Adam The risks posed from outsourced arrangements is within the TOP 10 operating risks faced by organisations. This is what YOU can do about it – Outsourcing risks to AVOID.
Studies by risk.net on operational risks have consistently shown that outsourced arrangements are at the top of organisations considerations. There are predominantly four areas within outsourcing that can help to reduce and avoid any risks to the service.
- Requirement Specification & Keeping it Simple – Having an ambiguous or unclear specification will make the contract difficult to manage for you and the supplier. This will result in poor performances, service disruptions and unnecessary contractual discussions. In addition, due to scope gaps, there is the risk that certain requirements will be missed by the supplier which will then require a contract variation to correct. In order to avoid this, ensure the scope of requirements is crystal clear, comprehensive and simple to understand, this will make it easy for both parties and reduce the likelihood of requirement related risks.
- Supplier Selection & Due Diligence – Choosing a supplier that can actually deliver the service, rather than one that thinks they can be crucial. The supplier selection and tender evaluation mechanism should provide the appropriate assurances that suppliers are financially and organisationally stable, however it’s also important to request case studies and other evidence that shows the supplier has a proven track record. Seeing that they have done it before, means they just might be able to do it again!
- Cost Incentives – Asking a supplier to deliver value and reduce costs is like asking turkeys to vote for Christmas, therefore any contractual arrangement needs to have a clear cost incentive mechanism. The keyway of ensuring this happens is to provide incentives on a gain-share model whereby any cost incentives are split between both parties, this encourages the supplier to driver further efficiencies on the basis that they will be rewarded with some of the ‘gain’. In addition, where performance incentives are needed, the best way to achieve this is with a gain and pain mechanism which is linked to a KPI. This means that when a supplier performs above the required standard, they are rewarded, but are also penalised for any poor performance.
- Contract Performance Ambiguity – One of the key risks with any outsourcing arrangement is having a service that is difficult to manage. Any ambiguity in the way a supplier’s performance is to be measured, or what is a key measure will result in poor performance. Firstly, unless it is clear within the arrangement what the key performance measures are, how will a supplier be able to conform? Secondly, without clear performance metrics, there is no way that the contract performance can be measured. Once a clear structure of performance metrics has been implemented this reduces the risk that supplier performance does not meet the required standard and makes it easier to track if they do.
The four areas listed here are key things that you can do when outsourcing key services to ensure that risks are avoided and that you have the appropriate mechanisms to deal with any that arise. Outsourcing arrangements can also be managed virtually, check out these top tips for managing suppliers in a virtual world.
