Glossary term
Outsourcing Risk
Subject: Risk Management, Third-Party Risk
Also known as: Outsourcing arrangement risk
Outsourcing risk is the risk of loss, disruption or regulatory breach that arises when an organisation hands a function or service to an outside provider but stays responsible for the result.
Explanation
Firms outsource to cut cost, gain skills or scale up quickly, but accountability does not move with the work. Typical risks include poor service, data leaks, loss of control and knowledge, hidden costs, a provider that fails or is taken over, difficulty in leaving, and breaches of rules that the firm still has to meet. Offshore arrangements add legal and political exposure. Financial regulators treat outsourcing as a defined category of third-party risk and set expectations for material arrangements: board approval, due diligence, a written contract with audit and access rights, monitoring against service levels, and exit plans. Many also require notice before critical work is outsourced. Only the activity can be handed over; obligations to customers and supervisors stay with the firm.
Example
A utility outsources its call centre to a provider in another country. After a staff shortage at the provider, billing queries take twice as long to resolve and complaints rise. The utility must report the delay to its regulator and credit customers. It reviews the contract, increases service-level monitoring and prepares a second provider as backup.
Not to be confused with
- Third-Party Risk
- Third-party risk covers every outside party, such as suppliers and agents. Outsourcing risk is the part tied to handing over a function the firm would otherwise perform.