The benefits and risks of outsourcing

Outsourcing has wide-reaching benefits for a vast number of businesses. A single-year cost analysis from Datamark discovered that outsourcing led to cost savings of 31 per cent, with this figure increasing to 33 per cent for a three-year analysis. Clearly, with such substantial decreases in expenditure available to businesses already taking advantage of outsourcing, many more are set to follow suit.

 

In some sectors, outsourcing is already highly prevalent. For instance, a study from PA Consulting published earlier this year, focusing on the UK IT market, revealed that 69 per cent of companies plan to outsource at the same rate or increase their activity in this area, with 40 per cent planning to outsource more. More than 70 per cent of organisations surveyed said they use offshoring or nearshoring, and this proportion is expected to rise further over the coming years.

 

Cost savings aren’t the only reason that more and more businesses are choosing to outsource work. According to a Protiviti/APICS survey, the single biggest driver of outsourcing activity is the need to reduce internal headcount (29 per cent), followed by constraints to internal capacity caused by increased demand (22 per cent), insufficient internal performance (20 per cent) and strategic process (19 per cent).

The risks of outsourcing, and why internal audit should be involved

It is important to note that alongside the many advantages, outsourcing is not without its risks. Delays in delivery can cause major problems for the outsourcing company, while the quality of products or services can also be negatively affected.

 

Given the wide variety of issues associated with outsourcing, it is vital that businesses fully consider the risks. Indeed, the Chartered Institute of Internal Auditors argues that strategically important outsourcing projects should never be signed off without the tacit approval of internal audit teams.

 

Internal auditors are responsible for providing independent assurance on the effective operation of an organisation’s risk management, internal control and governance processes, yet they are sometimes overlooked when it comes to establishing a new outsourcing partnership.

 

If the risks attached to outsourcing work are not foreseen and managed, the net result can be serious failures in service, additional costs, damage to reputation and delays in the implementation of new projects. Problems such as these can completely eradicate the intended benefits of outsourcing the process in the first place, and in some cases can even lead to regulatory fines. For example, last year, the Financial Conduct Authority fined three banks £42 million for failures with IT services managed by third parties, leaving customers unable to access their bank accounts.

‘Risk can’t be thrown over the fence’

As outsourcing becomes ever-more popular among both public and private sector organisations, now is the time to ensure that it is being done correctly. It is possible to outsource a business function, but the risk of problems associated with this function cannot simply be passed on to a third party.

 

Dr Ian Peters, chief executive of the Chartered Institute of Internal Auditors, explains: “Outsourcing the service does not outsource the risk. Organisations may think they have thrown the risk ‘over the fence’, but this is absolutely not the case.

 

“Internal audit can support boards in relation to outsourced services. There should be an appetite at board and senior management level for assurance that the risks of outsourcing are being managed so that the organisation’s achievement of its strategic objectives is not compromised.”

 

Our 2015 Mid-Year Report combines a review of the prevailing conditions in the internal audit recruitment market with the results of a comprehensive compensation survey, covering both permanent and contract internal and computer auditors.