Business outsourcing challenges

The main challenge is when a company has to give sensitive information which might even cause security concerns if the information lands in the wrong hands. There is also great concerns on the legal aspects incase the outsourced company exposes company’s sensitive information.

Business process outsourcing (BPO) has many obvious advantages for companies which decide to outsource one or more of their non-core functions or services to lower-cost or higher-value locations. However, there are also risks or challenges associated with this strategy, and it is important that a company is aware of these when embarking on the BPO path.

Security risks

International innovations in data security have to a large degree helped to mitigate the risk of sharing sensitive data with service provider companies. However, client companies have to ensure that their BPO service providers adhere to the client’s security policies and that all work done adheres to up-to-date security procedures, and therefore the issue of security should be addressed in contracts with BPO service providers and in service level agreements.

Duening and Click advise that both client and service provider should also review their internet security policies, keeping in mind the following principles:

  1. limiting access – i.e. the fewer people with access to a system, the better;
  2. developing a secure password policy;
  3. establishing a procedure for granting access rights;
  4. having backup and emergency procedures in place before going live, including disaster recovery and actions to be taken in the event of a security breach; and
  5. implementing an external audit by a professional auditing company, which should also be on call in case of a security breach.

Negotiating BPO contracts

Negotiating a business process outsourcing contract involves the arrangement of a long-term collaboration and therefore critical to the success of the venture. Aspects which should be included in nearly every BPO contract are: Scope of work, service level agreements, pricing (fixed price or variable pricing agreement), term of the contract, governance (i.e. monitoring performance and compliance through reporting and benchmarking), intellectual property, industry-specific concerns, termination of the contract, transition in the event that either party terminates the contract, force majeure and dispute resolution.

A common mistake of service level agreements is failure to define appropriate levels for out-of-compliance performance: For example, if the service level for a call centre requires that 95% of all calls are answered within a certain time frame, the service level agreement should also stipulate the minimum acceptable standard for the remaining 5% of calls.

Labour-related challenges

Collective bargaining and labour relations laws effective in the outsourcing location present another challenge to business process outsourcing ventures. For example, laws restricting an employer’s right to terminate employees exist in many countries that are typical outsourcing destinations and failure to follow the appropriate process may result in fines for the client company. For this reason it is important for companies considering outsourcing to study the labour laws in the country to which they want to outsource services. On the other hand, being implicated in so-called sweatshop labour practices may damage the image of a client company at home.

Legal challenges

The legal risks associated with outsourcing originate to a large degree from the fact that there is a relative lack of precedent for, e.g. remedies or damages that can be demanded from an outsourcing service provider in the case of a security breach or other contravention. One way of successfully minimizing the possibility for legal disputes has been splitting contracts between different services outsourced. Another method that has been successful in minimizing risk has been the development of milestones for project deliverables, with accompanying fee payment milestones.

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Outsourcing helps us cut cost but without the right research and consideration this might not be the case. This means we should know which factors of the organization should be outsourced and for how long. Consider the risk and make the right choice.

The objective of this whitepaper is to identify outsourcing issues and risks that are unique to smaller companies, offer you insights on how to address them, and ultimately help companies establish long-term success in manufacturing outsourcing. This paper identifies ten key areas in which the unique challenges facing smaller companies are most apparent.

1. Right-sizing your contract manufacturer selection

Challenge: Not all CMs with the capabilities you need will be interested in the amount of business you can offer.

At the foundation of every outsourcing relationship is the number of dollars at stake. Virtually every CM will be interested in determining the amount of revenue that could result from a business relationship with an OEM. This question is sometimes posed by asking for a volume projection along with a product’s specifications and bill of materials (BOM), thus enabling the CM to roughly calculate the overall business opportunity. In other words, the amount of business you are able to provide matters a great deal to the CM. That said, a contract manufacturer may consider working with smaller OEMs if they help the CM enter a new market with strong growth potential. In these cases, a CM may be willing to compromise short-term revenue gains for the chance to become a pioneer in a growing industry.

Solution: Make your business the right proportion of a CM’s revenue, and confirm interest before engaging in a lengthy RFQ process.

Unless there are other compelling circumstances, your annual purchases should represent a minimum of 5% of the CM’s plant-level revenue and no more than 20% of the CM’s total company revenue. Dropping below the lower threshold may make it difficult for you to get the right level of management attention from your CM, while exceeding the upper threshold may over-expose your CM to your business. You should obtain confirmation of interest in your business not just from the account team, but more importantly, from their executive management. If you are too small for these senior executives to reasonably get involved before you make your selection, then you should see that as a warning sign. In this situation, chances are that after you consummate the business relationship, they will be even less inclined to lend their support in resolving any issues that arise.

2. Forecasting with reasonable accuracy

Challenge: Forecasts are uncertain, but they set the foundation for your credibility with a CM.

Any sales, marketing, or operational professional will tell you that forecasting is an art, not a science. No company forecasts perfectly and only a few can do it consistently with a reasonable level of accuracy. Even with the best forecast, there are going to be changes due to customer push-outs, cancellations, spikes in demand, or unexpected shifts in product mix.

Despite these challenges, the forecast that you submit to your contract manufacturer serves as the most important evidence of your credibility as a company, especially if you are a start-up. A forecast is a mechanism that serves two fundamental purposes. First, it gives your contract manufacturer visibility to the amount of revenue or profit that can be generated from your business. This determines how much and what caliber of resources the CM will assign to support your requirements. Second, it defines the level of risk to which your contract manufacturer will be exposed. In most cases, long lead-time components on your BOM must be purchased based on a forecast that looks far ahead into the future.

Solution: Make forecasting a collaborative, cross-functional, and institutionalized process within your company.

Take the necessary steps to make sure that your forecast is reasonably attainable at the aggregate level, giving the CM some degree of predictability about the level of revenue they can expect to generate. Contract manufacturers are much less sensitive to changes in product mix than they are to the total dollars available to them. There is no magic target in terms of percentage of desired forecast accuracy because each market carries its own risks and uncertainties, but a variation of 10% or less at the aggregate level is considered reasonable.

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