How Not to Put All Eggs in One Basket - De-Risking Strategies for Outsourcers

What is De-Risking ?

Outsourcing is a process that involves selection of vendors who would then do the necessary work for their clients regarding handling such work that the clients deem can be done by Third Party Vendors.

What this means is that the clients first narrow down the list of outsourcers that can be entrusted with the work, selecting a particular vendor after due diligence, and then closing the deal by entering into contractual agreements with the vendors.

Due Diligence in this respect usually means evaluating the capabilities of the vendors to perform the assigned work to the satisfaction of the outsourcers, estimating the risks that can arise from outsourcing work, and then check if the returns on outsourcing outweigh the inherent risks to such projects.

Thus, outsourcers usually perform adequate evaluation and estimation of risks as part of their tendering and bidding processes.

In this context, the term de-risking is usually used to indicate the strategies employed by the outsourcers to ensure that the risk from the outsourcing deal is spread over the course of the project.

For instance, a particular outsourcer can determine that selecting a specific vendor to handle the project all by themselves can be risky to the clients and hence, they select multiple vendors so that they have backups and fallback options in case the project runs into trouble.

Indeed, the fact that outsourcers in the United States and Europe often choose multiple vendors in Asia and even within the same vendor country is a given when one considers the geopolitical, political, social, economic, and operational risks that the outsourcers have to take into consideration.

How De-Risking Works in the Real World

For instance, if say, Fidelity Investments chooses Infosys as the vendor to which they would outsource a part of their project, such decisions are also accompanied by de-risking wherein Fidelity would also partner with say, Wipro, and Tech Mahindra so that any risks from Infosys are mitigated by having multiple vendors.

Such risks can include operational risks wherein Infosys, and its project managers might not be able to complete the project in the time leading to delays and costs for Fidelity.

Indeed, operational risks are the most common among the reasons why outsourcers select multiple vendors for their projects.

Apart from the obvious operational risks of slippages and delays, there are other risks such as social and political turmoil in the cities in which Infosys operates that can lead to Fidelity choosing vendors spread over multiple regions and cities.

Of course, Infosys can always ensure that Fidelity֜s projects are handled across multiple centers, and this is again another de-risking strategy that is employed by both the outsourcers and the vendors.

However, it is usually the case that the outsourcer de-risks from their end before insisting on the vendors to spread the project across multiple locations.

Mission Critical Operations and De-Risking

While these risks are most commonly cited as the reasons for Western firms to employ de-risking strategies, it is also the case that outsourcers take into account geopolitical risks as well.

For instance, the risk of war breaking out in India or other countries is a key consideration when Western firms select the vendors and this is also the reason why many of these firms in the present times have been outsourcing their work to multiple countries instead of placing all their eggs in one basket by selecting one country alone.

This happens mostly with BPO (Business Process Outsourcing) projects since 24/7 availability and continuous operations are needed for call centers and other projects.

Indeed, de-risking by firms in this type of work is quite common wherein Western companies often insist on Indian and Filipino companies to not only have offshore backups but also coordinate amongst themselves so that their operations are unaffected in case of any national or regional turmoil.

Proof of Concept and De-Risking Strategies

Moreover, de-risking is commonly employed when Western firms deal with smaller players where the risk of the vendor folding its operations and closing its business is a very real one.

Indeed, selecting multiple vendors as well as insisting on the vendors to first accept the project on a Pilot basis as well as Proof of Concept testing are all different strategies that are employed by Western firms when outsourcing their work.

Proof of Concept refers to the practice of Western outsourcers checking the capabilities of the vendors over several months or even a year before they are convinced that outsourcing their work to the particular vendor would be risk-free or at least carry minimal risks.

A key concern for Western outsourcers is also the very real risk of logistical and infrastructural issues arising from Asian firms that do not have backups in place in case of natural disasters. While this applies to any firm anywhere in the world wherein hurricanes and earthquakes can disrupt operations, the key concern for the Western firms is the aftermath of such disasters that indicates the resilience of their vendors.

This is the reason why many Western outsourcers often insist on locating their projects in regions and zones that are deemed to be the least risky as far as their susceptibility to natural disasters is concerned.

Do not put all your Eggs in One Basket

Lastly, de-risking is a very valid strategy for any firm and more so, for the outsourcers since their entire business depends on the projects and the operations continuing smoothly and without interruptions and disruptions. To conclude, it is better not to place all eggs in one basket and hence, follow de-risking as far as possible.

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.