The Other Risks In Offshoring

It’s not just theft of corporate secrets that you need to worry about.

The big worry in outsourcing and offshoring has always been data theft. There are armed guards situated outside the doors of many outsourcing companies and heavy security even on the inside.

But the bigger threat may have less to do breaking into the building and stealing intellectual property than the plume of smoke emerging from a volcano in Iceland or a terrorist attack in India. Natural disasters, geopolitical unrest and infrastructure breakdowns can wreak havoc on outsourcing or offshoring operations. And even worse, they almost always surprise the companies doing business there.

“If there’s a city outage for the outsourcing operation, very few companies have ever planned for that,” says Sudin Apte, principal analyst in Forrester Research’s ( FORR – news – people ) IT services sourcing and vendor management research group. “When they talk about business continuity and disaster recovery, they focus on infrastructure and applications and how those can be moved from one city to another. Process knowledge and people are seldom included in the plan.”

Apte, who is based in India, is witnessing these problems firsthand. He says the annual flooding in Mumbai is a much, much bigger risk than theft of corporate secrets. But while companies routinely plan their data center recovery, they don’t have the same kind of follow-through when it comes to their outsourcing operations.

So what should they think about to mitigate the risk of problems with outsourcing or offshoring? Here are some of Forrester’s suggestions:

-Fully understand the people, resources and the process involved in an operation. Most companies look at the cost savings or amount of expertise they can gain by contracting out an operation such as application development or management–or by locating it somewhere else under their own management–but they don’t understand what’s involved in actually running that operation. It requires people and a deep understanding of the process necessary to make it work smoothly, and that’s something you can’t just easily shift from one location to the next if you don’t plan for it up front.

-Hedge your bets the same way you’d hedge the risk in a financial portfolio. Push a service provider to add other locations so that if something happens in one, work can continue with a minimum of disruption in another. The best strategy is to add operations in other countries, which is a lesson manufacturing companies learned during the 2003 SARS (severe acute respiratory syndrome) outbreak in China, which basically shut down all commerce for several months. Unfortunately that isn’t always possible in IT, because the skilled labor pool in India is significantly larger than it is in other locations. If other countries are not an option, then look in other parts of the same country.

-Understand the costs of downtime and build that into the financial model. Many companies focus on the infrastructure of an outsourcer. They need to look deeper into the infrastructure of the city where the outsourcer is located and any potential problems that might occur there.

This isn’t something companies would even raise an eyebrow about on their home turf. It’s part of good business management practices. Yet it’s surprising how it gets swept under the carpet when it moves beyond the direct oversight of a corporation.

“If you pull out all the wires from the walls in any company, they won’t survive more than eight or nine minutes, no matter where they are,” says Apte. “But only 10% to 15% of all the companies doing offshoring understand all the risks. Those are the mature offshore buyers. They’ve gone through this for the past 10 or 15 years. Others understand the risk only partly.”


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