Posted by Mary Milorrie Campos
Mar 26, 2024
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Outsourcing to offshore locations increases your capacity to run your firm, widens your access to qualified professionals outside geographical borders, and allows you to save costs.
But it’s not without its risks.
How can you manage the risks of offshore outsourcing then? Here are eight (8) tips to consider.
Tips to manage the risks of offshore outsourcing
In our recent article, we listed the common offshore outsourcing risks. Those risks are tied to these five core areas: operation, cybersecurity, financial, compliance, and your firm’s reputation. To lessen their negative effects on your firm — and achieve what you want from outsourcing — consider these tips for offshore outsourcing risk mitigation.
1. Be careful when choosing a service provider
If you want to avoid expensive switching costs, or the costs you may incur when changing service providers, you should be careful in choosing the right outsourcing partner.
But doing so goes way beyond just finding and selecting a service provider.
Knowing the rationale behind outsourcing must always be your first step. During this process, you should work closely with your firm’s decision-makers to measure the feasibility of this initiative. After deciding, you must specify your goals, requirements, and expectations.
Taking these extra steps can help you identify the right service provider for your firm. Therefore, reducing the unnecessary costs of working with an unfit provider.
Read more: Your Comprehensive Guide to Outsourcing in Offshore Locations
2. Do your due diligence
In its Principles on Outsourcing report, the International Organization of Securities Commissions (IOSCO)* states:
“A regulated entity should conduct suitable due diligence processes in selecting an appropriate service provider and in monitoring its ongoing performance.”
In the context of outsourcing, due diligence refers to a two-way process between the buyer (your firm) and the service provider. This means that both parties will have to assess the asset base, capabilities, resources, and processes of each other. From there, both parties can identify the possibility of maintaining a productive and successful outsourcing engagement.
“The due diligence undertaken by both the customer and the supplier will ultimately feed into the final outsourcing agreement. For example, the description of the services, any obligations regarding [the] transformation of the services, and the service levels,” writes Barbara Melby, a lawyer who specializes in the outsourcing market.
Since due diligence is a mutual effort, it sets the scene for a business partnership that’s grounded on accountability, transparency, and trust.
*The International Organization of Securities Commissions (IOSCO) is an international organization of securities regulators that promotes fair, efficient, and transparent markets. It also aims to reduce systemic risks and protect investors.
Related: Due Diligence in Outsourcing Accounting Services
3. Draft a legally binding written contract
Drafting a legally binding written contract is another proven way to manage the risks of offshore outsourcing. This document outlines the role of both parties throughout the outsourcing engagement. It contains:
- Performance standards
- Scope and limitations
- Pricing model
- Length of service
- Service level agreements (SLAs)
- Provisions related to the termination of contract (or exit agreement)
- And other agreed-upon conditions
However, a written contract alone is not enough to protect you from risks. Together with a legal expert, you must review all the conditions outlined in the outsourcing contract to ensure everything is fair and transparent.
4. Document your work processes
Service providers can fall short of your expectations when you leave them clueless about how you do things internally. If you let it persist, it can increase operational risk.
This can result in slower turnaround or subpar service quality, both of which can affect your day-to-day operations. To some extent, it may even impact your consumers’ perception of your brand.
If you have documented work processes, knowledge transfer becomes easier because it acts like a blueprint of your internal workflows.
It’s also useful during your initial search for qualified providers. You can use this document to identify providers that can integrate your workflows into their work processes.
5. Practice effective outsourcing governance
Outsourcing governance is a proactive approach to managing your ongoing engagement. It defines various responsibilities, objectives, roles, and controls involved in maintaining the quality and costs of your outsourced services.
In addition, outsourcing governance is necessary because despite having a legally binding contract, both client and provider can often go beyond rules, agreements, and exceptions. After all, a contract can’t anticipate all possible scenarios that might occur as the outsourcing engagement progresses.
As this IBM Research Report states,
“It is crucial to establish a set of disciplined outsourcing processes that consider the needs of the organization, prescribe the controls to ensure financial and regulatory compliance, manage the relationship with realistic performance standards, and proactively manage the potential risks.”
6. Set specific KPIs to measure outsourcing effectiveness
Without specific key performance indicators (KPIs) to measure the results of your outsourcing engagement, it’ll be difficult to say if this initiative adds value to your firm at all.
And without proper measures, operational risk increases.
In this Harvard Business Review article, Aron and Jitendra Singh write:
“What a firm doesn’t measure, it can’t offshore well... Only firms that set tolerance limits for errors, draw up completion times and productivity norms, and continuously measure employees’ performance are able to move processes offshore.”
7. Strengthen your internal cybersecurity measures
If you set high standards for your service provider’s data security, you can prevent disruptions and protect the integrity of your confidential data. This step — investigating their cybersecurity efforts — is usually a part of the due diligence process, as we've discussed in item #2.
But it’s not a linear, one-sided effort.
To further protect your sensitive data from cyberattacks, you must strengthen your firm’s cybersecurity measures. When you're protected from the inside — that is, your in-house employees have high cyber awareness, and your internal IT team is strict with data use and information sharing — cybersecurity risk can be low, even if you’re outsourcing for the first time.
8. Retain a portion of your processes in-house
While outsourcing offers cost-effective solutions, we still recommend doing it moderately.
If you become too reliant on a service provider, you’re running the risk of losing significant business knowledge internally. It may even affect your firm’s business continuity.
On the contrary, retaining some capacity in-house enables you to bring back those processes into your firm if needed.
In other words, it’s better to treat your offshore vendor as an extension of your firm instead of a replacement for your in-house team.
The good thing about most service providers is the scalability of their solutions — a feature that gives you the option to start with a small offshore team, measure its effectiveness, and ‘scale up’ when the need arises.
Outsourcing service provider for accounting firms
If you’re looking for a credible accounting outsourcing company, send us a message here.
You can also download our Finding the Right Talents: D&V Philippines’ Solutions for Modern Accounting Firms whitepaper to learn more about our services or read these case studies to find out how we assisted our clients in resolving their finance and accounting concerns.
