Outsourcing - Offshoring: where on the spectrum are you?

It’s tempting to think of outsourcing as a binary option: You either do, or you don’t. And if you do outsource, then it’s to an external third party which is remote: both physically in terms of location; and operationally in terms of systems and culture. Using a third party outsourcer introduces an additional element of risk (reflected in the diagram colours).

In practice, arrangements are more complex and varied. The outsourced provider may be an affiliate company rather than an external third party, and internal services are not necessarily delivered locally. ‘Offshoring’ is increasingly common. For many it’s a function of cost, and for global businesses it may be an essential part of delivering unbroken client service. Indeed the large audit firms use ‘service delivery’ functions or ‘centres of excellence’ to provide specialist input at a lower per capita cost. So the diagram is more of a matrix - and I know firms which operate with each of these different arrangements: whether it’s external third parties which are co-located; affiliates using shared systems; or internal functions which are physically and operationally remote.

As to the relative level of inherent risk, or required oversight, that’s much more nuanced. Is there more risk from an affiliate using common systems, or a business line within the firm which is functionally and operationally remote?

Managing an external third party is inherently more difficult than managing an internal function because you don’t have the same shared systems, attitudes and objectives. However a specialist third party may be more efficient / effective at performing a particular function sufficient to more than offset the ‘regulatory oversight' cost. That said, firms shouldn’t discount the level of management oversight required when operations are outsourced to affiliated companies; or ‘offshored’ to another business lines within the same entity - which may be just as remote.

One final thought. Many groups use a separate unregulated service company to employ all staff across all entities: so maybe the ‘green’ box - where services are performed by the regulated firm itself - has all but disappeared.