For small businesses especially, outsourcing has become the norm – and for a good reason. Specialized vendors can increase the efficiency of your company so you have the freedom to focus on your core business.

Companies often confuse the outsourcing of business processes with the outsourcing of responsibility. In reality, you are still responsible for your products’ and data’s quality and security. Of course, outsourcing is often necessary, but external parties expand the scope of your risk, creating new potential vulnerabilities.

Let’s delve into the fundamentals. A third party refers to an external contractor or vendor providing services or products to your company. For instance, you might engage an accountant to oversee financial matters, a cloud service provider for data storage, or supply chain vendors for component production.

This is where vendor management and third-party due diligence step in. Vendor management involves overseeing and optimizing relationships with external parties, ensuring they align with your company’s goals. Meanwhile, “Third-party due diligence” emphasizes the need to conduct thorough assessments and evaluations of these external entities to mitigate risks effectively.

Vendor Risk Management (VRM) focuses on third-party risk management and planning. The purpose of a VRM program is to provide a framework that can help you identify, measure, monitor, and mitigate the risks associated with external vendors.

What is Vendor Outsourcing?

Vendor Outsourcing, an integral part of modern business operations, involves strategically delegating specific tasks, services, or production processes to external service providers or vendors. It’s a crucial strategy for companies aiming to streamline operations, cut labor costs, access specialized subject matter expertise, and increase the efficiency of their business processes. Effective vendor management is pivotal in harnessing these external partnerships, whether IT outsourcing, software development, technical support, or supply chain management.

Businesses often seek vendors with specialized skill sets and subject matter expertise, especially in areas like software development or technical support. These relationships aren’t just about cost savings but also about tapping into the vendor’s technical capabilities to improve service delivery and meet Key Performance Indicators (KPIs) outlined in Service Level Agreements (SLAs). 

Vendor contracts and service agreements play a crucial role in delineating the expectations, responsibilities, and regulatory compliance required during the lifecycle of the relationship. Due diligence and risk management are paramount, especially in sensitive areas like cybersecurity, where ensuring data security and regulatory compliance becomes pivotal.

What Are the Risks of Outsourcing?

There are risks in every business. Even the best Supply Chain Management (SCM) program will experience some of the perils of outsourcing. Such as: 

Loss of Control

The most significant risk of outsourcing supply chain management is the need for more control.

When you outsource a business process to external agencies, you have little or no control over it. When that external vendor mismanages the process, the quality of the outsourced service is affected, potentially harming your reputation.

Privacy and Security Concerns

When you outsource to any service organization, you expose all or part of your company’s assets to an outsider. That’s why you must pay attention to privacy, intellectual property, and data protection. This includes copyrights, patents, and trade secrets, among others.

Although the odds of theft or a breach are low if you hire a reputable provider, the possibility always exists that the third party will steal or leak valuable information or trade secrets. This concern is magnified when hiring a vendor overseas that doesn’t understand or respect the laws and protections in your country.

Outsourced Product Quality

All companies aspire to deliver quality products as quickly as possible. When you enlist a third party’s help, you must maintain the same commitment to your customers. When outsourcing, however, correcting a quality failure is often more complicated and takes longer.

Poor Integration

Business operations become smooth once the company integrates with a Supply Chain Management (SCM) partner, but that transition can be a nightmare.

The integration will only be effective if the service provider sets realistic deadlines and appoints unqualified staff. In addition, failures such as delayed inventories, slow distribution, and poor communication can reduce your revenue. In short, outsourcing requires both parties to invest considerable time and coordination.

Unexpected Costs

The primary motive for outsourcing is to gain a competitive advantage through cost savings and profitability. That goal can suffer if hidden costs arise.

For example, taxes, shipping charges, and other hidden fees can get out of control. Some third-party logistics providers have considerable hidden costs, such as labeling, troubleshooting, and redistribution. To avoid this, only work with transparent suppliers with their fees so that you can protect your profit margins.


Thanks to technology, distance has become less of an issue for managing communications. For example, you don’t necessarily need to be concerned about the location of IT equipment if you outsource IT services. Still, you must consider the geolocation of the service provider when outsourcing physical products.

With greater distance, in-person meetings and inspections become more complex, which forces you to rely on virtual communication services. Scheduling meetings and dealing with time zones can complicate collaborating with offshore suppliers, resulting in monitoring performance and productivity challenges.

What Are the Benefits of Outsourcing?

Outsourcing supply chain management helps to minimize costs, focus on your core competencies, meet customer demands more effectively, and have greater flexibility in maintaining and operating your supply chain. These benefits can be far-reaching when outsourcing and SCM activities are managed well.

Focus on Your Core Competencies

Focusing on your core competencies and future strategy is more straightforward once you outsource supply and distribution operations to a third party.

Outsourcing certain activities to specialized vendors can give you precious time to develop new ideas, market those ideas, and strengthen customer relationships – all crucial to long-term success.

