During busy periods, such as the holidays, businesses often outsource to third-party contractors to handle additional workloads. This approach can be a cost-effective way to meet customer demand without committing to new hires or long-term investments. However, working with contractors can also expose your business to financial, legal, and reputational risks. Identifying these risks and addressing them proactively is essential.
Real-World Examples of Risk
Scenario 1: A company hires an overseas trucking firm to move goods from a port to a warehouse. The driver bribes customs officials to expedite the shipment, leaving the hiring company exposed to bribery and corruption charges both locally and in the U.S.
Scenario 2: A remote contractor hired for data entry lacks strong cybersecurity measures at home. Hackers infiltrate her system, gaining access to the company’s network and stealing sensitive employee and customer information.
These examples demonstrate how bribery and cybersecurity weaknesses can endanger businesses daily. Effective due diligence is key to mitigating these risks.
Managing and Minimizing Outsourcing Risk
Before contracting with third parties, familiarize yourself with all relevant laws and regulations. Your business’s geographic footprint determines which rules apply, including anti-bribery and corruption laws that hold companies accountable for their contractors’ actions. This is especially critical when operating internationally.
To evaluate contractors thoroughly:
- Gather documents such as incorporation records, ownership details, proof of insurance, and cybersecurity assessments.
- Assess the risk level based on the contractor’s access to your IT systems or other sensitive areas. The broader their access, the higher the potential risk.
- Perform deeper due diligence on high-risk contractors, such as cloud service providers or security firms, compared to lower-risk vendors like landscaping companies.
Regular reviews are essential. At least annually, reassess all contractors to ensure they continue to meet your standards, as their operations or circumstances may change over time. High-risk vendors should undergo review by an executive with authority to approve or terminate contracts.
Build a Stronger Defense
Contractor outsourcing risk is just one of the many challenges businesses face. We can help you evaluate your internal controls and risk management strategies to ensure they provide a robust defense against potential threats. Contact us to learn more.
