Risks will be unique to each organisation and will depend upon the individual business goals, culture, size and location of the organisation and so forth.
While there are many potential advantages to engaging an outsourcing provider, there are also potential risks that an organisation should consider and address.
the following is not an exhaustive list of the potential risks, and instead provides an overview of the more common risks organisations face when considering outsourcing and the ways in which these risks may be managed.
While the primary reason organisations decide to outsource human resource functions is to reduce costs (through reduction of personnel and overheads), if not managed correctly outsourcing can end up costing the organisation more than what was anticipated due to scope creep, undefined pricing or other loose contract clauses.
It’s essential that the organisation has a written contract in place with outsourcing provider, and that the contract provides detail around pricing and scope of function and that it is reviewed regularly. (See: What should be included in an outsourcing contract? for more information)
• LEGAL OBLIGATIONS / POOR PERFORMANCE
Under key employment legislation such as the Fair Work Act 2009, and various state legislations such as Work Health and Safety Acts, a contractor is recognised as a worker and any work performed or managed by the contractor can be viewed in a court of law as work performed or managed by the organisation.
In turn organisations remain legally and ethically responsible for the work of the outsourcing provider. If the outsourcing provider is providing poor performance (through delay, incorrect advice, and administrative errors) it could result in a legal claim. Poor performance generally of the outsourcing provider may also cost the organisation time and money to fix, and could lead to poor employee morale and wider community reputation.
The contract between the organisation and outsourcing provider should detail the expected performance standards of the outsourcing provider, and what should be achieved by who and when. It is important to highlight any legislation and industry standards the outsourcing provider and associated contractors are expected to understand and follow when working with the organisation. This can also assist with the outsourcing provider understanding and maintaining any organisational culture requirements: e.g. what language (casual or formal) should be used when answering queries. (For more information, please view information sheet : What should be included in an outsourcing contract?)
• LACK OF CLARITY
If not managed correctly, an outsourcing contract can add confusion and frustration to internal human resource roles,
e.g. double-checking work of outsourcing provider instead of focussing on strategic, value-added services.
It’s important that the contract scope is well defined within the contract – highlighting who will be responsible for what. Organisations may also wish to include details around phases or rate at which outsourcing will be introduced noting the benefits, as well as the risk the outsourcing services pose. (See: What should be included in an outsourcing contract? for more information)
Often outsourcing providers will have more than one client and may not be able to perform the human resource function as quickly as if performed ‘in-house’. They also may not be able to be able to dedicate specific consultants/individuals to an organisation which could result in inconsistency of approach and advice.
As above the contract should specifically detail the expected performance standard, and what should be achieved and when it should be achieved by. It’s also important to maintain communication with the outsourcing provider, and provide any feedback received regularly. (See: What should be included in an outsourcing contract? for more information)
• CONFIDENTIALITY / INTELLECTUAL PROPERTY
Whether intentional or not, the more people sensitive information is exposed too, the higher the risk of information leaks. Organisations also need to be careful with ensuring any work performed by outsourcing provider while they are ‘on the clock’ remains the property of the organisation (intellectual property).
The contract should include a clause around confidentiality (or ‘non-disclosure) and intellectual property, and should be reviewed regularly to ensure it remains applicable. (See: What should be included in an outsourcing contract? for more information)
Any delay in communication and/or advice from the human resource function may result in staff frustration. For the internal human resource team (and other areas throughout organisation), outsourcing may also have a negative effect on morale: e.g. ‘what does this mean for my job?’
If managed and communicated effectively, outsourcing can be a powerful tool to review positions and realign roles against wider organisational need. Organisations should consider adopting a communication strategy to assist stakeholder engagement and buy-in early. (See Outsourcing communications strategy example for more information)
It’s important that the organisation is comfortable with the level of control and authority an outsourcing provider has over the human resource function, particularly if there is a need to stop or alter the contract in some way.
As above, regular and timely communication with the outsourcing provider will assist with ensuring the organisation remains aware of outsourcing activities and where applicable that detailed delegations are included within the
contract. Prior to engaging an outsourcing provider the organisation should also decide on what type of outsourcing model that wish to adopt. (See: Outsourcing models for more information)
• MANAGING ALL RISKS
It’s important to highlight here that a well-defined contract between the organisation and outsourcing provider will assist with mitigating risks. The contract acts as a legally binding agreement, and provides some safety to the organisation when contracting an outsourcing provider. However, beyond this, the most effective way for an organisation to manage risk is to maintain regular and robust communication with the outsourcing provider.
The outsourcing provider should be viewed as a business partner, one that will directly affect the human resource function and any stakeholders (managers, employees, customers etc) associated with it. And just as an organisation would an internal employee performing the function, the expectations expected of an outsourcing provider must be communicated and their performance managed, monitored and measured.