Any event that prevents or slows trading or production, or changes an organisation's operating environment can lead to a loss of income, profit or market share and provide opportunities for the competition or adverse publicity. Many believe that outsourcing decreases costs and improves service levels, and that outsourcing non-core activities lets them concentrate on what they do best.

However, it's imprudent to totally abdicate responsibility through an outsourcing agreement. While it's often possible to outsource processes such as financial systems or customer services, it's unrealistic to expect a parallel change in public perceptions, or to ignore the resulting impact and consequences of real or perceived failure should the outsourcer fail to meet targets.

Good business practice finds a way to introduce dynamic management control and services into the outsourcing environment without harm. A clear framework for risk and governance is important, which identifies risks and benefits to both parties and facilitates the resolution of potential problems.

Key risks and challenges are often omitted at the start or change of an outsourcing agreement. These include those associated with continuous provision of business functions, technology and processes, changes in control, accountability, cost management and media perceptions. The most common omission is the consideration that an outsourcing entity can be dangerously exposed, as it becomes wholly dependent on a single-service provider for the continuing operation of processes.

Each party has its own business drives, imperatives and goals, so it's important to consider:

  • the risks and opportunities to objectives and organisations
  • the extent to which they may change
  • principal stakeholders
  • the entities responsible for owning and managing the risks
  • mutually acceptable parameters
  • the extent to which insurance and other risk management instruments are applicable.

    Consideration of these issues may consume resources during early stages, but will enhance the likelihood of success and minimise unanticipated costs.

    Sadly, misconceptions that outsourcing enables a complete transfer or “off-loading” of risks are still common. Even with increased awareness of the arguments for embedded corporate governance, there's a significant challenge in gaining buy-in from management of both parties for the negotiation, establishment and maintenance of the necessary controls.

    There are a number of techniques, mechanisms and risk transfer products that can be adopted to support the management, control and transfer of risk. However, none are comprehensive and care must be taken to provide appropriate coverage. Ultimately, it is best to create a situation where both sides gain by agreeing to shared, formal objectives that reflect actual requirements and a realistic vision of the short, medium and long-term future.