Outsourcing SCM Offers a Competitive Advantage

When outsourcing to specialized firms, you can gain access to facilities, knowledge, and capabilities that were initially inaccessible or unaffordable. While cost reduction remains a key incentive, collaborating with an outsourced provider must align with the company’s overarching objectives, ensuring that the vendor’s incentives and pricing structure align with the company’s long-term goals.

Companies can then focus their time, energy, and resources on what they do best: generating better products and services for their customers by outsourcing their supply chain.

Cost analysis: Is vendor outsourcing worth it?

When you engage a professional SCM firm, it will use its expertise and experience to help you save money on overhead. Usually, inventory, cold storage, sampling, overhead, and staffing expenses can add up and cause financial strain.

When working with the proper supply chain partner, these costs can be cut significantly. The partner will simplify logistics and devise the most cost-effective strategy for lowering the cost of specific tasks. The new enhancements may be better inventory management, economies of scale, and transportation optimization.

Meeting Customer Demand

The outsourced supply chain partner will share responsibility for supplying products in customer demand. With your guidance, the partner will be responsible for planning raw materials to meet production schedules. Your company can devote more time to growth and brand value creation by offloading these responsibilities to the vendor.

Risk Mitigation

Outsourcing a company’s logistics needs reduces labor risks and the financial risk of investing in equipment, property, and transportation should your company suffer a downturn. Working with external supply chain partners can help you achieve greater security and control in compliance, quality, lead times, and inventory levels.

This increased visibility allows you to identify risk areas and take steps to mitigate the impact. For example, you can work with your supply chain partner to reduce lead times, prepare for audits, secure backup suppliers, and optimize safety stocks.

Vendor Outsourcing to Access Expertise and Improve Capacity

Vendor Outsourcing strategically engages external service providers to fortify expertise and operational capacities, spanning meticulous stages from vendor selection to contract negotiation. Effective Vendor Outsourcing prioritizes not just cost efficiency but also streamlined business processes and robust vendor relationships, aligning services with the company’s objectives.

This practice demands diligent contract management, regulatory adherence, and vigilant monitoring of Service Level Agreements (SLAs) to ensure seamless service delivery. Moreover, proactive vendor risk management, especially cybersecurity, remains pivotal to mitigating potential vulnerabilities.

When Should Your Business Try Vendor Outsourcing?

Vendor outsourcing is ideal for businesses seeking to lower costs while accessing specialized expertise not available in-house. Consider outsourcing when scaling operations, onboarding new vendors, or managing relationships with third-party vendors.

Effective outsourcing vendor management involves monitoring metrics, ensuring stakeholder alignment, and conducting thorough due diligence when engaging new vendors. Whether considering nearshore partnerships or traditional procurement processes through Request For Proposals (RFPs), vendor outsourcing can streamline operations and optimize the business lifecycle.

By outsourcing specific services, businesses can focus on core competencies, enhance relationship management, and leverage external service providers to drive efficiencies in the company’s operations.

How Can You Safely Outsource Responsibility to Third Parties?

While your vendor may be at fault in a production or delivery glitch, your angry customer won’t see it that way. Instead, you’ll usually bear the brunt of the backlash. So consider these five best practices to outsource your supply chain management responsibly.

Develop a Detailed Contract

A contract between you and your third-party partner is essential. You must be clear on expectations and how the contract will be monitored and enforced. For example: “Is this service provided on an ongoing basis?” “What are the service-level agreements?” “How are performance measures tracked and reviewed?”

Confirm that your organization has a process or mechanism to oversee your vendors and service providers. Perform regular business reviews and risk assessments to verify ongoing performance and compliance.

Determine Your Risk

Start by researching and cataloging how outsourcing a particular business process leaves you vulnerable. What can you do to protect yourself? What are your vendor’s controls to assure the safety of your data? Identify risks and identify the best way to mitigate them.

Take an Inventory of Your Vendors

Survey department leaders to see which vendors are used in each department and how they are managed. While IT solutions are essential in vendor management, it’s not just an IT issue. Every department must play its part in controlling and managing the supply chain partners they work with.

Agree Upon Workflows

Establish workflows to manage and address third-party risks. For instance, mapping workflows with a responsibility assignment matrix can help you determine roles and responsibilities between your team and the vendor’s team. It will also provide clarity on organization structure and points of contact.

Find the Right Tools for the Job

If you have limited time and resources, prioritize which vendor and risk management tools will benefit your efforts most. Consider scalable platforms to expand your use of features as your supply chain management and outsourcing program evolves.

Manage Third-Party Outsourcing with ZenGRC

Don’t waste your time with cumbersome spreadsheets when ZenGRC provides a single source of truth to streamline risk and audit management for all your compliance frameworks.

Whether enhancing an existing supplier risk management program or starting one from scratch, ZenGRC’s scalable interface will help you track risk across your organization. Insightful reporting and dashboards provide valuable information as your supply chain evolves.

Automation and workflow features allow you to distribute questionnaires and surveys to your suppliers efficiently. Risk ratings of vendors based on scored questionnaires offer a clear picture of what your company needs to do to keep threats at bay.

If you’re concerned about managing your outsourcing processes, schedule a demo to learn how ZenGRC can help you manage your supply chain risk.

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