Introduction

Outsourcing refers to the transfer of the management of a corporate function or process to a third-party vendor. It has become a major business trend in recent years. Some of the most popular functions currently outsourced include IT, human resources, finance, administration and separate business processes particular to an organization.

Outsourcing poses a number of critical operational risk issues. Simply put, the operational change it necessitates, involving human resources, physical assets, business processes, technology and so on, can bring about new operational risk exposures that require extra management oversight. The risk profile of an organization the different mix of risks and their possible impacts on it can be altered in the process of outsourcing.

Many outsourcing arrangements are high risk, high reward projects where the potential pitfalls are huge. Outsourcing brings about uncertainty. A new relationship between supplier and corporate customer represents an untested agreement. No one can be absolutely certain that the function or process will be run more efficiently or with the same standards as it was managed in-house. A key part of risk management is taking the time necessary to carefully define business objectives in measurable terms, structure contracts that link vendor performance to the realization of those objectives, and actively manage relationships in order to ensure those goals are sustainable.

Although different forms of outsourcing pose different kinds of risks some more substantial than others, depending on the criticality of the function or process being outsourced all involve operational...