Top 8 Risks of Offshore Outsourcing
Offshore outsourcing is on a steady growth path, growing about 20%-25% per annum, with little evidence of slowing. Though enterprises experience initial resistance, most technical issues are readily resolved and geopolitical risk is deemed insignificant after careful evaluation. No matter which country you choose as your outsourcing destination, be sure to analyse its statistics in depth, as choosing the right outsourcing destination and partner can go a long way in ensuring that you reap huge benefits. The risks in outsourcing need to be successfully addressed to ensure your company's productivity.
The top 8 risks of offshore outsourcing are as follows:
- Cost-Reduction Expectations
The biggest risk with offshore outsourcing is that of cost reduction expectations. Companies that outsource their business functions assume that labor arbitrage will yield savings comparable to person-to-person comparison without regard for the hidden costs and differences in operating models. In reality, it is only at the end of the 2nd year and beginning of the 3rd year that you really see the saving benefits. - Data Security/Protection
Before deciding on an outsourcing supplier, be sure to check if they have sufficiently robust security practices and if they can meet the security requirements. While most companies find offshore vendor security practices impressive, the risk of security breaks or intellectual property protection is inherently raised when working in international business. Privacy concerns must be completely addressed. Although these issues rarely pose major impediments to outsourcing, the requirements must be documented and the methods and integration with vendors defined. - Loss of Business Knowledge
Companies must carefully assess business knowledge and determine if moving it either outside the company or to an offshore location will compromise company practices. - Vendor Failure to Deliver
Even with the superb quality methodologies of offshore vendors, they may sometimes fail to deliver. When considering outsourcing, companies should assess the implications of vendor failure and should have a contingency plan ready. If such a situation arises, the organization must be ready to shift the outsourcing strategy (e.g., from a single vendor to multiple vendors). The results of risk analysis vary between companies; it is the process of risk analysis that is paramount. - Fixed or Variable costs
There is no such thing as a fixed-price contract. All outsourcing contracts contain baselines and assumptions. If the actual work varies from estimates, the client will pay the difference. This simple fact has become a major obstacle for companies that are surprised that the price was not "fixed" or that the vendor expects to be paid for incremental scope changes. - Culture
Cultural differences are a sensitive issue in outsourcing. Though English is spoken throughout the world, pronunciation and accents can vary tremendously. In addition, cultural differences include religions, modes of dress, social activities, and even the way a question is answered. - Turnover of Key Personnel
Rapid growth among outsourcing vendors has created a dynamic labour market. Key personnel are usually in demand for new, high-profile projects, or even at risk of being recruited by other offshore vendors. While offshore vendors will often quote overall turnover statistics that appear relatively low, the more important statistic to manage is the turnover of key personnel on an account. - Knowledge Transfer
Most companies experience a 20% decline in productivity during the first year of an agreement, largely due to time spent transferring both technical and business knowledge to the vendor. The time and effort to transfer knowledge to the vendor is a cost rarely accounted for. Many offshore vendors are deploying video conferencing (avoiding travel) and classroom settings (creating one-to-many transfer) to improve the efficacy of knowledge transfer.
