Types of Vendors Risks You Should Know Before Outsourcing

Types of Vendors Risks

Businesses now rely on outsourcing more than ever before, and if you are thinking on the same lines, then it’s time to educate yourself about the types of vendor risks that exist. In this $92.5 billion industry, you’ll find all sorts of vendors — capable, sincere, frauds, liars, etc. Your goal should be to filter them based on your requirements and budget without incurring losses due to their inefficiencies. If done the right way, outsourcing can be very profitable because customers get to take advantage of employee arbitrage and reduce their costs by up to 70%. Nevertheless, there are certain types of risks involved which customers must be aware of. So, we decided to provide you with a checklist of all types of vendors risks involved in the outsourcing process and how you can mitigate them. 

Many businesses do not outsource their processes due to the increase in cybercrime, which exposes them to numerous security risks. This is mainly because customers have no control over the vendor’s IT infrastructure, leading to a series of problems like data theft and litigation. However, since outsourcing involves exchanging sensitive data such as intellectual property, third-party information, trade secrets, etc., this is necessary. This is the reason why large companies invest in shared operations units rather than engaging vendors. 

However, that may not be possible for small and mid-sized businesses due to the heavy costs and regulatory complexities involved in the process. A better alternative would be to set security standards for your vendors and bind them by an agreement to follow those. If the process involves placing orders or requests through the vendor’s website, ensure that the site entirely runs on HTTPS (HTTP+SSL=HTTPS). 

Your vendor can do this by installing a cheap yet premium Comodo positive wildcard SSL on the website. This type of SSL encrypts the primary domain and all the first-level subdomains, making the process secure. Also, emphasize using genuine and up-to-date operating systems, applications, and security essentials such as active antivirus and antimalware applications. You might also want to enforce the use of VPN and secure WiFi connections when the vendor’s employees or contractors work remotely.

  • Budgetary Risk

Outsourcing operations can be very profitable, particularly when you belong to a country like the US or the UK, with a strong fiat currency. The exchange rates let you access a wider talent pool from other countries. This might initially seem profitable, but it might turn out to be otherwise if you do not manage the end-to-end costs effectively. While managing the budget of an outsourced project, it is important to have a ballpark figure you are willing to spend on the entire project. 

This figure should be broken down into hours per resource or must be negotiated as a flat fee. Unfortunately, most businesses end up in a mess in hourly arrangements because they do not specify a capping on the number of hours allocated for a particular task. On the other hand, a fixed pricing model can be dangerous if paid in one shot. Therefore, it is important to keep the financial aspects clear from negotiating the total project cost and breaking it down into smaller milestones. This lets the customer have better control over the budget and prevents the vendor from backing off mid-project.

  • Operational Risks

Since the whole concept of outsourcing revolves around maximizing revenues, operational efficiency plays an important role. Now, this is easier in shared operations because there is direct control over the management and employees, but it can be tricky in outsourcing. 

In this case, the customer will have to bind the vendor with a clause that lets the customer monitor the vendor’s employees, systems, and IT infrastructure directly or through third parties. After that, the customer may hire relevant consultants to perform remote or in-person due diligence. 

With up to 70% savings, this should not be very difficult for businesses that outsource regularly. 

  • Transaction Risk

Losing money can be fatal for any business, and this is common while transacting with vendors in an international market. This happens for many reasons. Some of the most common ones include transacting with a fraudster or imposter, using the wrong payment mode, technological failure, or human error such as wrong account number or email ID. 

A safer alternative would be to use PayPal for smaller transactions or the escrow service for larger ones. This adds an extra layer of protection and compels the vendor to fulfill obligations before releasing the payment. Many genuine vendors will prefer one of these transfer modes, and those are the ones you should hire. 

Also, using these modes of money transfer to engage vendors is much cheaper and secure than hiring through freelance platforms, which usually take a 10 to 20% cut from the customer and the vendor. Moreover, you will be at the mercy of a third-party governed platform to exchange confidential data with the vendor, which increases the risk of data theft. 

  • Competitive Risk

While engaging vendors, it would be prudent to do so directly and without getting on third-party platforms like freelancing sites or contract portals. On such platforms, you seldom know whom you are hiring. It could easily be someone working with one or more of your competitors, which could backfire. 

Let us assume you hire someone to perform market research for your software application. The same person could very well sell that data to your competitors to make more money. The worst part is that you can do nothing about it. This is not the case when you hire vendors directly and ask them to sign a service agreement with a non-compete clause.

  • Regional Risks

Before you pick a vendor to do a job for you, there is the need to evaluate the vendor’s preparedness in the case of common natural disasters. For example, the Philippines is prone to volcanoes, tsunamis, earthquakes, and storms, resulting in power outages and disrupt work. So, before you hire a vendor, you need to perform a quick regional risk analysis and evaluate how that impacts your business.

Final Takeaway

Due to the current economic slowdown, over 200,000 businesses in the US have closed while thousands are struggling to remain afloat. A similar situation exists in the UK, with over 76,000 businesses shuttering down in 2020. Subsequently, many businesses have begun cutting corners and outsourcing processes to countries with weaker currencies and a larger talent pool. If you plan to do the same, remember the types of vendor risks discussed above and plan proper measures to filter out scammers and manage your resources more efficiently.