What are the Common Offshore Outsourcing Risks?

Understanding the different offshore outsourcing risks can help you prepare a realistic action plan to mitigate their potential impacts on your operations while enjoying the merits of outsourcing.

If you’re new to the concept of offshore outsourcing, we define it as: 

The business practice of subcontracting, delegating, or offloading some of your operations to service providers from other countries.

Outsourcing, by itself, gives you an added capacity to manage your firm’s workload. It’s also an effective way to address skills and knowledge shortages. And when you outsource to offshore locations, you can achieve bigger cost savings due to the major price differences of services between countries. 

 But of course, you also need to do some legwork to achieve the benefits of offshore outsourcing. 

Check out this guide: Your Comprehensive Guide to Outsourcing in Offshore Locations 

Aside from knowing the benefits of working with service providers abroad, you must also understand the risks that come with it. This way, you can prepare an outsourcing risk mitigation strategy to counter its potential negative effects. 

Types of offshore outsourcing risks and what causes them 

All business activities involve some degree of risk — and offshore outsourcing is no exception. 

When you outsource, you entrust some of your operations and delegate them to an external service provider. 

This move can introduce a new set of risks.  

Unlike the level of authority you have over your firm’s processes and systems, outsourcing provides you with limited control. Market conditions, regulatory requirements, political changes, and other external factors can also add to the risks you might encounter, especially when you outsource abroad. 

So, what are the risks you must watch for? 

Below is a rundown of the common offshore outsourcing risks and why they occur.

1. Operational risk

Operational risk is anything that can disrupt your firm’s day-to-day operations. If left unattended, it can lead to direct or indirect financial losses. This type of risk usually arises from ineffective processes, systems, people, or external events.  

Here's how it applies to outsourcing:

a. Processes. Operational risk due to ineffective processes can be the result of: 

• Lack of outsourcing readiness: Outsourcing without proper goal setting (and planning based on those goals) can lead to a failed engagement.  
• Undocumented processes: Failure to document internal processes can make it harder for the outsourced team members to keep up with your requirements and expectations. This can result in slower-than-expected turnaround time and subpar output. 
• Insufficient metrics: Without the right metrics, it’ll be difficult to measure the quality of outsourced processes. And if you cannot measure quality objectively, it becomes harder to say if the offshore company is better or worse at handling the outsourced tasks than your in-house employees. 

b. Systems. Incompatible, outdated, or inadequate systems (e.g., software and equipment) can slow down the progress of your outsourcing engagement. It might even incur additional costs down the line.

c. People. Internally, operational risk caused by the people factor stems from employee shortages, mismanagement, or human errors. In outsourcing, it can be due to the failure of the service provider to deliver. Some of the reasons can be:

• The inability of the service provider to scale as initially promised 
• Knowledge gaps in internal processes, industry, buyer personas, and relevant regulations 
• High employee attrition 
• Skills mismatch 
• Low-quality output 
• Bad management 

If you’re outsourcing professional services like accounting and software development, the people factor can majorly contribute to operational risk.  

d. External events. Natural disasters, political changes, and economic conditions can also affect your service provider’s ability to deliver. This highlights the importance of choosing an outsourcing location wisely.

 For a more extensive discussion of operational risk in outsourcing, check out this helpful guide from the Harvard Business Review. 

2. Cybersecurity risk

Cybersecurity risk is a critical concern in outsourcing, especially when you need to share sensitive information with an external provider. 

“Entities that acquire outsourcing services may be less than fully protected against these risks or perhaps unaware that they exist,” states Paul A. Ashcroft, an associate professor in the School of Accountancy at Missouri State University in this article. 

Failure to perform due diligence on a service provider’s data security measures increases your exposure to data security threats, particularly data breaches.  

A good prevention strategy starts during the initial phase of selecting a service provider. Part of your selection process should focus on answering how secure their services are and the measures they have in place to protect confidential business information. 

3. Financial risk

Despite its use as a cost-cutting tool, offshore outsourcing still has its fair share of financial risk — a type of risk that can cause negative impacts on your bottom line.

In outsourcing, this translates to spending more than expected. Instead of reducing costs and getting positive returns, high exposure to financial risk can be an added expense on your behalf. 

Among the triggers of financial risk in outsourcing are: 

• Hidden costs 
• Unclear pricing models 
• Financial instability of the service provider 
• Poor outsourcing decisions (especially when choosing a service provider) 
• Changes in the economy or political landscape in the country where your service provider is located 
• Too cheap services (service quality can be substandard) 

Conducting a cost-benefit analysis before outsourcing offshore is one way to manage financial risk. 

4. Compliance risk

Compliance risk can be tricky because applicable laws and regulations can differ depending on:  

• the nature of the job you plan to outsource, 
• your industry,  
• relevant data protection laws, and 
• the country where you plan to outsource.

Outsourcing accounting roles, for instance, requires a service provider to have the necessary knowledge of IFRS or GAAP.  

They must also be familiar with your country’s unique regulations and requirements. For example, filing taxes in the United States Internal Revenue Service (IRS) differs from lodging taxes to the Australian Taxation Office (ATO). 

Since there are no universal guidelines about compliance in outsourcing, it’s important to discuss all relevant laws and regulations with the service provider. Failure to adhere to legal and regulatory requirements can result in legal consequences and monetary losses. 

5. Reputational risk

Outsourcing to offshore locations can also make you susceptible to reputational risk because of several factors: 

• Poor work practices of third parties 
• Service failures 
• Substandard service quality 
• Negative brand perception (consumer backlash, resistance from employees) 
• Unsatisfactory customer service 
• Limited local market knowledge of the service provider 

To manage reputational risks, you must select a reputable service provider. You must also dig into their track record to see how they handle their clients. 

Read Next: What are the Common Offshore Outsourcing Risks? 

10+ years of delivering quality and reliable accounting support

Outsourcing to a credible service provider should be one of your considerations when developing a risk mitigation plan. 

For over 10 years, we have worked with over 400 CFOs and professional services firms worldwide to improve their accounting processes. We’re also on the lookout for the latest technologies and regulatory changes. To maintain the quality of our services, our Quality Assurance team conducts regular checks and reviews on our service delivery. 

If we tick all your requirements, we’re happy to support you with your finance and accounting needs. Let us know how we can help by sending a message here. 

But if you’re not yet ready for a call, download our Finding the Right Talents: D&V Philippines’ Solutions for Modern Accounting Firms whitepaper to learn more about our services and processes. 

You can also read these case studies to find out how we assisted our clients in resolving their finance and accounting concerns.