BDO warns firms of security risks of cut-price outsourcing

The risk and security research, which was commissioned by the forensic accounting team with BDO, found that over 50% of CEOs and financial directors have been seeking to reduce costs - or share financial risk - since the beginning of 2008.

However, says BDO, 75% of these businesses do not understand that cost cutting exercises such as outsourcing have actually increased their security risk of being drawn into litigation which can be both difficult and expensive.

The research was carried out amongst more than 200 firms to assess the likely causes of the increase in litigation associated with the recession and found that half of UK companies have sought to reduce their costs by increasing their use of subcontractors and freelancers.

In addition, researchers found that many firms have been outsourcing activities such as support services or relocating facilities offshore and granting product licenses.

Almost half of these companies believe that performance and conduct of these subcontractors, franchisees or sales agents could in fact damage the company's market reputation or brand resulting from poor performance by subcontractors.

Coupled with a increased reliance on outsourcers interrupting the quality or continuity of supply - or commercial harm arising from damage to intellectual property or relationships with key customers - BDO says that most companies are unaware of the risks they are running.

BDO adds that these are all issues that are frequently the basis for disputes that can end in damaging and expensive litigation.

Mike Mason, director of forensic accounting at the Southampton office of BDO, said that few businesses have managed to come through the challenging economic environment of the last 18 months entirely unscathed.

"The speed and extent of the recession has forced many to make tough choices and to find innovative ways to cut costs and manage their business", he said.

"It is evident from some of the disputes that we have been instructed upon that businesses often expose themselves to enormous commercial risks which can result in disputes and litigation," he added.

According to BDO's Mason, measures such as redundancies, outsourcing support services, relocating production facilities offshore or joint venture arrangements have the potential to deliver significant cost savings.

However, he continued, those financial measures that focus purely on the cheapest solution can sometime have unwelcome side effects on service delivery and profits.

Mason says that, in times of recession, firms run an increased risk of becoming embroiled in a wide range of disputes surrounding the alleged non-performance of contracts.

On top of this, he added, many companies are finding that more onerous contracts have a more significant impact on profits as the diverging interests of commercial partners and shareholders come into sharper focus.


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