Is your relationship risky?
Posted 06 Jul 16
With the continued reduction of barriers and overhead costs surrounding the outsourcing of business processes and functions, our approach to managing the associated risks facing governance must evolve to meet the changing business environment. Particularly from an SME governance perspective, it is imperative that the risk management processes remains one step ahead of the new opportunities faced by Australian businesses.
In addition to the operational capabilities of outsourced parties, SMEs need to consider any risks arising from dealing directly with external parties who may operate in differing economic, cultural or legal environments. Geographical economic contagion issues may have the potential to seriously jeopardise the financial and operational stability of international organisations.
The reputational risk resulting from outsourced relationships can be burdensome, particularly for SMEs reliant on their brand image. The public perception of corporate social responsibility can extend beyond the reach of the organisations direct, internal activities to those of associates and related parties. If an organisation is seen to be taking unfair advantage of outsourced relationships with parties exposed to more a relaxed regulatory environment, it can have a negative impact on the organisation’s public image.
The enforceability of the official terms of an outsourced relationship (contractual or otherwise) should also be a primary consideration prior to entering into any outsourcing arrangement. Differences in geographical locations and legal jurisdictions can make exercising the terms of an outsourcing agreement a challenging task for management. Governance should ensure that they thoroughly understand their practical ability to administer their rights under outsourcing arrangements, such as:
- Rights to have operations independently audited or reviewed
- Right to demand timely and accurate information
- Right to maintain a level of continued oversight by those within the organisation
- Ability to pursue legal action for breaches of contractual terms (and associated costs)
While the prospect of reduced overhead costs through the outsourcing of administrative, and other labour-intensive activities can be appealing to SMEs, it is the role of governance to ensure that their policies and procedures prepare their business for the road ahead.
If you have any questions regarding how to manage outsourcing risk from a governance perspective please do not hesitate to contact Charles McKee and Ken Weldin at PKF on 03 9679 2222, or click here to find the adviser nearest you.