Outsourcing Business Processes (without In-sourcing the Associated Risks) Gregg Anderson – Crowe Horwath (risk manager) Doug Tripp – Crowe Dunlevy (outsourced provider) Leslie Lamb – Cisco Systems, Inc (facilitator) RMG 303 April 2012 The Scenario • Sport Co is an industry leader in manufacturing sporting goods products and services • Revenues are $1B annually • Headcount is 10,000 worldwide • Headquarters is in North Carolina • Major locations include North Carolina, California, Bangalore and London 2 2 The Challenge 3 3 The COO’s Worst Nightmare 4 4 The Solution • Outsourcing – Information technology infrastructure services, including data centers – Supply chain management – Customer care 5 5 The Risk Manager • Identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives. – Derived from COSO ERM Definition • In other words – “Manage risk to achieve objectives.” 6 6 Our Enterprise Risks Market Market Strategic Strategic • Macro Economics • Right Solutions • Customer Economics • Business Model • Financing Financial • Competition Integrity • Brand & Marketing • Growth • Consolidation • Acquisitions Financial • Organizational Design & Resources • Foreign Exchange Human Resources • Budget Operations Integrity • Revenue Recognition • Regulatory Compliance • Financial Reporting • Legal • Access to Funding • Fraud • Margin • Data Security Human Resources Operations • HR Compliance •Training • Facilities • Authorization • Attract, Develop & Retain Talent •Aging Workforce • Business Disruption • Costs & Efficiencies •Incentives & Compensation • Policies & Procedures • Customer Service • Decision Making • Contracting • Employee Morale & Culture • System Capabilities 7 7 Sample Risk Universe Traditional Third Party Risks Market Market Strategic Strategic • Macro Economics • Right Solutions • Customer Economics • Business Model • Financing Financial • Competition Integrity • Brand & Marketing • Growth • Consolidation • Acquisitions Financial • Organizational Design & Resources • Foreign Exchange Human Resources • Budget Operations Integrity • Revenue Recognition • Regulatory Compliance • Financial Reporting • Legal • Access to Funding • Fraud • Margin • Data Security Human Resources Operations • HR Compliance •Training • Facilities • Authorization • Attract, Develop & Retain Talent •Aging Workforce • Business Disruption • Costs & Efficiencies •Incentives & Compensation • Policies & Procedures • Customer Service • Decision Making • Contracting • Employee Morale & Culture • System Capabilities 8 8 Sample Risk Universe Expanded Third Party Risks Market Market Strategic Strategic • Macro Economics • Right Solutions • Customer Economics • Business Model • Financing Financial • Competition Integrity • Brand & Marketing • Growth • Consolidation • Acquisitions Financial • Organizational Design & Resources • Foreign Exchange Human Resources • Budget Operations Integrity • Revenue Recognition • Regulatory Compliance • Financial Reporting • Legal • Access to Funding • Fraud • Margin • Data Security Human Resources Operations • HR Compliance •Training • Facilities • Authorization • Attract, Develop & Retain Talent •Aging Workforce • Business Disruption • Costs & Efficiencies •Incentives & Compensation • Policies & Procedures • Customer Service • Decision Making • Contracting • Employee Morale & Culture 9 • System Capabilities 9 Understanding the Objectives Primary Objective: Reduce Operating Cost Secondary: Maintain Fixed Costs below a target % of Revenue 10 10 Other Objectives of Outsourcing • Improve Results – leverage the outsourcer’s expertise • Re-focus on core competency – redirect management’s skills toward what made Sport Co. the industry leader • Improve customer experience • Compliance 11 11 Understanding the Objectives Reduce Operating Costs Outsource IT Infrastructure Reduce Spend Outsource Supply Chain Management Improve Resiliency Outsource Customer Care Improve Performance 12 12 Anticipating the Risks Loss of Talent Outsource IT Infrastructure Reduce Spend Data Breach Reduce Operating Costs Outsource Supply Chain Management Improve Resiliency Outsource Customer Care Improve Performance Business Disruption Outdated Systems Brand Deterioration 13 13 Understanding the Risks •Operational – poor service, disruption in operations, loss of control, deterioration •Financial – overruns, change requests, 3rd party charges, the outsourcer’s solvency •Compliance and Security – data breach, disclosure of sensitive information / customer data / PII or PHI, compliance with laws •Extraordinary Risks – armed conflict near service facility, tsunamis and earthquakes, major security breaches •Brand Reputation – spans across all of the above 14 14 Engaging the Outsource Provider (things to think about) Super IT Consultancy - Outsourcing IT Infrastructure • Flow of information from SportCo to Super IT • Super IT’s storage facility: cloud or data center • Understanding the type of data stored: HR related, customer info etc • Contractual issues • Super IT’s compliance with standards i.e. PCI • Super IT’s call center availability 15 15 Engaging the Outsource Provider (things to think about) Flexible Outsourcing International – Contract Manufacturer • Location, location, location • what are the hazards? • International or US? • Flexible’s Quality Control Program • Intellectual Property • Contractual issues • Flexible’s Business Continuity Program • Social Responsibility • Environmental Responsibility • Political Issues (terrorism, govt unrest, employee care) 16 16 Engaging the Outsource Provider (things to think about) Accentumetrics Technical Responders – Outsourcing Customer Care • Location and language • Hours of operation • Training programs • Brand reputation • Intellectual Property • Contractual issues • Social Responsibility • Political Issues (terrorism, govt unrest, employee care) 17 17 Managing the Risks via the Contract • Robust Governance Provisions • Comprehensive Audit Rights • Contractual Requirements – Continuity of Key Personnel – Compliance with Laws – Mandatory Technology Refresh / Release Versions – Key Performance Metrics with Meaningful Remedies 18 18