourcing and Offshoring Decisions – Taking a Risk Intelligent Approach

Many companies are increasing their dependence upon and use of outsourcing and offshoring (O/O).  This report, published by Deloitte, shows O/O can provide companies with several benefits such as: reduced costs, a focus on core competencies, ability to implement vendors’ best practices and innovations, an increase in flexibility of operations, increased access to human capital, and the opportunity to participate in the growing global economy. 

A Risk Intelligent approach to O/O decisions helps companies to mitigate the risk of an O/O opportunity failing to deliver its intended value.  Several growing trends have increased O/O risks:

• reliance on third parties and offshore entities for core business processes;
• increased competition for global talent, thus a need to focus on human capital strategies;
• regulatory developments;
• piracy, security breaches, and theft of information;
• volatile political environments;
• third-party suppliers may morph into de facto partnerships.

The O/O lifecycle presents a sequence of decisions and tasks management must perform in order to implement an O/O strategy.  Each stage should be approached using Risk Intelligence.  The stages include: strategic assessment, business case development, vendor selection, contracting, and service transition.

Stage One: Strategic Assessment

Each company should evaluate how its O/O strategy will support its strategic business goals.  A Risk Intelligent approach to evaluating an O/O strategy begins with assessing what the company wants to accomplish at the strategic level and then determining whether O/O will help the company achieve its goals.  Creating an environment that encourages Risk Intelligent assessments includes:

• integrating the company’s formal sourcing strategies and business strategy;
• matching the company’s sourcing vision and sourcing capabilities;
• building risk mitigation into downstream sourcing lifecycle activities (vendor selection, contracting, service transition, and ongoing operations).

Stage Two: Business Case Development

When developing a company’s business case, each company should consider factors extending beyond operational costs and savings.  A Risk Intelligent approach to developing a sound business case includes a formal method of identifying the costs and benefits of outsourcing and using sufficient due diligence to support assumptions.

Stage Three: Vendor Selection

A company needs to makes sure it has attended to the previous stages adequately before implementing this stage of the lifecycle.  Companies should exercise due diligence in evaluating a vendor’s capacity, resources, and capabilities.  Once a company enters into an outsourcing arrangement with a vendor, the vendor’s risks essentially become the company’s risks.  Companies should keep this in mind when evaluating vendors.  A Risk Intelligent approach to vendor selection should include:

• deliberation at the entity level of the company;
• RFPs with comprehensible performance requirements and techniques for recovery, security, control and audit;
• validation of initial assumptions, review of operating and quality assurance capabilities, and sensitivity analysis of proposed pricing;
• assessment of a vendors business continuity plans;
• exit and switching strategies.

Stage Four: Contracting

After implementing the previous steps in the lifecycle, the contracting step should be relatively simple.  A Risk Intelligent contract involves:

• performance criteria;
• mechanisms to manage variations in volume and costs;
• defined payment terms;
• checklists of legal, contract, regulatory, and insurance requirements;
• right to evaluate the performance of the vendor;
• contract termination and transition rights.

Stage Five: Service Transition

The key activities in this stage are transition planning, training, knowledge transfer, and key personnel retention.  It’s important to evaluate outcomes against preset criteria during this stage as well.  An ongoing monitoring program is useful in validating a vendor’s compliance with numerous expectations and assumptions.

Implementing even a few of the O/O lifecycle stages, which leads to a more Risk Intelligent outsourcing and offshoring, will help companies place their O/O initiatives ahead of their competitors’.  Even with effective O/O implementation, managers still need to be aware of their accountability.  Oversight, after all, cannot be outsourced.

Original Article Source: “Offshoring in the Financial Services Industry ‘Forever Changed’ by Globalization,” Deloitte, October 2007