What Is The Key To Outsourcing And Mitigating Risk?

Outsource Risk

Costs are rising, vendor risks are changing … so how robust or fragile are your supply chain management structures? From the SME to the largest of global corporations no one is too big to fail, no one is immune but on the flip side no one is beyond taking steps now to navigate post credit crunch territory.

Globally inflation is back and commodity costs are rising. By way of illustration, The Economist Intelligence Unit predicts global oil demand in 2013 could step up momentum at nearly double 2012’s rate; supply and demand, growth in China and the U.S added to uncertainties in the Middle East are having an impact on barrel prices.

The same unit reported that the global economy began 2013 fundamentally stronger, with the euro crisis significantly improved and China ready to grow. In general however, market growth has stagnated with an inevitable knock on effect on job growth.

Stagnated market growth limits a business’s ability to widen its strategic sourcing activities thus limiting spend management critical to keeping cost under control. Lack of significant market growth is warning shot across the bows of all outsourcing stakeholders.

Now is the time to get spend management under control but that same lack of growth means volumes are not increasing to allow Purchasing Managers to negotiate volume based savings on an individual basis. Volume based cost savings will be achieved by engaging with a multi-sourcing with a mature sourcing strategy but what about governance?

A mature governance strategy is key to achieving the business case for outsourcing and mitigating risk. So you’ve got one right? Professor Brian Squire from Bath School of Management conducted a study with procurement managers and directors from the UK and China which highlighted 300 individual risk factors yet half of UK organisations had no formal strategy to identify supply chain risks (rising to 87% in China).

Rising fuel and energy costs, insufficient internal management maturity, supply chain conflicts caused by cost cutting pressures, risk of supplier insolvency and fluctuating exchange rates were identified as major risks but mitigation of the risks seemed more aligned with risk impact than forecasting risk probability.

Increasingly organisations are looking to the muliti-sourcing model for answers to cost, risk and an ever growing list of business drivers. Multi-sourcing is the process of outsourcing to multiple vendors and service providers instead of a single source.

Trends show that suppliers are increasingly preparing their operations to fit into a business landscape that demands this model. Government procurement processes have moved away from larger, more established, more expensive service providers discovering , as the private sector has, that cost savings can be achieved by using a selection of suppliers with niche, specialised services to offer and gain cost efficiencies.

This creates a new risk because juggling many smaller niche providers is harder than one large supplier and frankly few organisations are geared up to manage these contracts efficiently enough to make the cost savings that the original business case stipulated.

Furthermore, a significant number of aggressive acquisitions from larger organisations looking to consolidate and expand their footprint is changing the vendor landscape on a constant basis – who has the time to monitor all that? Your multi-sourcing partner should be on top of this for you because consolidation should benefit you, the end user, as much as (in our view more than) the supplier.

Capita purchased Call Centre Technology in Bristol, Serco bought Intelenet, the Indian Global Services provider, CSC agreed to take over iSOFT and such consolidation in the market will continue as companies look to increase their client base and footprints within those client organisations.

Now is the time to question whether your supply chain management, risk mitigation, vendor governance practices and operational, service level monitoring is geared up for the new reality. As many organisations are discovering, to make sure these muliti-vendor deals are successful requires a lock, stock and barrel renewal of management skills.

David Cotgreave

David Cotgreave MBA, BSc (hons), PRINCE II, is Professional Services Director at Stoneseed, with over 20 years’ experience in IT Consulting. David has worked with organisations such as BT Engage IT and KPMG, before founding Stoneseed in 2009 and has gained considerable business experience whilst working with a wide range of organisations across the UK and Europe carrying out a range of strategy, review and implementation projects. David is currently responsible for leading the Professional Services and IT Advisory business within Stoneseed. The IT Advisory team work with clients to realise value and efficiency from their IT investments through a range of services including requirements definition and IT Strategic Planning.

  • Michael Bian

    Great insights!