Risk Tips Issue # 25: Outsourcing Risk

  • Jun 28, 2018
  • RIMAN, Deloitte, Wall Street Journal

Outsourcing is "an agreement in which one company contracts-out a part of existing internal activity to another company. It involves the contracting out of a business process (e.g. payroll processing, claims processing) and operational, and/or non-core functions (e.g. manufacturing, facility management, call center support) to another party.

Outsourcing makes it into top three Operational Risks in year 2017, spurred by a clear message from Regulators that firms must improve oversight of third-party risk management, or else face punitive sanctions.

Risks Associated with Outsourcing

Reputational Risk is definitely one of the key risks; To avoid negative impact on the brand name, supplier human rights issues (e.g. hiring underage workers, poor treatment, and environmental violations) must be carefully investigated to ensure compliance with the company’s code of conduct.
 
Supplier Risk: Any arrangement with suppliers has elements of risk involved with it; however, risks associated with sourcing internationally are often higher. With sourcing, the company must thoroughly investigate (i.e. carry out due diligence on) potential source markets and suppliers, making an in-depth risk assessment and checking the business practices of potential suppliers to identify any possible problems.
 
Intellectual Property Protection: When companies share information with suppliers in countries that have less stringent regulations about intellectual property rights, proprietary information is often leaked.
Quality: The implications of a quality failure from an international source are much more severe than a quality failure from a domestic source. To help minimize this risk, many companies prepare detailed product specifications for suppliers and insist on independent quality control inspections.
 

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