| In an election year in the US
(and we presume one to follow in the UK in 2005), unemployment,
lack of employment, a lack of "good" jobs
and outsourcing seem to be the topics of conversation
in both countries, and in particular in the US. It seems
to have made very little difference that, when numbers
were calculated of actual jobs lost due to outsourcing,
only a tiny percentage relate to outsourcing. But then
it is not my job that is being outsourced.
Indeed, outsourcing has received such bad press that
even the business-friendly Lou Dobbs (for the non-US
reader, Lou Dobbs is an anchor on the popular Moneyline
show on CNN) focuses on outsourcing each night, often
giving statistics of the latest examples of outsourcing.
In these examples, and in the press generally, outsourcing
is defined as the wholesale shipping of jobs (increasingly
skilled jobs) to countries with cheap labour, such as
India.
Having grown up in the UK, where we have long outsourced
our ability to build ships (except for warships) and
manufacture a whole range of products we invented, it
almost seems natural to see industries move abroad to
cheap labour markets.
The decision to outsource is not a simple one. Like
every good business decision, outsourcing should be
considered through a rigorous risk assessment process.
It should be viewed as another “arm” of
your business that needs to be researched, negotiated,
implemented and monitored.
Unsuccessful outsourcing usually occurs when a business
seeks to simply abdicate its responsibility –
tempting, but not wise. Before you take a leap of faith,
I digress with some pros, cons, pitfalls and an example
of outsourcing in a highly regulated industry.
THE PROS
In simple terms, outsourcing is a solution to transfer
the basic “stress” associated with delivering
a service, thereby allowing you to concentrate on your
core activities. It may also save you costs, improve
efficiency and/or mitigate risk (that is, ensuring employees
turn up).
Furthermore, the contracted “expert” is
often in a much better position to deliver a high quality
service – can a top insurance broker really judge
whether the advice they receive from the IT department
is good advice? Outsourcing tends to work best where
the service can be tightly defined and delivery assessed.
THE CONS
True, outsourcing can be viewed as a method of transferring
risk – but it also brings new risks. Some examples
include:
- A contractor may become out-of-touch
with your business – pensions are a great example
where trustees can become stale on, say, fund management
and therefore may not have the ability to discharge
their responsibilities
- Quality of delivery and procurement
risks – quality safeguards and access to information
are all too often ignored from the service contract
and usually there is little recourse
- Security of information –
does anyone carry out internal control reviews of
outsourcing companies? Test their networks, and so
on
- Volume risks – can the
provider you chose while you had 20 employees continue
to provide the level of service when you number 50
or 100?
- Reaction time – if there
is a crisis and you need to move quickly, your reaction
time will almost always be slowed when a third party
is involved
- Exit routes – how easy
will it be for you to get out or ensure a smooth handover?
Have you covered the ownership and intellectual rights
to papers and contracts? (The contract negotiation
phase is the best time to consider the terms for contract
termination)
And how about those industries that are highly regulated?
Perhaps after Sarbanes Oxley, all listed companies should
regard themselves as operating in a highly regulated
industry?
INSURANCE, THE FSA AND
OUTSOURCING
The FSA recently highlighted some specific areas to
consider regarding outsourcing, including the handling
of customer information, disaster recovery and the insurance
industry’s regulatory obligations and responsibilities.
CUSTOMER INFORMATION
One little code says it all – BS7799. Achieving
this signifies that your business meets the code’s
standards for information security management. This
“badge” shows you know how to look after
your customers’ personal information from call
centre to claim handling. This is also a good benchmark
to require of your supplier. But remember to tie it
to your contract renewal that the supplier is
up-to-date with any new FSA guideline amendments.
DISASTER RECOVERY SERVICES
The FSA has recently produced guidelines on Business
Continuity Management (BCM), including a requirement
for material Service Level Agreements (SLAs) and performance
criteria, for example, frequency of testing, work area
maintenance standards, adequacy of IT and telecommunications
services, alerting the firm when the site is unoccupied,
and so on. And remember the warranties – does
your coverage match your potential loss?
THE SYSC MANUAL
The Outsourcing section [3A.7] from the SYSC manual
[re CP142] specifically states a firm cannot contract
out its regulatory obligations and it provides guidance
on a business’ responsibilities to manage the
outsourced functions.
Insurance has not been tightly regulated in the past
– now the FSA has released information on how
they will monitor insurance companies. CP142 (among
others) sets out the systems for insurance regulation.
Put off yet? Don’t be – one thing you can
outsource in the short-term is for sound business advice
from people who have read the mounds of regulation.
WRAPPING IT UP
As you can see, there is much to consider in your outsourcing
decisions. It is simply not viable to farm out a service,
or for that matter your manufacturing and your responsibility.
But before you put it all in the "too hard"
basket, outsourcing can be an effective tool to
boost your business performance (and piece of mind).
As a client recently put it to me, while they hated
being responsible for transferring jobs overseas, if
that increased company profitability, surely it was
a good thing as there would be money to invest in the
business. Does that sound like a prayer?
The UK and the US are two of the most liberalised economies
in the world and hence two of the largest outsourcers,
of both industries to overseas countries and outsourcing
within the two countries. The UK has not been in recession
since the early 1990’s and the US is one of the
most productive and efficient economies in the world
– what other economy could have survived Enron,
World Com, and so on? Perhaps outsourcing is the key:
concentrate on what you are good at and let others do
what they do best.
Mazars is an international audit and accounting firm,
operating in 55 countries with over 6,000 partners and
staff.
If you would like more information concerning the above
article please contact Andrew
Sims at +1
212 375 6980 or e-mail him
at asims@mazarsusa.com
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