Outsourcing is the new mantra in the present age when companies believe strongly in focusing on their core competencies. Gone are the days when large corporations would try to ‘do it all’ in having the whole gamut of functions and sub functions in-house. For instance, an auto maker would have large payroll functions or contract labor operations that were necessary but were quite far removed from the core competency and expertise areas of the company. It is this realization that has spawned the hugely profitable business of outsourcing, which is based on the principle of win-win where both the client and the customer stand to gain.

Outsourcing contracts can be worth millions of dollars on an annual basis. While the promise of cost advantage exists, there are also quite a few risks that can give any CFO sleepless nights. Many of these outsourced contracts could go across the world to low cost countries like India, Vietnam or the Philippines, which means the risk of operations could come into play. There are various ways in which such risk could be minimized from a CFO’s perspective. For one, the contract that is signed should be precise, detailed and crystal clear, with very little scope for ambiguity and misinterpretation. Deliverables as well as performance standards should be clearly mentioned so that there are no disputes later. It goes without saying that a thorough scrutiny of the credentials of the company in terms of track record, financials, list of clients and recommendations, as well as statutory compliance should be checked. After all, you cannot outsource work to a company that uses child labor or pays lower than the minimum wage to its employees!

In addition to the aforesaid things, it is necessary to clearly spell out the governance structure and the channels of communication, evaluation as well as feedback. One has to ensure that proper flow of information occurs so that quality and cost mishaps can be avoided. When you are paying top dollars for outsourcing work, you need to have adequate quality and monitoring capability on time so that cost and time overruns or risk of unacceptable quality are effectively avoided. It may be necessary for top management to get involved in the quality evaluation as well as price and standards negotiation process where respective functional heads and experts deal with the head honchos of the company that is bidding for the contract.

In some cases, it may even make sense for your top officials to visit the company at its operations on-site to check out in person before any contract is signed. Sitting in New York, it may not really be possible for you to know what’s happening in Bangalore, which makes it worthwhile to perhaps make a trip to India before signing on the dotted line.