Business process outsourcing (BPO) has become an essential strategy for companies looking to reduce costs, improve efficiencies, and focus on core competencies. However, BPO also comes with significant risks that must be properly managed. When critical business functions are handled by third-party vendors, companies can lose control and oversight, leaving themselves vulnerable to potential pitfalls.

In this comprehensive guide, we will outline the major risks associated with business process outsourcing and provide best practices for mitigating those risks. Whether you are just starting to use BPO services or looking to improve an existing program, understanding and properly managing BPO risks is crucial for success. 

While BPO risks can never be fully eliminated, with vigilance, governance, and the right partnerships, companies can effectively control them to realise the many potential benefits of outsourcing. The key is approaching BPO with eyes wide open, not underestimating the risks involved.

Common BPO Risks

Let’s start by examining some of the most prevalent risks that come with business process outsourcing:

Information Security Risks

One of the top concerns with outsourcing is the potential loss or leakage of sensitive data and intellectual property. When third-party vendors handle critical data and processes, companies can lose full control over data security. 

Outsourcing partners may not invest adequately in security or have the proper controls in place. Vendor security policies and practices may not align with the company’s standards. Networks could be vulnerable to hackers. Disgruntled workers at the vendor may steal data. The list of security risks goes on and on.

High-profile examples, like the [Target breach in 2013](https://www.forbes.com/sites/maggiemcgrath/2014/01/10/target-data-breach-spilled-info-on-as-many-as-110-million-customers/384bdfbe1d4b), illustrate how outsourcing can significantly increase exposure. In Target’s case, network credentials were stolen from their HVAC vendor and used to access Target’s payment system undetected.

For companies handling sensitive consumer data, intellectual property, or other critical information, a major data breach resulting from outsourcing could clearly be catastrophic.

Quality Control Risks

When you leverage third-party vendors, you also rely on them to consistently meet quality standards for outputs. However, maintaining quality can prove challenging with outsourcing for several reasons:

– Communication gaps – Miscommunication and lack of clarity between parties can lead to outputs not meeting expectations.

– Lack of visibility – Companies may lack full visibility into the vendor’s actual processes, tools, and internal quality checks. 

– Incentive misalignment – Vendors may be incentivized to maximise volume and lower costs rather than focusing on quality.

– Employee turnover – High turnover at the vendor can degrade output quality over time.

– Lack of control – Companies have less control over training programs, management oversight, and other quality assurance practices.

These risks can result in everything from minor errors to major defects that significantly impact customers and business results. For example, an outsourced call center may provide poor customer service. Contract manufacturers may produce defective products. Software projects may require rework. The outsourced work simply fails to meet the standards you would maintain internally.

Dependence on Third-Party Providers

Relying on vendors also creates a dangerous over-dependence that can jeopardise operations. If the outsourcing provider experiences any problems with their technology, infrastructure, staffing, or financial stability, your business processes may suffer.

For example, weather events, power outages, or IT failures could suddenly disrupt their ability to deliver services. They could mishandle sensitive data or have lax security. Rising costs over the contract period may force them to cut corners. Ultimately, you have less control over their operations and any emerging issues that can impact you.

If the relationship or contract sours, or the provider goes out of business entirely, you face major challenges replacing them and resuming operations. The risks of dependence multiply as you outsource more critical functions to fewer vendors.

Compliance and Regulatory Risks  

Depending on your industry, outsourcing may expose you to legal, regulatory, and compliance risks as well. You can become liable for any failure by vendors to meet:

– Government regulations like HIPAA healthcare compliance or PCI compliance for payment processors

– Industry standards like SOC 2 Type 2 audits

– Local laws regarding data security, privacy, safeguarding intellectual property, and more

As the primary business, you cannot simply pass the buck. Carefully vetting providers, imposing contractual obligations, monitoring compliance, and other due diligence is essential.

In financial services, for example, firms must ensure business continuity plans account for third-party risks that could disrupt critical functions. Outsourcing core banking functions also requires scrutiny from regulators concerned about governance and risk management.

Intellectual Property Risks

Lastly, outsourcing business processes can increase exposure of your intellectual property, including:

– Trade secrets

– Proprietary methods and processes 

– Specialised tools, software, and technology

– Confidential data and business strategies

Vendor employees may steal IP for competitors. Providers can take your internal tools and processes to serve other clients. Without adequate contractual protections, your unique IP can easily leak away, eroding competitive advantages.

Strategies for Mitigating BPO Risks

While the risks involved with outsourcing can seem daunting, many prudent strategies can help companies minimise these risks and safely leverage the benefits of BPO.

Conduct Thorough Due Diligence

The first step is comprehensive due diligence across potential providers to assess risks. This includes:

– Detailed RFPs – Issue detailed RFPs requiring extensive information on their operations, staff, processes, and security controls.

– Site visits & interviews – Tour vendor facilities, meet principals, interview staff. Look for modern systems, redundancy, discipline, and professionalism.

– Request audits – Require recent financial, operational, and security audits (SOC 2, ISO, etc.). Review results carefully.

– Check references – Speak to their current and past clients. Get candid feedback on service levels, technology, communication, governance, and reliability.

