Reduce Risk

Tremendous risks are associated with the investments the organizations make. Markets, competition, financial conditions, government regulations and technologies all change quickly. Further, it is very risky to keep up with these changes, especially those in which the next generation requires a significant investment .However, in the context of outsourcing, outsourcing providers make investments on behalf of many clients, not just one and shared investment spreads risk, and significantly reduces the risk born by a single company.

It is necessary to distinguish between "risk sharing" and "risk reduction". It is highly unlikely that outsourcing will actually reduce the risk that an organization faces. What outsourcing can do is to make risk more easily measurable, so that it can be more easily managed. The organization can decide to share some of its risks with the outsourcer and with the outsourcer's other customers. It should also be realized that outsourcers are not insurance companies. Using an outsourcer to manage those risks will not reduce the costs of risk management.

What outsourcers can do is to measure and assess the risks, decide how to share those risks between its customers, and offer a solution for managing those risks. When a function is difficult to manage or is out of control, outsourcing can appear as a final 'fall-back position'. It implies that the organization has given up on all other ways of bringing a function under control and has decided to sell the problem on to someone else. There is clearly a problem with any organization that believes that it can sell its problems on in this way, because the problem usually lies with the management of the organization rather than with the manageability of the function.

I have often found that the reason that an organization finds a function difficult to manage is that it does not really understand that function. In outsourcing, it is essential that the organization's management do understand any function that they plan to outsource, so that they can communicate that understanding to the outsourcer. Choosing to outsource a function (or, more appropriately, to outsource the problem) will probably only lead to the scale of the problem increasing.