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Home => Columns => Equaterra
Fear FactorsHow to Improve Sourcing Decisions through Risk Assessment and MitigationBy Bob Cecil Gut feelings are good for deciding what to order from the menu or which hotel to book. But for multimillion-dollar sourcing decisions, when the risks are much greater than heartburn and hard pillows, mere intuition is far from prudent. Yet that's precisely the risk assessment route too many companies take in deciding whether to drive improvements internally or through an outsourcing solution. A better way to reach a quality decision is through a structured, comprehensive method of assessing and managing the risks for each option and their potential impact on quantitative factors. A common assumption is that finance and accounting outsourcing automatically carries more risk simply because it involves new people, processes, and delivery models. In reality, nearly half of our clients end up ascribing a higher risk to an internal solution than an external one. For example, one client determined the path of internal improvement would be the riskier option due to a recent downsizing that resulted in a lack of internal resources, not to mention the company's track record of failed internal fixes. Another client used a structured risk assessment to get a more holistic sense of the fear factors, replacing the company's anxiety with objectivity. The assessment helped the company reach a certain level of confidence for each scenario- becoming, say, 80 percent confident that a solution would hit targets X, Y, and Z. A holistic risk assessment has several components outlined as follows: IDENTIFYING RISKS Key risk areas can range from contractual to operational, from regulatory to reputation. Does an FAO contract ensure that service delivery will adhere to Sarbanes-Oxley requirements? Is there a risk of service failures or of a higher-than- anticipated investment? Does a prospective Gulf Coast service provider have a continuity plan in the event of another hurricane? Does the company risk losing personnel during a transition to outsourcing? Too often, risk assessments are based on the opinions of a few individuals whose collective experience may or may not reflect a cross-representative view. To begin a comprehensive assessment, choose a team of assessors who have enough seniority and organizational perspective to identify and rate all of the potential risks, as well as to estimate the company's ability to manage them. Another option is to choose a third-party consultant whose approach ensures that risk assessments are normalized within the organization, minimizing bias in evaluating internal versus external business alternatives. DETERMINE PROBABILITY AND CRITICALITY Once risks have been identified, determine their probability by considering factors such as relevant company track records, the dynamics of the company and the market, and organizational capabilities. Consider using Six Sigma-based analytical techniques to rate the risks in ways that reflect your organization's unique situation. http://www.equaterra.com/summerfestival/support-acts/risk-assessment-and-mitigation.html (1 of 2)9/21/2006 6:59:49 AM The EquaTerra Summer Festival Say you've identified your company's limited experience with outsourcing as a risk for an external solution. Your assessment identified the potential effects as underestimated transition costs, communication costs, lost productivity, wage and currency dynamics in offshore markets, and legal and regulatory costs associated with business in foreign markets. To determine overall criticality, you might add your assessor's probability rating (likelihood that the company's limited outsourcing experience will indeed be a factor) with the severity rating (the calculated dollar and non-dollar impact of the potential effects). MITIGATING RISKS AND MAKING A DECISION The bottom line to all of this: Mitigating factors can offset the true impact of an identified risk and reduce its criticality, based on the lowered severity and/or probability. For example, one client found in the assessment process that it had overemphasized risks such as the protection of intellectual property, which, in reality, can be effectively mitigated through various outsourcing management techniques. This speaks to the importance of understanding not only the risks and their projected impact but also the outcomes when companies implement innovative, proven operating models. The unfortunate fact is that almost any business decision involves risk. However, you can feel more confident in your sourcing decisions when you thoroughly assess the probability and severity of all the risks-and then manage them. In complicated comparisons of internal improvements versus outsourcing solutions, a structured, comprehensive assessment helps ensure decisions are based on objectivity and analysis, not intuition. Bob Cecil is EVP of F&A and Shared Services Practice Leader for EquaTerra. He can be reached at bob.cecil@equaterra. com. ABOUT EQUATERRA EquaTerra sourcing advisors help clients achieve sustainable value in their business processes. With an average of more than 20 years of industry experience in over 600 global transformation and outsourcing projects, our advisors offer unmatched industry expertise. EquaTerra has deep functional knowledge in Finance and Accounting, HR, IT, Procurement and other critical business processes with advisors throughout North America, Europe and Asia Pacific. Our people are passionate about providing objective, conflict-free advice to our clients, which has fueled our exponential growth over the past three years. We help clients achieve significant cost savings and process improvement with outsourcing, internal transformation and shared services solutions. It is all we do. For more information, please contact us at 1 713 669 9292 (US) or 44 207 100 7766 (Europe). |
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