Managing outsourcing risks

Outsourcing, i.e. the handing over of corporate tasks and structures to third parties, is a very specific type of external procurement. This outsourcing of tasks is often unlimited in time and is only stopped again in the event of negative experiences or strategic changes. The reasons for outsourcing

"It requires sound preparation."

are very complex. Basically, however, companies are looking for ways to achieve an additional benefit. In most cases, it is cost considerations and the focus on the core business as well as more flexibility that lead to the search for an external solution. But where there is sunshine, there is also shadow. Outsourcing is always associated with risks, which need to be identified and managed accordingly.

Opportunities with outsourcing
In addition to the possibilities already mentioned, increased demands on the technical solution, the maintenance of the same, changes in competition, processing speeds that need to be increased, etc. can also be drivers for outsourcing solutions. can be drivers for outsourcing solutions. If, at the same time, outdated organisational structures and a lack of qualified personnel in the company itself make it difficult to carry out the company's tasks in a targeted manner, a relocation of the processes can become attractive.

The expected cost savings are usually a major driver for outsourcing. One example of such a targeted cost reduction is no longer operating one's own infrastructure (e.g. IT systems, office buildings) and saving on the personnel required for this. As a result, various savings are conceivable:

• Elimination of vacancies / idle time as this will now be incurred by the service provider.
• Change from fixed costs to variable costs, as these are only incurred when the service is used.
• Savings thanks to a large order volume, as the service provider has more orders of the same type and can therefore optimise and better automate the processes.
• Reduction of dependence on internal specialists, fallback scenario in the event of a shortage of skilled workers.

Risks in the cost considerations
The comparison of own actual costs with the offer of the service provider is elementary. However, apples should not be compared with oranges. Only if the transparency of one's own cost situation is actually available should the outsourcing project be tackled. Particular attention should be paid to the allocation of overhead costs, which are usually historically grown in the own company.

In addition to the necessary truthful process cost calculation, it is also recommended to implement internal improvement programs before outsourcing projects in order to ensure process optimization internally. Only when this lemon has really been squeezed should one compare oneself with companies that have specialized in this subarea. Possible pitfalls:

• Integration costs
• Efforts for management and control of the new supplier / partner
• Profit mark-up of the service provider

In the case of offers from service providers, there is a risk at the beginning that the offer is initially made below cost and that, after shifting, the initial losses are compensated for by excessive adjustment and change costs.

In addition, it should be borne in mind that cost comparisons for innovative applications and one-off complex services prove to be problematic, as there is no sufficient database either within the company's own organisation or with potential service providers. With this lack of accurate figures, an objective and proper determination of costs is not possible. Nevertheless, issues such as know-how and resource availability could probably lead to an outsourcing project here.

Risks outside the cost considerations
In addition to the cost analysis, other risk considerations are important for a successful out-sourcing decision. No matter in which area outsourcing becomes an issue (production, administration, IT, projects, research), an expensive reintegration of the externally relocated processes back into the own organization is to be avoided at all costs. Thus, a well-founded risk assessment is required, since outsourcing decisions usually have a high corporate impact on the organization and long-term effects.

The risk of business fluctuations as well as bearing the consequences of errors/defects caused by the service provider must certainly be described as so-called relocation risks.

The list of operational risks is much longer:

• A failure of the service provider, because organizing a timely replacement service provider could become very difficult.
• A great dependence on the supplier due to the shifted process depth and the expertise that is now no longer available internally.
• This means a forced cooperation with the service provider, because the necessary know-how for a possible further development of the product/service is now with the supplier.
• Damages / failures due to deficiencies in the service provided, e.g. failures of the EDP systems.
• Complaints and additional costs due to a lower quality level; a 100 % test would prevent this, but would not be payable.
• Costs resulting from unclearly formulated service levels, contracts, specifications or requirement specifications, which lead to misunderstandings and errors.
• Forced know-how release and additional effort due to necessary detailed process descriptions, which would not be necessary internally in all cases. However, these are now necessary in order to have the special work carried out by the service provider.
• Holes in data security as well as a violation of secrecy requirements, since not all processes take place in one's own organization and are therefore difficult or impossible to control by one's own organization.
• Reduction / lack of flexibility, as everything has to be communicated and provided via the now existing additional body (the service provider).
• Deteriorated customer service because your own customer is now no longer directly served by your own organization.

Experience shows that failures in outsourcing are often due either to the fact that the wrong provider was selected or that the wrong process was outsourced. The necessary effort in the own company to describe the tasks and processes as well as the necessary standardization and the support and control of the service provider are also often greatly underestimated.

Summary
Outsourcing offers many opportunities, but its dangers must be considered. An organization must be clear when outsourcing makes sense for the company. An outsourcing should be checked especially with regard to the competitive advantages. However, an analysis of the company's own strategy is absolutely necessary first.

This requires sound preparation and a consideration of all risks (i.e. opportunities and threats) as well as the existence of concrete specifications and comparable actual costs. If this is the case, good outsourcing can and will make a valuable contribution to a lean and economic organization.