Outsourcing & Diversification Defined
Outsourcing is not a new concept for businesses, but its prominence has dramatically increased over the past few years. It is no longer only thought of as a cost savings tool and has evolved into a key strategy for overall business growth. However, businesses need to consider all aspects when implementing an outsourcing strategy, and not only the positive factors. It is just as important to consider the risk factors of outsourcing and design strategies for how to mitigate those risks.
One of the most universal strategies for risk mitigation in outsourcing is diversification. Diversification as a broad term means allocating resources in a particular way that reduces the exposure to one particular asset.
Importance of IT Portfolio Diversification
The main goal of diversification is to ensure that your business performance, systems and services have redundancy and have eliminated single source of failures points which also include your outsourcing partner. Most companies now think of outsourcing as portfolio management, with partners in various parts of the world.
Diversification strategies are commonly used in finance to reduce the risk of losses based on concentration. A basic example is, two people have a stock portfolio but Person A has 100% of their investments in a single holding while Person B has 5% of their investments in that same stock as well as a diversified portfolio of 19 more stocks. If person A investment were to suddenly crash, Person A would lose everything, while Person B would only lose 5% of their assets. The same scenario comes into play when developing a global outsourcing strategy.
The outsourcing movement is here to stay for the long term and companies need to take the proper steps to ensure a stable and profitable outsourcing strategy. There are Best Practices to Global Outsourcing that allow companies to build customized Outsourcing Blueprints that accommodate their risk, cost, quality and velocity tolerance to their needs.
Unpredictably of Risk Across the World
Global Pandemic:
There is simply no exact science for predicting what will have a positive or negative effect on the workforce. Across the world, we all learned this the hard way in 2020 when Covid-19 hit. In basically the matter of days companies across the globe were forced to shut down, let workers go, pause projects, or transition to working from home. Travel from outsourced/far-sourced countries was put on hold and has not returned. Thousands of outsourced projects had to be stopped while companies dealt with this transition and unforeseen change in the world.
Natural Disasters:
Natural disasters occur across the globe with little or no warning at all. Even if we just look at the United States alone in the past few years there are numerous examples. We’ve experienced fires across the west coast, tornadoes across the Midwest, many hurricanes all over the South, Southeast, and Northeastern coasts, and even just last year we experience temperatures so cold that many residents were left without power for weeks. Everyone does what they can to predict and prepare for these natural disasters, but never know the real effects until they arrive.
War:
War is something we hope no one experiences. Our hearts go out to all those affected by what is happening in Ukraine with the Russia conflict. Gartner Inc. estimates that there are 85,000 to 100,000 outsourced service workers in Ukraine employed in software engineering and other IT (Information Technology) services. Almost all these employees are unable to work because they are either fleeing for safety, no longer have internet, are taking their place in the fight, or dealing with any other issues. Many companies like SAP, FIVVER, and Wix are doing everything they can to support and ensure the safety of their Ukranian based workers, but none of them could have imagined or predicted these events.
Communication:
When working with an outsourced provider, a huge key to success in the partnership is the ease of communication. However, it's not always clean communication channels. If we look at India, there is a large problem with the integrity of their infrastructures which leads to a strained power grid largely due to the number of people constantly connected. At any moment during the day some businesses could lose power or internet connection multiple times a day. Not to mention communication issues that occur while people in the US are working, they are sleeping and while they are working, people in the US are sleeping, but that’s another story.
Government Issues:
There are many unpredictable risks that come when talking about the way certain governments are run. Looking in Central America alone, there are currently over 10 Governers under investigation for their bribery and corruption charges. Political corruption is something that unfortunately happens in more places than we realize, and while most places are actively trying to overcome it, it can take decades and is highly unpredictable.
Conclusion
Overall, when making a large business investment in outsourcing it's important to understand the Best Practice to Global Outsourcing and strategies for mitigating risk. Outsourcing offers a huge benefit to companies when done the right way, but like all investments there are risks. Designing your Outsourcing Blueprint and diversifying your portfolio is a great place to start when looking to mitigate business risk.