So you can€™t outsource risk?

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I have just read in a recent article how you can’t outsource risk and am amazed that people still think this is the case. Of course maybe they mean you can’t outsource all risk?

In fact, if you have managed to do that then you have probably outsourced your business to such an extent that you don’t have it any more.

However, you can outsource a proportion of risk and liabilities; you will pay more, the more risk that your supplier takes on, but in some circumstances you may well find it worthwhile. One way to approach this is constructing an outcome based model with your suppliers.

This model is being used by end users in an effort to detach themselves from how a supplier delivers their services, which allows the user to focus on end objectives. This model has become prominent enough for the National Outsourcing Association to hold a seminar dedicated to the topic.

Essentially, the end user sets business orientated objectives and then lets the supplier(s) worry about how they meet the objectives and therefore they accept the inherent risk associated with reaching the objective.

Agreements can be put in place that essentially hold the supplier to account if the overall objectives are not met in a set time frame. This seems like the perfect end user model, however all the risk is quickly shifted back onto the end user if the vendor does not deliver at all! Essentially the user would be left with nothing to show for a great deal of time and financial investment. Wise users will split provision to mitigate risks.

This outcome based model is not a licence for end users to simply walk away and leave it to their suppliers. As with any outsourcing deal the nitty gritty of the contract needs to be thrashed out properly in order to reap the benefits.

End users that only focus on outcomes can lead outsourcing deals into trouble. Whether a customer is starting out on a new outsourcing relationship or is renewing an existing one, if the aim is to achieve a business outcome, effectively analysing the service requirements is still as important as ever and should not be overlooked.

Outsourcing a process or outcome will certainly allow users to outsource an element of risk and depending on the type of outsourcing agreement the outsourced risk could be quite significant. However end users must ensure that the same precautions are taken regardless of the type of outsourcing model they engage in.

Structured SLA’s and regular milestones should be included in any agreement to allow a user to keep track of the supplier’s progress. As with any business deal, risk should be carefully analysed and appropriately handled, outsourcing can alleviate pressure on end users, it just needs to be done correctly.