• Technology
  • CFO.com | US

How to Limit Your Outsourcing Risk

Experts offer advice as companies around the world reel from the scandal at India-based Satyam. High on the list for CFOs: paying careful attention before hiring a service provider.

For example, even though Satyam has guaranteed that Nestle’s three-year contract for software development and maintenance won’t be disrupted, the Switzerland-based food company is considering “alternative solutions,” says Ferhat Soygenis, a spokesman. “No disruption of Nestle’s IT operations is expected.”

Other big-name Satyam clients are acknowledging the fraud but deflecting any notion that it will create a blip on their daily operations. A Cisco Systems spokesman tells CFO.com the scandal will not have “any material impact” on the company. And Nissan North America and Ford Motor are closely monitoring the matter but declined to comment further.

Smart companies have contingency plans to prepare for problems at service providers, including performance problems, power outages, terrorism, and fraud, say outsourcing advisers. Qantas has five years remaining on a seven-year, multimillion-dollar contract under which Satyam provides IT application maintenance and support. A spokesman for the airline tells CFO.com that Qantas believes any risks to its business are “manageable,” and a team has been monitoring the situation daily. “In the event that Satyam is unable to continue services, Qantas has the ability to activate alternative internal and external arrangements to enable the continuation of seamless services,” he says.

Depending on the wording of their contracts, existing customers of Satyam may be able to legally backtrack on the agreements, say outsourcing experts. But the practicality of doing so is another story.

Services limited to off-the-shelf software projects may be annoying to move. More painful to uproot are more-customized jobs that involve less tangible skills, such as knowledge about the company’s general ledger and accounts receivable and payable.

To mitigate the risk of business disruption, David Rutchik, a partner at outsourcing advisory firm Pace Harmon, cautions that companies should always closely watch their vendors and keep updated documentation about their work. Still, he acknowledges, knowing everything another company is up to — and assessing its financial stability — is difficult: “If you look at WorldCom, Enron, and the Madoff scandals, there is no way to completely protect oneself against individual fraud.”

Broken Trust

The enormously inflated cash balances at Satyam have popped a hole in the reputation of the outsourcing market, which has grown from business offering solely tech business, to back-office work such as finance and accounting. “This has really shaken up the outsourcing industry,” says Peter Allen, a partner and managing director for outsourcing advisory firm TPI. “The industry is built on relationships that imply some level of trust and confidence and integrity.”

Allen says there’s now “nervousness” about the industry that will prompt companies to relook at their deals with outsourcers. Some of these agreements have ballooned over time without reassessments of their inherent risk, from, say 10 people working on one project to 1,000 contracts working on many services.

Of course, advisers say companies are better off assessing the risks involved with a particular vendor before signing a contract. But they also say that assessments should continue throughout the outsourcing agreement. During the hiring process, companies should conduct due diligence on at least one other vendor, suggests Benvenuto, so the client has a provider to fall back on if something goes wrong.

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