Business strategy, Management and leadership
Managing the risks of outsourcing
Business models have evolved enormously over the last two decades. Firms have battled for a competitive advantage over their rivals, attempting to use their resources more efficiently and offer their clients extra services by outsourcing certain job functions to external service providers.
A big question for companies who are recalibrating their business model is; why do something if someone else can perform a function more efficiently and at a cheaper price? Outsourcing brings plenty of advantages to both the outsourced service providers and the companies who they work with.
For one, the independence of the outsourced service provider (OSP) and their corporate customer reduces potential professional conflicts which might arise in the professional services space.
In addition, the wealth of niche expertise available from external resources can help take your business to the next level, without having to employ help on a permanent basis.
What are the risks of outsourcing?
There are several key risks of outsourcing to consider when implementing the practice into your business model. We will explore these below, as well as ways to manage these risks.
A loss of control
Losing control of certain functions within your business is the most important risk of outsourcing to consider. If the OSP mismanages the function they’re performing, the quality of your business’ product can be negatively impacted. However, if using an OSP, you will ultimately have less capacity to step in and make a positive change to the situation than if the function was being performed in-house.
How to manage
The first step to take prior to hiring an OSP is clearly define, through a plan, which functions of your business you are willing to hand over. It is crucial to implement a few project management points including check-in meetings, outlining KPIs, and identifying a point of contact within the external organisation.
By creating a solid plan, you’ll be abreast of every stage of the process in collaboration with an external partner.
Despite the pandemic showing us that it is possible to do most things online, communicating via phone and video calls still presents a risk of misunderstanding between collaborating partners. This is especially true for offshore outsourcing, which comes with the risk of miscommunication.
Scheduling issues also present themselves to businesses who are using an international OSP. Working across timezones can make it challenging to find a good time for teams to meet.
Ultimately, the risk of communication barriers can sometimes render the OSP a less efficient candidate to perform functions in your business than an in-house team.
How to manage
To bridge any gaps in communication with your outsourced partner, it would be shrewd to set core business hours for both sides to adhere to. This way, you will know that if you need to communicate something in real time, there will be a point of contact at the other end of the phone.
In addition, the use of project management tools such as Trello, Basecamp, and Slack can be an effective way of enabling cross-team communication to keep things organised.
By anticipating any communication issues and using technology to your advantage in order to mitigate them, this risk of outsourcing is minimised.
Cost savings and the potential for increased profitability are a major pull of outsourcing. However, hidden costs related to hiring an OSP present a risk to a company’s finances.
Before outsourcing any element of your business, it is crucial to compare the OSP’s pricing with the current financial output for performing this task in-house. This will show you whether you’d be getting value for money by outsourcing and mitigate any risk of overpaying.
When outsourcing, you will, however, always run the risk of being hit with increases in costs later down the line, even if you deem it to be good value for money on an initial basis. Costs like hardware or software upgrades, troubleshooting, and out of hours assistance all add up, and can push your output for an OSP beyond your original budget.
How to manage
By clearly establishing the project’s requirements at the beginning of the partnership, you can ensure that your work with the OSP is on track and remains within the parameters of your agreement.
In addition, it is integral to take note of every cost detail your outsourcing provider highlights.
Using employee productivity management tools like Time Doctor or Toggl to accurately log the working hours of each outsourced employee also goes a long way in establishing costs in a transparent way, leaving little room for upselling or cost fabrication.
Privacy and security of your business
When outsourcing, your business assets become completely exposed to a team who operate outside the parameters of your organisation, as well as any privacy protocols you may have in place.
When working with an OSP, it is essential to monitor your company’s privacy, intellectual property, and data protection. Things like copyrights, patents, and trade secrets are your business’ property, and it is important to understand how these are being used and viewed by your outsourced partner in order to ensure that the collaboration is risk averse.
How to manage
To manage any threat to your firm’s security, it is wise to create a comprehensive outsourcing contract or service level agreement (SLA) with the help of a lawyer to protect your business. If you’re working with a partner who is based overseas, hiring an international lawyer will help you to manage any outside jurisdictions should issues with security arise. As an employer, you are even entitled to ask your OSP to sign a non-disclosure agreement if you deem there to be any potential risk.
In the past, organisations have taken steps to mitigate the risk of outsourcing certain processes by including a ‘right of audit’ clause in any contracts exchanged with OSPs. These clauses allow firms to send risk, compliance, or audit teams to carry out periodic reviews of relevant third-party processes in relation to their product.
Instructing your team to take a look at corporate governance documentation such as operational manuals, or scheduling meetings with representatives of the relevant functions, helps you keep an eye on how your money is being spent.
Outsourcing a flagship product
Outsourcing your key product is a huge decision to make and can come with potential risks. Perhaps, this may lead to the linchpin of your success hinging on an external vendor. Whilst outsourcing can be a huge relief on the purse strings of your business, you could eventually lose the expertise you’ve built surrounding your key product and compromise your reputation as having elevated competency in that area.
How to manage
The optimum way to manage the risk of outsourcing a key product is to only draft in outside help for elements of your project, not the whole thing. By keeping the crucial management and key expertise in-house, you easily retain the reputation for excellence in your product niche.
Hiring an area specialist like a designer or team of developers allows you to add an extension of your core team, as opposed to a replacement.
Seeking help from external agencies and a legal team to conduct background checks on your OSP can also help quantify details of their reliability and expertise.
OSP failing to meet your needs as expected
Whilst they can be a great boost for your business, outsourcing service providers are generally expected to take longer to complete a task, and to ensure this is done accurately may see you having to reiterate what you need from your partner more times than you would an in-house employee. Delays or errors can occur due to all manner of factors including communication, time barriers, and a lack of shared process.
How to manage
To troubleshoot any operational risks, it is shrewd to schedule regular check-ins with your OSP to keep an eye on progress. Drawing up a contingency plan for what happens in an instance of failed delivery or working in surplus inventory to deal with cases such as supply chain issues and HR challenges will increase the productivity of your partnership.
As you can see, there are many avenues to take in order to manage the risks of outsourcing. Businesses looking for creative ways to save money in the current business climate can benefit from outsourcing if they take these crucial steps to protect their product.
If you would like further information on outsourcing and what you should consider before engaging with an OSP, then please get in touch.