– Assess financials – Review financial statements to determine stability and ability to deliver long-term. Check for positive revenue and profit trajectories.

– Background checks – For key vendor employees and principals, conduct criminal background checks and verify credentials. 

Thorough due diligence takes time but helps avoid partners plagued by security flaws, poor processes, financial issues, or an unhealthy company culture.

Implement Strong Information Security  

The top priority is implementing robust data security practices and controls, both during due diligence and throughout the outsourcing relationship.

– Verify security policies & procedures – Review and regularly audit their information security rules, controls, technologies, and internal policies.

– Limit data access – Only provide access to the minimum data needed for their role through least-privilege protocols.

– Employ encryption – Require strong encryption for data transmission and storage. 

– Restrict data location – Stipulate that data can only be stored in approved jurisdictions.

– Conduct vulnerability testing – Hire third-parties to conduct tests mimicking real attacks (ethical hacking).

– Require immediate breach notification – Legally obligate the vendor to notify you of any breaches immediately so you can promptly respond.

– Allow site audits – Put site audit rights in the contract to verify ongoing compliance.

By taking the lead to impose strong security practices, you can significantly reduce information security and IP risks.

Establish Clear SLAs and KPIs

Solid service level agreements (SLAs) and key performance indicators (KPIs) help create accountability for performance and quality.

– Define quantitative KPIs – institute measurable KPIs for quality, speed, accuracy, uptime, and other standards.

– Establish issue resolution processes – Clarify escalation procedures and timeframes if service levels are not met. 

– Impose penalties for non-compliance – SLAs should institute financial penalties for the provider if they cannot maintain compliance with KPIs. This provides meaningful incentives.

– Monitor compliance – Use monitoring tools and audits to identify any dips in service levels or quality. Enforce penalties or termination provisions if warranted.

Well-designed SLAs and KPIs help ensure vendors put in real effort to deliver consistent, high-quality outputs and responsive issue resolution.

Maintain Oversight and Governance

Even with SLAs in place, don’t take an entirely hands-off approach. Maintaining some oversight and governance is critical.

– Designate relationship managers – Appoint internal staff to serve as relationship leads for each outsourcing vendor and regularly monitor operations.

– Structure regular business reviews – Put quarterly or monthly reviews in place to discuss performance, compliance, changes, and relationship health.

– Create escalation pathways – Ensure staff knows when and how to escalate any issues that arise so nothing slips through the cracks.

– Implement change management – Clarify that you must approve any major changes to their processes, policies, staffing, systems, or security controls.

– Request regular reporting – Require periodic reporting from vendors regarding operations, performance, staffing changes, emerging risks, and security incidents.

While you want to avoid micromanaging vendors, governance and active relationship management enables you to catch and resolve problems early before they pose major risks.

Build Strategic Partnerships

View outsourcing vendors as true strategic partners committed to shared success through transparency, collaboration, and communication.

– Align on goals and vision – Clarify your business goals, brand vision, and target customer experience so they fully understand objectives. 

– Foster a trust-based culture – Develop relationships anchored in transparency, integrity, and trust to facilitate open communication.

– Collaborate on process improvements – Work together to continuously improve processes, tools, and training.

– Discuss emerging needs – Have regular calls to discuss anticipated changes to your business needs so they can proactively prepare.  

This partnership mindset promotes mutual engagement that helps achieve excellent results and risk mitigation.

Diversify Providers 

While working with fewer vendors can seem easier, avoid putting all your eggs in one basket. The more you diversify, the less risk each provider represents.

– Avoid reliance on a single vendor – Outsource each function to multiple vendors whenever feasible to build redundancy. 

– Segment sensitive data – Never provide full data sets to any one vendor. Segment data to limit exposure.

– Have transition plans in place – Proactively develop transition plans that outline how you would migrate from any vendor to avoid major disruptions.

– Know your exit options – Carefully review contract termination provisions so you can exit relationships smoothly when needed.

Although managing multiple vendors is more complex, diversity minimises the impacts if any single vendor experiences issues.

Invest in Technology and Automation

Emerging technologies can also mitigate certain BPO risks:

– Leverage AI and automation – Where possible, use AI and automation to standardise outputs and reduce quality issues.

– Implement cloud-based tools – Cloud collaboration tools with robust security enable real-time visibility and seamless communication.

– Build integration capabilities – Invest in integrating vendor systems and data flows with your internal tools and databases.

– Standardise with low-code platforms – Streamline processes using low-code platforms that impose consistent workflows and controls.

New technologies create opportunities to enforce standards, strengthen security, and gain transparency across outsourced processes.

Conclusion

While business process outsourcing critical operations inevitably involves risk, implementing diligent risk management strategies enables companies to maximise value while minimising pitfalls. Following the best practices around assessing vendors thoroughly, building strategic partnerships, governing relationships, diversifying providers, and leveraging technology delivers optimal results.

With the right foundation of rigorous risk management, outsourcing can elevate business performance, lower costs, and provide strategic advantages over competitors. As globalisation intensifies and disruptive technologies accelerate, understanding these risks and mitigation approaches only grows more crucial for business success.