Outsourcing can have significant benefits but is not without risk.1 Some risks can be anticipated and addressed through contracts. Others, however, are harder to anticipate or deal with.
As a general principle, functions that have the potential to ‘‘interrupt’’ the flow of product or service between a company and its customers are the riskiest to outsource. For example, outsourcing call-center responsibilities can result in customers being dissatisfied with the product or service and, thus, in higher product returns, lower repurchases, or complaints that could endanger the company’s reputation.
The second riskiest type of activity to outsource is one that affects the relationship between a company and its employees. Outsourcing the human resources function, for example, can affect employee-hiring quality and outsourcing payroll and benefits processing can result in information breaches that generate identity theft issues and resultant legal issues. By contrast, support functions such as accounts payable and maintenance are less risky to outsource because they have few direct links to customers or internal organizational processes.
More formally, risks associated with outsourcing typically fall into four general categories: loss of control, loss of innovation, loss of organizational trust, and higher-than-expected transaction costs.
Why would you put your company to risk by outsourcing without the expertise and know-how that is required?