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BPO Journal

Tuesday, February 21, 2006

Risk Management in BPO

An important finding in my research on governance of BPO relationships was that when firms outsource a business process, they also tend to outsource the risk associated with the execution and management of the process. Not surprisingly, these relationships are marked by high levels of dissatisfaction.

Protiviti, an independent provider of internal audit and business and technology risk consulting services, has a good article on the risks involved in outsourcing and the management of such risks. The risks described in the article are firm- or relationship-level risks. No macro risks such as political or economic risks are outlined here. The risks are broadly classified as project planning and management risks, supplier selection risks, contracting and negotiation risks, transition and start-up risks, and contract and supplier performance risks. While the article does not offer a recipe for risk management, it does provide a thought framework to analyze the risks involved in outsourcing.

Risk management, according to my empirical analyses of survey data on more than 140 companies, boils down to the following processes:

Know thy outsourced process - Firms often outsource complex processes that are not executed or managed efficiently in-house. This is a recipe for dissatisfaction. Firms must attempt to untangle complexity and outsource processes whose requirements can be efficiently communicated to the service provider.

Analyze the outsourced process - Examine complexity, strategic importance, and interdependencies of the outsourced process to clearly define outsourcing objectives and functional requirements.

Govern well - The governance structure must reflect the unique nature of the outsourced process. The article focuses on the contract as the governance solution, which is also the mistake that most firms make. The contract must be complemented by investments in processes and technologies that execute the contract to realize efficiency gains in outsourcing.

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