With risk avoidance, assessment and management rising high on the corporate agenda for 2008, offshoring is certain to be one area that is closely examined, along with HR (see separate article). This predicates a need for 'risk intelligence'. Historically, the UK has been risk averse, while the US has adopted more of a 'portfolio' approach, whereby any failures are more than counterbalanced by the greatest successes. Signs are, however, that the US again sees the West as wild, and has begun circling the wagons.
Nevertheless, the global information technology and business process outsourcing market is approaching $500 billion and investments in outsourcing and offshoring have never been higher, or more critical to organisational success. To help companies address the associated risks and maximise the value of their outsourcing and offshoring strategy, Deloitte has published a whitepaper, The Risk Intelligent Approach to Outsourcing and Offshoring.
Deloitte 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 characterise 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 organisations to identify, assess, prioritize and mitigate outsourcing/offshoring risks at the right stage."
Deloitte 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: Analysing 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, Deloitte.
