The rapid pace of technological development is exerting profound changes in the way companies conduct some of their business activities.
In recent years, many companies have sought to realize the economic benefits of technology by outsourcing some or all aspects of their IT-related services functions to third-party service providers, shedding non-core services and reducing costs.
The COVID-19 pandemic has promoted a growing inclination towards outsourcing as the need to gain a competitive advantage by offering high-quality services at low cost is now greater than ever.
What is Outsourcing?
Fundamentally, outsourcing refers to the transfer of an in-house function to an external organization to achieve near-term operating results such as cost savings and greater efficiency. The concept of outsourcing is not new. Facilities management and service bureau agreements have continued to proliferate since the 1970s.
The recent advancements in technology have opened up new opportunities for a sharp increase in outsourcing arrangements due to the increasing demands on IT departments to conduct higher and more complex tasks that require extensive training.
Indeed, the market volume in the business process outsourcing segment is projected to grow by around $40 billion during 2021–2025.
A third-party service provider can offer enhanced levels of business specialization, often at a lower cost, thereby providing companies with a new way to decrease costs and improve their competitive market position.
Reducing costs is not the only benefit as outsourcing can eliminate the need to recruit additional IT staff, thereby allowing the company to concentrate on its core business activities.
Risks and Challenges
Apart from the cost and time benefits that outsourcing could offer, some risks need to be carefully assessed and considered, such as data protection, employee issues, and the outsourcing relationship. The odds of such risks will vary, but a business will need to ensure any potential risks arising from outsourcing are addressed, proactively managed, and mitigated.
Managing the Ups and Downs of the Outsourcing Relationship
One of the benefits of outsourcing is the ongoing cooperation between parties and the mutual benefits creating incentives for both parties to remain in the relationship. However, a key facet of the outsourcing relationship is the shared bearing of risk; the parties are in it together.
With that in mind, a business entering an outsourcing partnership should assess whether the outsourcing partnership can comprehensively meet their customers’ needs and most importantly, their organization overall.
The key is for a business to establish a win-win outsourcing partnership that meets the company’s objectives over the lifetime of the contract while ensuring that financial, operational, and technical risks are adequately mitigated and sufficiently controlled.
To the extent that adopting an outsourcing process may be challenging to manage with a third-party service provider, outsourcing may not be welcomed by the organization’s employees. Therefore, to dispel any concerns, a business should ensure there is a high level of transparency, and communication is vital to address any concerns regarding the outsourcing process and ensure that common ground and trust can be established from the outset.
Such communication should ideally be relayed directly from leadership — communicating directly and accurately about the reasons and implications of adopting an outsourcing process. This is important to manage the organization’s culture and productivity and ensure acceptable standards of control are maintained in the organization.
IT outsourcing will inevitably involve the third-party service provider handling and processing personal data during the outsourcing relationship. A provider will take the role of the data processor; therefore, the business should be diligent in ensuring that personal data is handled and processed in compliance with data protection rules.
In the UK, the implications of the General Data Protection Regulation (GDPR) will impact outsourcing contracts with companies strictly following GDPR guidelines to avoid any complications arising out of non-compliance.
The source of uncertainty centers on the potential of the loss or destruction of personal data. As such, a business appointing a service provider should ensure they are clear on what data protection procedures the service provider will need to follow.
However, compliance does not only apply to the service provider. The company will also be under scrutiny to ensure it is protecting the data of its customers and employees.
For a business, the solution might seem obvious, that is, to bulk up its security measures by adhering to GDPR guidelines. Indeed, a more fundamental step towards stricter compliance may be needed, for example, to ensure the outsourcing provider understands the key procedures set out under the company’s GDPR policy and the implications of non-compliance.
Even if agreement regarding how data is processed and controlled is reached, it will still need to be implemented. One way would be to set out the obligations of each party in the outsourcing contract in respect to how personal data will be controlled and processed, thereby ensuring that both parties are clear on their obligations as a data processor and a data controller.
Mitigating the Risks
Considering the terms to be agreed between both parties in the outsourcing contract will ensure that some of the risks presented from outsourcing are mitigated. Both parties should develop an appropriate strategy and decide on the specific conditions that adequately meet the business objectives.
One way of achieving this is by negotiating, at the outset, the terms to be implemented in the outsourcing contract to ensure the parties address the potential risks of the outsourcing relationship.
The contract terms should also consider the needs of the business and its clients, for example, whether a company is regulated, data protection regulations, and how client data will be controlled and processed. Contractual terms should, therefore, be unambiguous to avoid future conflicts arising between the parties.
A company choosing to outsource its services should consider both the advantages and disadvantages offered because of outsourcing, as well as the potential challenges and risks that may arise as a result of outsourcing arrangements and agreements. These risks could potentially cause various inflicting issues for a business.
When entering an outsourcing relationship, a company should adopt stable management to analyze the risks and challenges presented at the outset. This is, of course, subjective and solely depends on the size and niche of the business, but developing a close and cooperative outsourcing relationship can be key to establishing a successful and long-term outsourcing partnership.
About the Author
Dena Anee is a writer and student legal advisor for qLegal at Queen Mary University of London’s department of law.