The objective of outsourcing is to allow a company to focus on its core business by tasking an outside source to handle its non-core operations. Outsourcing takes place when an organization transfers the ownership of a business process to a supplier.
Outsourcing can often bring a company’s entire operation up to best-of-breed standards at a cost equal to or less than current expenditures, without huge capital expenses; however, outsourcing comes with its own set of risks and a failure to manage it can have the following impact: reliance on third parties whose objectives runs counter to the entity’s plans; reliance on third parties whose performance runs counter to the entity’s plans; reliance on startups or other vendors that may not be in existence by project completion; and reliance on vendors with immature infrastructure may be unable to provide service, impacting its customers.
This document discusses the benefits and risks of outsourcing and shares questions to consider when evaluating business risks. Questions to consider include:
- Are the core and non-core activities or functions clearly defined?
- Is there a full understanding of the total cost of activities outsourced or planned for outsourcing?
- Is there a competitive advantage for outsourcing?
- Has there been an exhaustive review of possible outsourcing vendors?
- Are the culture and values of the outsourced company understood and in alignment with those of the contracting company?
- Are the company and its outsourcer operationally compatible (e.g., systems capabilities and reporting standards)? Will they remain operationally compatible in their future strategies?
- Does the outsourcer’s pricing include incentive components? Are these incentives based on achievement of measurable, quantifiable goals, which can be audited by outside parties?
- Is a competent internal resource available to manage the outsourcing arrangement? Is there an integrated team of company and outsourcer staff to manage the transition of the outsource function?
- What management and monitoring toils can be used to effectively manage the outsourcing relationship?
- Is the outsourcer a viable organization, or have questions arisen about the outsourcer’s credibility?
- Is the service level defined contractually attainable by the outsourcer given their profit margin and resource demands?
- What are the options should SLAs not achieve management objectives?
- Have contingency plans been built?