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Outsourcing – The risk of giving the business away

By Michael Vincent

26 December, 2006

Is outsourcing the risk management function a risk or a benefit to the organisation? 

Risk management is about the identification, mitigation and financing of identified risks within an organisation.  Outsourcing is about obtaining materials, components and services from suppliers outside the organisation. 

The key to the success of this process is the identification of core and non-core activities, once this is done you know what can be outsourced and what must not be given away. Unfortunately in the business environment we have today, outsourcing is about fiscal results and bottom line ratios, this approach is guaranteed to ensure the business unit disappears and is overtaken by emerging entities.

Internal risk management encourages a business to achieve the following:

1. More effective decision making

2. Better allocation and use of resources

3. High standards of accountability and customer service

4. Breeds creativity and innovation in management practice

5. Improved capacity to manage in the face of competition

6. Improved morale and flexibility in meeting objectives

7. Transparent decision making

Can you achieve the same benefits by outsourcing the risk management function; indeed is the management of risk a function or a series of functions within an organisation.  The outsourcing of risk management is increasing at a rate of 25% a year, therefore there must be something in this approach or companies are giving away unknowingly core activities or in other words the value of the business.

One cannot enter into an outsourcing arrangement without understanding the fundamental paradox of the activity "Outsourcing exhibits a contradictory nature.  One of its elements is the high cost of getting into or out of a relationship; this necessitates a long-term agreement in order to amortise costs.  A long term deal is inherently inflexible because prices and metrics are projected into the future but decided at the outset; yet because we cannot predict what the future holds, flexibility will be necessary to deal with changes."  This paradox creates the tension of flexibility versus long-term relationships, can this be negotiated at the start.  This is the fundamental challenge of outsourcing.

Outsourcing the risk management function does have some advantages, these are: -

1. The desire to focus on core business

2. Want to achieve rapid growth

3. Want to control operating costs

4. Want to reach new markets

5. You are understaffed

6. Having to deal with market seasonal variations

7. Struggling with system limitations

8. The entity is going to restructure

There are seven steps for successful outsourcing, they can be applied to any function, but are most appropriate for the risk management function: -

1. Planning - form a team to study and implement the outsourcing option, keeping others informed.

2. Explore - determine how outsourcing fits with your company's long-term strategies and does it fit with other transformational activities.

3. Analyse cost/performance - measure existing costs against outsourcing costs, ensure future costs are factored in.

4. Select providers - identify qualified providers, ensure relevance and prepare requests and evaluate proposals.

5. Negotiate terms - reach an agreement of specific terms, scope of services, performance standards, pricing and management.

6. Transitioning resources - human resource issues, arrange transfer of functions to outside provider.

7. Manage relationship - monitor performance, evaluate results and resolve problems, aim to build a strong relationship with the provider.

 

Selecting the outsourcing partner must be the basic priority, questions that must be answered are, do they have the capacity, do they offer a solution and not a template and importantly do they understand your risks and business?

 

Innovation does not always grow from within an organisation, so perhaps the greatest risk facing the risk function is not considering outsourcing.  Finally always remember when outsourcing you are moving functions to an external provider but you cannot outsource or move the ultimate responsibility.  To outsource for the sake of short-term ratios is to totally abrogate that responsibility

About the Authors

Director

Australasian Risk Management Unit

Faculty of Business and Economics

Monash University

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