Understanding causes of quality risk in business outsourcing

By Prof Ndede Amadi

Business process outsourcing (BPO), like any other business activity, is prone to risks.

Identified business process outsourcing challenges include quality of service risks, language skills, staff turnover, company knowledge, qualification of suppliers, security, productivity, and the buyer’s capacity to effectively monitor progress.

In this article, we discuss the quality of service risks. The other challenges will be discussed in future articles in this column.

In a broader context, quality risk is the possibility that a product or service will be defective due to factors related to its operations.

Quality risks can occur when the incentives of the supplier and those of the buyer are not aligned, so that the supplier of outsourced services tries to take advantage of the outsourcing relationship, to the detriment of the buyer.

For example, the supplier might perceive the negotiated fees as not adequate compensation for services performed, and might try to deliver on the contract agreement without giving the best quality possible.

Information asymmetry is another quality risk factor. It happens when the information exchange between buyer and supplier is either not shared, or not understood, uniformly by both parties, leading to compromised quality of work delivered. Brokering the information exchange process more equitably can avert this risk.

High asset specificity is another quality risk factor, which occurs when the project deliverables are very specific, but the supplier is not able to meet the standards agreed upon.

Switching costs

High supplier switching costs is a quality risk that occurs when the outsourced service does not fall in the exact domain of the supplier, such that adjustments have to be made to existing systems in order to deliver on the assignment. The high costs of switching might cause the supplier to compromise on the quality of the service delivered to the buyer.

Poor buyer-supplier communication is another cause of quality risk. It results from failure to establish communication guidelines for the assignment on the outset and from further failing to establish these guidelines in the course of the assignment.

Lack of supplier capacity can compromise the quality of the outsourced project. It is always safer to outsource assignments to suppliers who already have existing capacity in-house. Whereas the supplier might be tempted to overextend its range of capabilities, it is the prerogative of the buyer to ascertain that the supplier has the necessary attributes for delivering on the specific job before signing the contract.

Another factor that contributes to quality risk in outsourcing is buyer-supplier contract enforceability. If the contract between the two parties is not enforceable due to, for example, matters of jurisdiction, then the quality delivered is at risk since the buyer has no recourse for substandard deliverables.

Quality fade

Another risk is quality fade. This is the deliberate and secretive reduction of the quality of labour, in order to widen profit margins. In quality fade, the downward changes in human capital are subtle but progressive, and usually not easily noticeable by the buyer. Usually, in the initial interview, the products or service might meet the buyer’s requirements. However, the support team is slowly replaced with less experienced workers, thereby compromising the quality of services delivered to the buyer.

One way to mitigate this risk, is for the buyer to constantly conduct customer satisfaction surveys. Otherwise the buyer may suffer high customer turnover, and an investigations into the cause of the problem might yield solutions when it is too late to gain back the trust of the customers.

And therefore, the buyer is worse off after outsourcing work to the supplier, paying for the outsourced services and losing its customer base.

Fortunately, there are ways that a buyer of outsourced services can reduce quality risks, such as signing a service level agreement (SLA) with the supplier.

We will discuss SLA in the next article on this column

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