The Outsourcing and its Risk

By Raul Bernardino

Introduction:

Nowadays, the global marketing and global economic competition has forced the companies to be more effective in the timely manner and efficient in costly manner. Therefore, the companies are intending to use the outsourcing model to be more effective and efficient in the products or services delivery.

“Outsourcing is a viable business strategy because turning noncore function over to external parties enables companies to leverage their resources, spread risks, and concentrate on issues critical to survival and future growth (Sink, and Langley, 1997)”

In the beginning of 1980’s, the outsourcing businesses become common business activities. The outsourcing is namely to give an internal works either partially or all to the external services providers companies or agencies.

The outsourcing bases are on the contract signed and the agreement on certain services that will provide by supplier and the client had agreed to pay certain amount of money for the services.

Usually, the implementation of the outsourcing is because the companies have not enough funding to recruit an additional staff to do the work. In other hand the outsourcing is ready to supply the services. What can be outsourced? In the common practices the Information and Technology (IT), auditing, accounting and Human Resource (HR) are those that can be outsourced.

Outsourcing definition:

There is still not has a fixed definition of the outsourced. The term of outsource often sees as to give away one or two internal jobs or a complete works to another parties with the agreement in upfront; whereas the supplier will be providing the listed of services to the clients, while the client has to pay a certain amount of money to the third party or supplier.

The objective of the Outsourcing:

• To ensure the cost effective and saving (cost efficiency) in the company;
• To ensure the improvement of the qualities of the services in the company;
• To ensure the using of the right expertise and talent people from the third parties pool;
• To ensure the capacity of the innovation in the company;

The Advantages and the Risk of the Outsourcing:

The Advantages of the Outsourcing are follows:

• The first intention of having outsources or third parties are to save the money for company. The customers will be achieving the maximum productivity with the lowest cost;
•  To minimize the risk because risk itself has being distributed among customer and the third party; as far as all necessary features (for instance software application) are predefined in the scope of work;
•  Internal staff can concentrate in the core business while the third party staff will be focusing on additional task that has been signed to them. This can make a significant growth;
• The customer will be hiring more skillful people from the third party with minimum cost, and therefore company will be gaining more productivities;
•  The customer or company will be saving an additional extra cost from taxes;
• The customer will be focusing on their core business without  have to worry the technological update which most costly;
• Services from the supplier are base on the agreement and contract so it easy for customer to see the outcomes;

“According to David G. Kulik, the president of Customized Transportation Incorporation (CTI), a leading third party logistic provider, an outsourcing agreement reached by CTI and General Motors (GM) contribute to the realization of GM’s financial aims and reduction of inventory (Foster, 1999)”

The Risk of the Outsourcing as follows:

• Since contract of the agreement had signed, the supplier will be having a full control on the services area of the contract (full control on the coding/Software) and the business owner has a less control on the coding;
•  Maybe the supplier will be leaking the information; in this case the outsourcing are dealing with Information and Technology;
•  Even we have set time delivery in the service level agreement, the supplier may fail to meet the dead line;
•  In many cases the transfer of the knowledge will be expensive; also usually the suppliers are not more productive in the year one;
•  Lack of the quality test of the software application; client just believe the supplier that design and implementation are in the scope;

“If a firm has an efficient, well-managed distribution system, outsourcing that system may not reduce operating cost (Lynch, 2002)”

In order to overcome the risks situation, the clients or customers have to clear everything upfront in the manageable way. For instance not give all control to the third parties; third part gives full control to client on coding (software). Always supervise the third parties activities.

The supplier has to sign the ‘confidential agreement’ with the client in which to avoid the leaking of clients or customers data information to other entities.

The supplier of the services has to meet the time line as it agreed, in terms of the reference. For example the urgent matter will be delivering in about one hour; or if the customer requests the IT services for urgency matter, the suppliers should be present in customer office in about 30 minutes and otherwise the supplier is not reliable.

To minimize the cost of knowledge transfer from the supplier to client, the customer need to assign one dedicate person from the company to accompany the third party when the delivery the work, so that he or she can learn by doing with the third parties.

On the software site, we have to have a quality test before it is implementing in to the core business. This is to allow the users are to be familiar or the stakeholders are to be familiar with the new system as it expected to be before it gets the final payoff.

Conclusion:

After having a risk assessment towards the outsourcing and mitigate the risks, now we are in the position and have more confident to use and involve outsources or the third parties as a part of the business strategy. This is to minimize the cost of the direct recruiting expert staff to the company and switch it to having an expert or skillful person to do the same type of work from the third parties.

In the same time the clients or the costumers can learn by doing directly with the experts and from the third party without have to expend extra money for the trainings. Therefore, the customer have to assign one two person to accompany the supplier while there are on duty.

The client has a leisure time to be more focus in the core business strategy.

References List:

·         IT Outsourcing Poses Risks [Online] Available from:  
http://www.forbes.com/2009/10/21/information-technology-outsourcing-risks-technology-oxford.html  (accessed date: February 22, 2011)

·         Outsourcing Risk Reduction: How to Avoid Disasters and Ensure Solid Working Relationships [Online] Available from:  http://www.executivebrief.com/outsourcing/risk-reduction-outsourcing/ 
 (accessed date: February 22, 2011)

·         [Online] Available from:  http://opim.wharton.upenn.edu/~clemons/files/outsourcing_v4_2.pdf   (accessed date: February 22, 2011)

·         Reducing Risks in Logistics Outsourcing [Online] Available from:  http://www.uctc.net/papers/641.pdf  (accessed date: February 22, 2011)

·         Advantages and Risks of Outsourcing [Online] Available from:  http://www.buzzle.com/articles/advantages-and-risks-of-outsourcing.html  (accessed date: February 22, 2011)

·         Risks of Outsourcing [Online] Available from:  http://www.artechhouse.com/GetBlob.aspx?strName=Axelrod-ch4.pdf  (accessed date: February 22, 2011)

·         Avoid outsourcing risks by building flexibility into contracts [Online] Available from: 

http://www.techrepublic.com/article/avoid-outsourcing-risks-by-building-flexibility-into-contracts/5708950 (accessed date: February 22, 2011)

·        IT outsourcing and IT outsourcing strategy [Online] Available from:  http://itoutsourcingstrategy.com/it-outsourcing-risks-to-avoid/ (accessed date: February 22, 2011)