Risk-based due diligence
Selecting a strategic outsourcing partner goes far beyond a checklist of their capacity, capabilities, and cost. A company
should thoroughly assess all of the risks associated with that partnership, develop the appropriate remediation plans and
contingencies with the potential partner, and agree to jointly manage those risks to successful outcomes. Conducting a thorough
and intelligent risk-based due diligence, performed as a shared exercise with the outsource partner, can identify key areas
of uncertainty that need to be addressed. Due diligence can also help align each party's expectations with regard to their
relative roles and responsibilities, accountability, and what success looks like for each of the parties involved.
A number of alternative risk- assessment and risk-management methodologies and toolboxes exist. One should be selected that
effectively identifies, prioritizes, and helps manage the risks that exist but that also provides an objective and quantifiable
output that clearly supports the business case for that outsourcing decision.
Key areas to be considered in these risk-based assessments are outlined in the sidebar (see "Due Diligence Checklist").
Due Diligence Checklist
At the conclusion of the assessment, both the company and potential outsource partner should have a comprehensive profile
of the major risks of the overall outsourcing strategy, including those related to time, cost, and deliverables as well as
the degree of regulatory, operational, and cultural risk.
The prospective partners can then collaboratively determine the relative priorities of those risks to each party, how those
risks will be mitigated, and the contingency plans that will need to be put in place. The time and cost of mitigating each
risk and the ROI for doing this must also be carefully considered so that an informed business decision can be made about
entering into the relationship.
This risk-based assessment should not be a single undertaking. Conditions change and risks change with them. The evaluation
should, therefore, be conducted periodically as a formal part of the business relationship process in order to continue to
manage change and uncertainty, assure alignment of the partners with the goals and deliverables of the agreement, and to validate
that the work or services being conducted continues to support the strategic supply chain and business strategy.
Establishing and maintaining successful relationships
The success of strategic outsourcing relationships, both in the short and long term, depends upon effective planning and project
management, appropriate metrics, successful knowledge transfer, ongoing open communication, and periodic reassessment to help
assure the long-term viability and health of these critical business partnerships.
Effective planning begins with the development and execution of the appropriate business and quality agreements that clearly
define and specify the relative roles, relationships, specifications, and deliverables that are expected. These include the
proper controls and contingencies that may be needed to address any unexpected situations that may arise. Metrics must be
established to serve as an early warning system for potential issues and to measure the relative success of the outcomes that
are expected. It is also highly recommended that companies establish dedicated resources to manage these relationships as
they move to a broader and more strategic sourcing strategy. These dedicated resources should also monitor progress against
plans, quality of the deliverables, costs, and other parameters that have been set forth in the business, technical, and quality
The relationship begins in earnest with complete and reliable IP and knowledge transfer between the sponsor and the contract
partner, including effective technical transfer if the outsourcing involves a process to be run or product to be made. Companies
that intend to engage in outsourcing need to assure they have an effective information and technology transfer process in
place that is formal, efficient, scientifically and technically sound, compliant, cost-effective, and reliable. This is a
core competency that consistently produces maximum strategic impact. Too often, however, such transfers are treated as one-off
events that are the responsibility of a single function, department, or site, rather than part of a comprehensive transfer
framework supported by well-trained and experienced resources on both sides of the agreement. That framework should include
- An overall transfer program management process, including a governance structure, the establishment of executive sponsorship,
and the clear delineation of roles and responsibilities, including those of support functions and transfers. In this way,
the company can manage its outsourcing transfers as a portfolio and apply risk management techniques to the portfolio as a
- Project-level management for each individual transfer, including a set of requirements, activities, decision points, milestones
and best practices that help ensure predictable, on-time transfer that is able to be validated.
- Transfer strategy, including the means to fill any gaps in the organization or the receiving organization, an overall description
of the transfer, and measures of success.