The Risk that can’t be Transferrred – Outsourcing your Reputation

Risk transfer has been a hot topic for some years now. A lot of outsourcing has been predicated on the idea – we’ll transfer responsibility to a third party, they can handle the risk better than us, and we’ll  just have a nice predictable contract for the services.

Certainly there are times when this makes a lot of sense. Simply agreeing a fixed price for a basic construction project is an example of risk transfer – the supplier takes the risk of higher than expected materials inflation, general cost overruns, time lost because of bad weather even. All risk the contractor accepts, transferred from the buyer.

But a key principle is that, in most cases, risk transfer makes sense where the contractor is better placed than the buyer to manage the risk. We can see how that applies in the above construction example. However, when we get into the area of reputational risk, it is very difficult to think of cases where the contractor can truly handle that.

The current NatWest banking fiasco has demonstrated this. (And two weeks on, and Ulster Bank customers still have problems). When we wrote about it the other day, Clark Kent commented;

 For me this is an object lesson in the reality of risk transfer. Ultimately this is presented as Nat West’s problem and their mistake. Whatever you outsource, risk is never truly transferred out, it is always your problem when something goes wrong.

It doesn’t actually matter here whether some of the bank’s software and technology services are outsourced or not – indeed, that is the whole point.  It doesn’t really matter which firm provided the core software that has been at the centre of things, or who employs the staff who maybe were responsible for the problem. In the eyes of customers and the media, it is NatWest who have failed. And that is appropriate and fair.

Similarly in the public sector – while an outsourced service provider will take some flack, it is the public body who get hammered in the press if prisoners escape, people in care are badly treated and so on. Again, that’s as it should be.

Whilst I would argue with Clark Kent in the sense that I believe some types of risk can be transferred pretty successfully, he is spot on in the case of reputational risk. That can be as big an issue as any other more tangible supply chain risk, and it is probably the one type of risk you just can’t transfer to your supply chain.

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Voices (2)

  1. Ian Heptinstall:

    Agreed PlanBee, basic construction has suffered from the mindset of “push the risk down the chain” irrespective of who is best placed to manage it.

    Even in Peter’s simple example, I might question why a contractor is better placed to predict inflation or the weather than the ultimate client. What is likely is that contractors make conservative guesses, and so across a large portfolio, clients end up paying more for these kind of risks than they would if they retained them.

    This is then multiplied because most large contractors dont deliver themselves, they just sub-contract, pushing the risk down the chain, adding unnecessary cost and waste at each step, whilst loosing the ability to balance the swings and roundabouts

    The fact is whatever your contract says, if things go pear-shaped, the ultimate client will get most of the flack.

  2. PlanBee:

    I am not even sure you can entirely outsource cost risk. In the end if the contract doesnt deliver a margin, the outsourcer will go bankrupt or downgrade the service, introducing new risks

    Wembely stadium was meant to be a contract that was built to a fixed price, but they still came back for more, and got it. Then there is the dome et al

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