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