February 7th, 2008
IT Consulting firm Deloitte has published a new whitepaper titled, “The Risk Intelligent Approach to Outsourcing and Offshoring” to help companies address today’s significant outsourcing and offshoring risks and maximize the value of their outsourcing and offshoring strategy.
The global information technology and business process outsourcing market is approaching US$600 billion and is growing rapidly, according to Deloitte. In today’s global economy, investments in outsourcing and offshoring initiatives have never been higher, or more critical to organizational success.
Corporations are facing dramatically increasing risks as they rely more than ever on other parties and/or offshore entities for a growing number of business and information technology processes. The paper, the eighth in the Deloitte Risk Intelligence series, identifies several trends that have increased outsourcing and offshoring risks:
* Companies rely on other parties and/or offshore entities not just for specific projects and back-office functions but more often for core business processes.
* Increased competition for global talent has contributed to shortages of qualified talent.
* Regulatory developments have increased exposure to liability for malfeasance or misfeasance. In some cases, senior management and the board can be held accountable for non-compliance associated with operations of organizations hired to serve the interests of the company.
* Piracy, security breaches and theft of information can erode brand value, intellectual property and other intangible assets, in which companies have heavily invested in recent years.
* A volatile political environment or infrastructure limitations in some popular offshore locations can preclude effective and efficient operations.
* Outsourcing relationships often morph into de facto partnerships, albeit without the analysis, reporting, visibility and control that typically characterize true partnerships.
“To deal with such complex and dynamic risks, companies must employ a Risk Intelligent approach to guide decision making throughout the outsourcing/offshoring life cycle,” said Mark Layton, global leader for Deloitte’s Enterprise Risk Services practice. “Aligning objectives, risks and controls throughout the outsourcing/offshoring lifecycle enables organizations to identify, assess, prioritize and mitigate outsourcing/offshoring risks at the right stage.”
Outsourcing companies are increasingly using risk management in a more strategic role in order to address their own and their client’s broad business objectives. In fact many companies see risk management as a real challenge while implementing an onshoring or offshoring project. Assessing risk and planning for the business helps not only the customers identify the right partners to offshore with, but also helps the service providers to preempt client needs and manage efficiencies and costs more effectively. The Indian outsourcing industry is at a stage where there is a pressing need to innovate and move to the next level of efficiency in managing costs and performance simultaneously. Assessing client risk is a good place to start in order to offer solutions that meet these end objectives.
“Outsourcing is not about abdicating responsibility but about managing performance. This requires a partnering approach between the client and the service provider to jointly implement best practices, manage risks and thereby manage performance. The risk intelligent approach of Deloitte is an important tool to enable performance management,” according to Joydeep Datta Gupta, executive director of Deloitte India.
The Deloitte report identifies the following critical stages within the lifecycle of an offshoring/outsourcing relationship and addresses in detail the most important risks around each:
* Strategic assessment: Deciding whether, why and how outsourcing/offshoring may support your business strategy.
* Business case development: Analyzing expected cost savings and other financial and operational benefits of the initiative.
* Vendor selection: Choosing a vendor according to criteria related to the strategic assessment and the business case.
* Contracting: Negotiating a contract that captures the needs and expectations of both parties, and addresses compliance and risk factors identified in the previous three stages.
* Service transition: Managing the migration, or initiation, of the service in the vendor or offshore location. Monitoring the ongoing performance and risk of the relationship according to the contract and service level agreements as well as for the attainment of strategic objectives.
“Many outsourcing and offshoring initiatives fail to live up to their potential or the expectations of the parties. Even worse, a fair number of them fail outright, leading the company to either pull the operations back in house or to start anew in the search for a reliable, mutually beneficial partner. A Risk Intelligent approach can help organizations realize the expected benefits and improve relationships among constituents impacted by outsourcing/offshoring,” said Peter Lowes, outsourcing advisory services leader of Deloitte.
Entry Filed under: Why Outsource?