Magazine article Risk Management

The O Word: Outsourcing Overseas: IBM Is Doing It. So Is Dell. Amazon, Cisco Systems, Motorola and Merrill Lynch Are Also in on It. Congress Is Filibustering on the Topic and Presidential Candidates Are Debating It. So What Exactly Is All the Excitement over Outsourcing Jobs Overseas?

Magazine article Risk Management

The O Word: Outsourcing Overseas: IBM Is Doing It. So Is Dell. Amazon, Cisco Systems, Motorola and Merrill Lynch Are Also in on It. Congress Is Filibustering on the Topic and Presidential Candidates Are Debating It. So What Exactly Is All the Excitement over Outsourcing Jobs Overseas?

Article excerpt

Whether or not this headline-grabbing theme takes jobs away from U.S. workers or delivers on its promise to push up the economy, the fact remains that outsourcing internationally is far more common than most people know. And with it comes certain challenges and perils that risk managers need to be aware of.

In the United States, outsourcing largely entails the transferal of certain technology-based jobs--such as computer programming, technical support services, data processing and manning call centers--that used to be handled domestically to countries like India, China, Singapore, Malaysia, Slovakia and Poland, where the same jobs can be done less expensively. Firms outsource through two main methods. Large organizations, such as IBM and Citigroup, tend to buy internationally based business process outsourcing (BPO) providers and use them to replace their own business process departments. Smaller firms generally lack the resources to buy their Own BPO providers, so they instead hire the services of one as a third-party contractor. According to Stamford, Connecticut based consulting firm Gartner, cross-border BPO--of which technology-based functions are the major component--will increase by nearly 70 percent from $123.6 billion in 2001 to $178.5 billion in 2005.

Risk managers are playing a significant role in this trend, but not all are given the chance to offer their skills to employers before the deals are done. By understanding how risk management impacts the success of a BPO arrangement, senior executives can recognize the importance of the field, and risk managers can step up to the new responsibilities they create.

Getting in at the Start

There are two layers of risk analysis to be considered with overseas BPO: the contractual issues of the relationship and the outcome of the process being outsourced. Unfortunately, according to Christopher Keegan, co-leader of the information risk practice at Marsh in New York, many risk managers are brought in after the contract has been sealed, bypassing a valuable opportunity to reduce the company's liability.

"Often risk management is an afterthought," says Keegan. "Companies are doing themselves a disservice by not weighing the risks and making risk managers part of the decision. They should be included earlier--they have an important role."

As with any relatively new facet of risk management, the first step is getting involved in the process along with the other groups typically invited, such as legal, IT, purchasing, security and business owners. By illustrating the need for risk management analysis and mitigation, starting with the contractual agreement and demonstrating their skills to provide this service, risk managers can potentially reduce the number of risks that would otherwise arrive at their desk after the new deal is up and running.

Considering the Contract

Risk managers serve primarily as educators during contract reviews. Whether it is part of an enterprise risk management department or something on a smaller scale, the risk manager, especially when allowed to take part in the contract evaluation process, can educate the vendor review team and senior executives on how the risks posed are either already being managed or how new risks can be taken on and to what degree.

The primary areas of risk in cross-border BPO include data security, customer privacy, intellectual property, geopolitical risks, business continuity, disaster recovery, quality control and reputation risk.

By identifying the potential risks of an outsourcing deal up front, protections may be built into the contract--from a division of liability between the two parties to specifying the expectations for quality delivery of a service. "People have probably not paid as much attention as they should have on how to structure agreements with vendors and how to effectively execute offshore initiatives themselves, resulting in service quality issues," Stefan Spohr, vice president of A. …

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