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.

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 agreements.

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 the following:

• 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 whole.
• 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.