Fundamentals of Risk Management

TAbLE 
32.2
Scope of outsourcing contracts
As a minimum, the agreement between the organization and the outsourced 
service provider must address the following issues:
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scope and duration of the arrangement
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services to be supplied and restrictions on sub-contracting
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pricing, fee structure, service levels and performance requirements
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audit and monitoring procedures
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confidentiality, privacy and security of information
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default arrangements and termination provisions
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dispute resolution arrangements
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insurance requirements, liability and indemnity

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Risk governance
386
Most businesses outsource certain functions, but this is a major decision and the benefits 
can be difficult to define. Outsourcing can cut costs by reducing overheads and having a 
professional perform the operation. Although this benefit is attainable, it should not be the 
only reason a company decides to outsource.
The benefits of outsourcing can be divided into two types. First, there are the direct 
benefits of having a specialist company undertaking the outsourced activities. Then, there 
are the indirect benefits of giving greater focus to the core activities that remain in-house. 
The direct benefits of outsourcing are reduced costs, decreased cycle times and improved 
customer perception and satisfaction, including:
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focus on core competency;
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reduction in the cost of manufacturing and logistics services;
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reduction in head count of hourly workers and management;
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improved accuracy;
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flexibility and wider range of services;
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access to global networks and superior technology;
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improved service and quality;
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reduced capital investment and increased cash flow.
Benefits of outsourcing
In many countries, there is legislation covering the protection of employees when
an operation is outsourced. For example, if an organization decides to transfer the 
catering or the cleaning services to an outsourced company, the employment rights 
of staff previously employed by the organization may be protected. This can be a 
significant obstacle to the outsourcing of certain facilities management and other 
activities and thereby obtaining the cost reduction that would result.
Outsourcing of operations is usually considered to be a mechanism for having 
non-core activities undertaken by a contractor. For example, an office-based business 
may decide to outsource cleaning and catering, as well as other facilities manage-
ment operations. The benefits will normally focus on reduced cost while, at the same 
time, receiving a greater level of expertise from the outsourced contract.
The box below considers some of the benefits of outsourcing. Outsourcing is 
often undertaken to save costs, but it may also be undertaken so that the work is 
fulfilled by a specialist company. For example, a mortgage lender may outsource 
property surveys to a company with greater resources and more expertise.

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