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Outsourcing risk- key considerations
11 Apr 2022

It’s difficult to envisage a world without outsourcing these days. Two decades ago, outsourcing business activities was the exception, however it now appears to be the rule in conducting efficient business worldwide.

Although outsourcing began as a means of minimising costs within a company, it has now expanded to allow the corporation to focus on its core strengths while outsourcing other tasks to full-fledged specialists who specialise in that field. This would result in increased overall efficiency.

Outsourcing is a corporate strategy in which a third party is hired to provide products or services that would otherwise be conducted in-house by company employees.

Within the context of risk management, it’s critical to completely comprehend what outsourcing entails in terms of benefits and risks to correctly assess its place within your firm.

There are several advantages to outsourcing technology resources and business processes. You can gain specialised knowledge and solutions, increase opera­tional and financial efficiencies, increase management’s ability to focus on core business functions, accelerate product or service delivery, increase the ability to acquire and support current technology while avoiding obsolescence, and possibly reduce costs and conserve capital for other business ventures.

Apart from all the benefits that outsourcing brings about, it has also added noteworthy risks to a company. The most significant of these include operational risks related to underperformance, regulatory infractions and unethical behaviour, cyber-attacks or data breaches, and the incapacity to offer services in the face of a business disruption or tragedy.

This is amplified by the fact that vendors might further subcontract work to other vendors, often outside the view of their clients, increasing the potential for back-door vulnerability.

Companies are appreciating the fact that if they manage their third parties properly throughout the outsourcing lifecycle, it will ultimately benefit their own well-being and sustainability. Companies should give focus and attention to their outsourced vendor relationships to protect their systems, data and processes. There is no such thing as a one-size-fits-all solution to controlling vendor risk.

Perform proper due diligence to select the best service provider- Reana Micallef

Nonetheless, there are several basic practices that every company with a solid risk management programme should think about implementing, namely: defining your risk appetite for outsourcing arrangements and materiality; performing proper due diligence in order to select the best service provider; undertaking the risk assessment to identify vendor criticality and monitoring priorities; implementing controls and monitoring metrics for oversight purposes; and maintaining a robust service level agreement and contract.

All the above steps should be incorporated into and outlined in the outsourcing policy. The policy would establish the company’s risk appetite as well as an annual risk assessment approach that may be used to identify high, medium, and low risk vendors, ensuring these are monitored based on their criticality.

To begin the monitoring process, you must first identify your vendor population and proceed to do your risk assessment for suppliers in accordance with your policy and methodology.

Undoubtedly there is much to consider when assessing the need to outsource a specific process or product. However, the most imperative thing to bear in mind is that a company can subcontract or outsource the process and technology, but not the responsibility.

The manner in which the firm handles the outsourcing relationships reveals a great deal about the company. Having a firm grasp on outsourcing is unquestionably crucial for mitigating related risks and vulnerabilities, which range from the operational effect of third-party failures to the reputational impact of poor third-party work practices.

However, it also establishes the standard by which third parties will see you and, if handled well, may open the door to strategic opportunities arising from cost savings and innovation.

Organisations that lose control of their outsourced management suffer increased regulatory scrutiny, reputational harm, and, eventually, customer resentment.

Reana Micallef is risk manager at BOV Asset Management Ltd.

 The author and Bank of Valletta have obtained the information contained in this article from sources they believe to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The author and the company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document.

They have no obligation to update, modify or amend this article or to otherwise notify readers thereof if any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate.

BOV Asset Management Ltd is licensed to conduct investment services in Malta by the Malta Financial Services Authority.

 

 

Issued by BOV Asset Management Ltd, 58, Zachary Street, Valletta.

 

 

 

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