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What is De-Risking ?
Outsourcing is a process that involves selection of vendors who would then do the necessary work for their clients regarding handling such work that the clients deem can be done by Third Party Vendors.
What this means is that the clients first narrow down the list of outsourcers that can be entrusted with the work, selecting a particular vendor after due diligence, and then closing the deal by entering into contractual agreements with the vendors.
Due Diligence in this respect usually means evaluating the capabilities of the vendors to perform the assigned work to the satisfaction of the outsourcers, estimating the risks that can arise from outsourcing work, and then check if the returns on outsourcing outweigh the inherent risks to such projects.
Thus, outsourcers usually perform adequate evaluation and estimation of risks as part of their tendering and bidding processes.
In this context, the term de-risking is usually used to indicate the strategies employed by the outsourcers to ensure that the risk from the outsourcing deal is spread over the course of the project.
For instance, a particular outsourcer can determine that selecting a specific vendor to handle the project all by themselves can be risky to the clients and hence, they select multiple vendors so that they have backups and fallback options in case the project runs into trouble.
Indeed, the fact that outsourcers in the United States and Europe often choose multiple vendors in Asia and even within the same vendor country is a given when one considers the geopolitical, political, social, economic, and operational risks that the outsourcers have to take into consideration.
How De-Risking Works in the Real World:
For instance, if say, Fidelity Investments chooses Infosys as the vendor to which they would outsource a part of their project, such decisions are also accompanied by de-risking wherein Fidelity would also partner with say, Wipro, and Tech Mahindra so that any risks from Infosys are mitigated by having multiple vendors.
Such risks can include operational risks wherein Infosys, and its project managers might not be able to complete the project in the time leading to delays and costs for Fidelity.
Indeed, operational risks are the most common among the reasons why outsourcers select multiple vendors for their projects.
Apart from the obvious operational risks of slippages and delays, there are other risks such as social and political turmoil in the cities in which Infosys operates that can lead to Fidelity choosing vendors spread over multiple regions and cities.
Of course, Infosys can always ensure that FidelityÖœs projects are handled across multiple centers, and this is again another de-risking strategy that is employed by both the outsourcers and the vendors.
However, it is usually the case that the outsourcer de-risks from their end before insisting on the vendors to spread the project across multiple locations.
Do not put all your Eggs in One Basket:
Lastly, de-risking is a very valid strategy for any firm and more so, for the outsourcers since their entire business depends on the projects and the operations continuing smoothly and without interruptions and disruptions. To conclude, it is better not to place all eggs in one basket and hence, follow de-risking as far as possible.