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Outsourcing: Eight Steps to Help Mitigate Risks

Globe with red pinsOutsourcing Involves 3 Main Types of Arrangements:1. Off-shoring. engaging a provider from another country without considering the resulting distance.2. Near-shoring. Engaging a provider in a nearby country. Near-shoring also includes companies moving outsourced functions from a country that is geographically distant, to a foreign country that is closer to a company's home base.3. On-shoring. Engaging a provider that is located in the same country.

Potential Benefits

Potential Risks

Save Money

Face hidden costs

Free up in-house resources

Loss of control in procedures and quality

Gain expertise you don't have in-house

Intellectual property or data could be stolen

Bring products to market faster

Cultural, language and time zone differences

The outsourcing of business processes has helped numerous companies improve their financial performance, as well as increase customer satisfaction. In extreme circumstances, outsourcing can literally ensure a company's survival.
However, it can involve a number of risks. In order to determine if outsourcing makes sense for your organization, consider taking the following steps:
1. Identify and document your expectations regarding an outsourcing relationship. For example, by what amount would you like to reduce operating costs? Do outside providers have the expertise or skills that your company does not possess in-house? Is outsourcing consistent with your company's business model and overall strategy?
2. Prepare a detailed inventory of the processes and procedures that you plan to outsource. While gathering the information, you may identify inefficiencies that need to be addressed before the processes can be outsourced. Alternatively, you may decide that inefficient or ineffective processes would be better outsourced, knowing that they will need to be refined by the provider. In any event, being aware of what you plan to outsource, as well as the state of those processes, is key to a successful outsourcing.
3. Write a detailed request for proposal (RFP) that identifies all requirements that need to be met by the provider. This can also serve as the reporting framework once a provider is engaged. In addition to preparing an RFP to be circulated to potential providers, consider documenting the attributes that a "perfect" provider would possess. The profile should include the location, industry experience, type of customers served, level of employee skills and the technology employed.
4. Request references from customers that have worked with the providers for one, three, five and if possible, 10 years. Immediate cost savings from an outsourcing relationship can be straightforward to capture. However, maintaining and improving on those savings over time is considerably harder. Talking with companies that have experience working with the providers can help your company gauge an outsourcing company's ability to deliver sustained improvements
5. Ensure that the contract with the provider contains sufficient flexibility to respond to changes in the economic environment. Also, incorporate incentives for the provider to improve performance over time. By offering incentives in the contract, you can dramatically increase the chances the provider will meet the expectations. Just as importantly, incentives should reward a balanced approach. For example, invoice processing time should not be rewarded at the expense of accuracy.
6. Establish a cross-divisional team to consider the risks that can result from engaging an outsourcing firm. Your company's team could include representatives from operations, legal, accounting, finance, human resources, security, fraud and corporate communications, etc. The type of risks that can result from an outsourcing relationship include fraud by the provider's staff members, interruption in service due to terrorist activity, political instability and corruption in the location, and backlash if jobs are transferred overseas. Depending on the size of the proposed outsourcing relationship, sub-teams may need to be created to address specific issues, for example, the impact of outsourcing on employee morale.
When looking at an outsourcing company outside the country, your firm should examine its compliance with local labor laws. In addition, it is important to consider how the outsourcing company, specifically its labor pool and operating history would be viewed by the U.S. government, as well as your customers.
7. Determine what tax implications are involved in the relationship. This could involve the rules for independent contractors, if outsourcing locally, or the tax laws of another country, if you are shipping work overseas. Your tax advisor can help ensure your company is in compliance with applicable laws.
8. Decide what infrastructure is needed to support the provider once the outsourcing relationship begins. For example, do you need to assign company personnel to work on-site at the provider's offices? If not, how often do company personnel need to visit the provider's operations? How much will it cost to send staff to the provider's location?
Outsourcing can provide considerable savings. But as you can see, it is not without risk. The steps noted above can help your company navigate the process and deliver sustainable long term savings that directly improve the bottom line.
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