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Force majeure risks

386 Comments · Business outsourcing

Force majeure risks are the most difficult to quantify and specify. What is the likelihood of a war? A hurricane? An earthquake? No one really knows.

Yet these risks can be estimated with some measure of objectivity, and an appropriate mitigation strategy can be developed and enacted.

Geopolitical realities around the world today have brought the threat of war to nearly every doorstep.

At the same time, reasonable assessments of the probability of war affecting a BPO vendor can be made.

Business Monitor International provides extensive coverage of the political, economic, and military risks that exist for countries around the world.

Their Web site at www.businessmonitor.com provides a starting place for assessing the war risk associated with the home country of the business process outsourcing (BPO) vendor. Another great source of country-specific information is the US.

Department of State Web site. This site at www.state.gov has extensive information for travelers and business people to determine the risks associated with regions around the globe.

The PMT can manage its own exposure to liability by utilizing objective information sources in the development of its force majeure risk management plan.

The potential for political unrest exists in many countries that are desirable outlets for outsourcing, such as India and the Philippines.

Firms outsourcing to foreign countries should plan for the possibility of war and the impact such a conflict would have on their business. Contingency plans should account for a worst-case scenario that would address issues such as the following:

• What would you do if the country were attacked?
• How would you perform the outsourced functions?
• How would you protect your facility and its contents and your intellectual property?
• Where would you relocate your business?

The recent outbreak of severe acute respiratory syndrome (SARS) affected several companies that outsourced functions, especially those based in China.

But the effects of SARS were felt in the United States, too. Companies that had employees working in China when the SARS outbreak occurred had to move those employees back to the United States or have them quarantined.

Besides, companies in the United States that received packages from China were concerned about opening them in case the disease could spread.

The SARS outbreak illustrates the importance of planning for unusual and unexpected events. Companies need to understand the flow of their business and how each function on operation could be affected by an unusual event.

If they have not already, companies that outsource overseas need to develop disaster recovery and business continuity plans.

Such plans force companies to examine possible risks, and they are crucial if the outsourcing firm wants to purchase insurance to cover property, liability, or business interruption exposures.

Also, it is a good idea to have a backup in place in case anything goes wrong with infrastructure, business partners, or distribution channels.

In addition to a backup, BPO buyers should consider drawing up a contract with the company responsible for securing the outsourcing.

Sample Language for Disaster Recovery
Scope and Definition: The outsourcer shall develop and implement a plan for the prevention and mitigation of business interruptions due to natural and other causes.

The outsourcer shall make all reasonable efforts to prevent and recover from such events to ensure the continuity of business operations.

Outsourcer Responsibilities: Make all reasonable efforts to ensure the continuity of operations through implementation of a disaster recovery and business continuity plan.

And develop a more detailed and comprehensive plan to ensure business continuity in the event of natural or other events that may cause service, supply chain, delivery, on performance interruptions.

The plan must address these activities that are necessary to resume operations at the optimal level at an alternative location within X number of days of a catastrophic event.

Source: “Touch These Bases Before You Sign to Outsource Your IT,” Contractor’s Business Management Report (November 2003), pp. 4-5.

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