Mitigating The Risks of Outsourcing in Today's Business Environment

Outsourcing is a common practice in today's business environment, where companies delegate certain functions to specialized firms in order to cut costs and increase flexibility. However, this decision comes with its fair share of risks.

One of the main risks associated with outsourcing is the need to ensure that the outsourcing company shares the same principles and values as the organization. Failure to consider this can lead to disagreements and inefficiencies in the functioning of the company. Additionally, by becoming dependent on the outsourced agency, the company is vulnerable to higher prices and potential exploitation. If the service provider fails to deliver on time or in an efficient manner, the company may suffer financial losses.

These risks are not limited to a specific department or field within the organization. For instance, outsourcing the information technology function can expose the company to the risk of hacking and compromised security. It also makes implementing changes and upgrades more time-consuming and less secure compared to an in-house IT department. Similarly, outsourcing retailing or human resources can create precarious relationships that require careful handling.

Legal consequences are another risk that companies face when outsourcing. Establishing a relationship with an outsourcing agency involves sharing sensitive information, but there is no fiduciary obligation for the service provider to prioritize the client's interests. This lack of trust can hinder effective collaboration and pose risks in conducting business transactions. Delays in contract creation and maintenance can result in unfavorable market positions or damage the company's reputation.

Another risk is the loss of control over the outsourced function. The company may be uncomfortable with the vendor's operations or require more information, but the vendor may not be able to provide satisfactory answers. Moreover, the quality of service provided may vary, especially if the vendor becomes overwhelmed with other customers. This can result in increased operating costs for the vendor, leading to higher prices for the company.

In an international market, the risks of outsourcing are even higher due to unfamiliarity with the market and its regulations. While international outsourcing offers cost benefits, there is no guarantee of efficient work. Legal barriers and unfamiliarity with international markets can render the outsourced service useless for companies operating locally.

To mitigate these risks, companies should ensure all communication with the vendor is properly documented and track any changes in policy. Additionally, conducting thorough research on the vendor and preparing the company to face potential risks is crucial. Each company may face specific risks depending on its sector and operations.

In conclusion, while outsourcing provides benefits such as cost reduction and flexibility, it also comes with various risks. Companies must carefully consider these risks and take necessary precautions to minimize their impact. By doing so, they can maximize the benefits of outsourcing while safeguarding their operations and reputation.

References:

1. Schniederjans, M. et al. Outsourcing and insourcing in an international context, M.E. Sharpe, (2005).
2. Giera, J. & Schooley C. “The Benefits and Risks of Outsourcing Learning” Forrester.
3. ISACA, Wright, C. Top Three Potential Risks with Outsourcing Information Systems.
4. Tompkins Associates, Tompkins, J. Top 40 Risks in Outsourcing.