Many businesses throughout the globe are increasingly seeking services from third parties to undertaken activities that the businesses would normally have to do. Studies show that most of the businesses are outsourcing significant parts of their operations either regulated or unregulated. The arrangements made during outsourcing of these services are increasingly becoming sophisticated and complex as time progresses.
Outsourcing is a potentially risky affair, and companies could run the risk of being left out in their businesses. In such situations, the companies need to establish high-level principles about the whole process of outsourcing.
In today's world, outsourcing is used in a financial scenario as a means of reducing costs and improving financial and strategic purpose. The potential impact of outsourcing can be seen across many business activities such as in information technology where outsourcing can be done on activities like programming, application development among others. In more specific operations outsourcing can be done on activities like accounting and finance, back-office processing and even on administration. Reports within the financial industry are indicating that financial institutions are increasingly entering into contractual agreements with other firms and related businesses and or even third-party service providers to assist in most parts of a business regulated and unregulated activities.
Most of the functions and operations within an institution are too large to the extent that they performed and/or delivered in different ways. An organization can divide such activities or services such as marketing, product manufacturing, back office and others in the category of regulated entities. The controlled entities are tasked with keeping such activities in-house, but can operate some of those activities from different locations. As such this is not outsourcing and therefore the entity would have to bear the costs and risks posed by such an arrangement in the regular risk management framework.
Regulators can in a big way also mitigate concerns raised by making sure that outsourcing is one aspect in their assessment either in individual firms or outsourcing third parties. An accounting of the risk concentration in the service providers at the same time takes note of the systemic risk issues that arise afterwards.
The first process towards achieving a suitable outsourcing partner as mentioned earlier would involve formulation of high-level outsourcing principles that would guide the whole process of outsourcing from deciding which process to outsource to ensuring compliance. Some of those guidelines required for our case study are as follows;
When an entity that is regulated is seeking to outsource operations, it should have an extremely comprehensive policy in place. The policy will be used to guide the assessment of how and if at all those processes can be outsourced. The equivalent of or the board of management should retain the sole responsibility for the processes outsourced and the outsourcing policy arrangement.
A firm should formulate a thorough outsourcing management of risk framework or program to address the outsourced processes and the relationship shared with the third party service provider.
A company should make sure that outsourcing of operations and the arrangements made hitherto do not demean a company's ability to fulfil its mandate to its clients nor constrain the business financial or otherwise.
The companies involved should ensure that the outsourcing relationship guides and managed by written relevant contracts that well detailed and explains the meaning of all aspects of the outsourcing arrangement entered.
A firm should formulate and establish contingency plans that should include planning for business continuity and disaster recovery.
A business should take considerable steps to ensure that service providers protect and guard confidential information of both the firm and its customer from either malicious disclosure to persons not authorized.
Businesses should understand outsourcing processes as an important part of their ongoing assessment of the regulated entity.
Firms take necessary measures to assure themselves of any outsourcing arrangement risks that would derail their ability to meet its regulatory requirements.
Firms should have knowledge of the potential hazards they are exposed to where the outsourced processes of many companies are concentrated.
Definitions
Business process outsourcing is the act of contracting specific business tasks to a third party service provider. This method is implemented as part of cost-saving measure in most companies that want to stay afloat in their market field and as such the BPO is considered as an operational finance move. Business process outsourcing is divided into two main groups. One is the back office outsourcing and the front office outsourcing (Trojanh, 2006).
Statistics and trends
Research by a world leading consultancy firm has estimated about $500 billion of major the United States financial service providers are outsourced from offshore locations.
The graph below shows some of the most outsourced processes.
The graph indicates growth in percentage in outsourcing of Information Technology related processes. The graph also shows a growing percentage in other processes as such indicates a trend that is emerging which indicates a shift from the traditional outsourcing of specific processes towards more strategic outsourcing.
The process of process outsourcing
For a firm seeking to outsource one or some of the business processes there several contracts that could be of help in protecting the outsourcing firm and it service provider from future conflicts. Determination of which contract to take as part of the outsource arrangement should make the major part of the make or buy analysis. This because the final cost of any project will entirely depend on the structuring of the contract. Identifying which cost will be liable to the outsourcing service provider, needs to be part of the service provider's procurement task. It is important to understand the various responsibility matrices for both the outsourcing firm and the service provider either from the perspective of purchasing or in project management. This is occasioned by existences of large groups which have worked together to ensure smooth operations of the outsourced processes.
Advantages of outsourcing
Cost saving: Outsourcing of business processes can save a firm significant costs such employee compensation related costs, office, and related location costs. The elimination of such costs makes available resources be more efficiently utilized hence saving major costs involved in the daily running of a firm or company or institution.
Outsourcing also helps an organization to give more focus to the core functionalities of business rather than concentrating on side issues like management or customer service for example.
The legal requirements in contractual process and contracts
Business law is majorly concerned with the laws that cover trade and contracts. While seeking to identify how to protect a buyer and seller in a contract agreement is important to the whole process of business process outsourcing. Understanding the issues of contention such as the statutory rights, the terms implied in a contract and other contract related terms like the myriad of trading laws and trading standards. First, a contract can only exist when a set of conditions have been agreed between buyer and seller. This conditions included the intention and capacity to make a contract between a purchaser and a seller. Another condition is an offer has to be made and accepted and finally the exchange of something of value.
Essentially there three types of contracts that are used in any business environment. The three contract types are the Fixed Price Contract (FP), Time and Materials Contract (T&M) and the Cost Reimbursable Contract (CR). Each of the three contracts has different cost variations that could help control cost and work in motivating vendors to deliver outsourced processes effectively and efficiently.
Outsourcing seems to be the norm in the recent days and as such making informed decisions and comparisons on the financial implications of outsourcing or insourcing the various business processes. This will help determine the most cost-effective contract to use when outsourcing services. The process of identifying the correct contract or whether to outsource or utilize the internal resources underlies in a firm's ability accurately estimate what the cost implications of insourcing the business process to that of outsourcing the business process or activity. It is of great importance to understand how to calculate the various cost estimates. An example of how to make accurate comparisons of insourcing and outsourcing first takes the upfront insourcing, add to the cost of maintenance of the business process or activity if necessary then multiply with time equate this to the cost of upfront outsourcing added to the cost of maintenance multiplied with time. After making such comparisons try to decide which outsourcing contract to choose based on the contract pricing analysis.
Contract pricing is the analysis done on the contracts to ensure that the cost of outsourcing is both fair and within a reasonable range. To understand the concept of contract pricing, it is important to understand what price in procurement terms is and what its implication are. Therefore, in procurement circles, price is the cost of a product service or process plus any additional fee and or applicable profit within a contract type. The contracting firm covers the initial cost of the contract from other sources including other contracts, financial reserves or even from alterations of overpriced contracts.
References
Halvey, J. K., & Melby, B. M. (2007). Business process Outsourcing: Process, Strategies, and Contracts. Hoboken, N.J: John Wiley & Sons.
Trojahn, M. (2006). Development of an assessment-tool for procurement business process outsourcing. Norderstedt: GRIN.
