WHAT IS
OUTSOURCING?
ALSO CALLED “CONTRACTING OUT”
Involves hiring Typically follows
outside Common in after market
contractors to both public and testing and
perform services private sectors competitive
previously done tendering
in-house
TYPES OF OUTSOURCING
Business Process Product Outsourcing
Outsourcing (BPO) Hiring external
Contracting non-core manufacturers to produce
business operations like goods a company cannot
customer service or HR to make in-house cost-
a third-party provider. effectively.
Knowledge Process Service Outsourcing
Outsourcing (KPO) Delegating professional or
Outsourcing high-level tasks support services like IT,
such as market research, data accounting, or education to
analysis, and legal services outside firms.
requiring specialized
expertise.
Outsourcing involves hiring
external contractors to perform
tasks that were previously done
in-house.
GREEN FLAG RED FLAG
Product outsourcing refers to
delegating customer service and
HR to external providers.
GREEN FLAG RED FLAG
Knowledge Process Outsourcing
involves tasks like legal services
and data analysis.
GREEN FLAG RED FLAG
KEY PRINCIPLES AND
PRACTICES
Before outsourcing a service, a
01 - MARKET TESTING & TENDERING company compares different suppliers
to find the best one.
Establish a written agreement that
02 - SERVICE CONTRACTS clearly defines what services the
contractor must provide and how they
will be monitored.
Organizations should not base their
03- COST-BENEFIT ANALYSIS decision solely on the lowest cost;
quality and reliability must also be
carefully considered.
Focus on what your company does best
04 - FOCUS ON CORE ACTIVITIES —and consider outsourcing other, non-
core tasks.
Check regularly if the outsourced work
05 - PERIODIC REVIEW is still competitive in terms of price and
quality.
Service contracts do not need to
be in writing as long as both
parties verbally agree.
GREEN FLAG RED FLAG
A cost-benefit analysis in
outsourcing should consider only
the lowest price.
GREEN FLAG RED FLAG
IMPACTS ON INTERNAL
CONTROLS AND AUDITING
PROCESSES
Weakened Oversight Service Quality Risks Security Risks
Internal staff are no longer If the contract doesn't specify Outsiders may have access to
directly responsible, making it quality standards or penalties, sensitive areas or data,
harder to monitor day-to-day service may decline. increasing security
operations. vulnerabilities.
02 04 06
01 03 05
Reduced Institutional Dependency on Audit
Knowledge Third Parties Challenges
With fewer in-house experts, Relying too much on one Auditors must assess
the company may struggle to contractor can be risky if they contracting procedures, value-
handle issues or make informed fail to deliver or raise costs later. for-money evaluations, and
decisions internally alignment with strategic goals.
IMPLICATIONS FOR
INTERNAL AUDIT
Objective contractor Periodic market
1. selection
2. Value for money 3. testing
Are the contracting procedures for Is it evident that contracted-out services Is contracted-out work periodically
outsourcing adequate to ensure the are value for money? market-tested to ensure the service is
contractor is selected objectively, and provided competitively?
are these procedures followed?
Avoid supplier Contract performance
4. Define core activity 5. dependence 6. reviewed
Does the business have a clear strategic Is contracting out leading to excessive Does management review the discharge
grasp of what its core activity is, and so dependence on one supplier, and does of contracts for outsourced services
should not be regarded as a candidate for management regularly consider this risk? with a view to learning lessons from cost
outsourcing? overruns, etc.?
Outsourcing increases oversight
since tasks are managed
externally.
GREEN FLAG RED FLAG
Security risks can increase when
sensitive data is handled by
external providers.
GREEN FLAG RED FLAG
REAL-LIFE EXAMPLES AND
THEIR IMPACTS
WHAT APPLE
OUTSOURCED
ASSEMBLY & MANUFACTURING
01 Outsourced to partners like Foxconn and
Pegatron in China and other Asian countries
for cost-effective mass production.
COMPONENT PRODUCTION
02 Key parts like chips, displays, and batteries
are produced in Korea, Japan, and Taiwan by
specialized suppliers.
SUPPORT SERVICES
Outsourced parts of logistics and customer
03 support to streamline operations and reduce
overhead.
IMPACT OF OUTSOURCING
ON APPLE’S OPERATIONS
Cost Efficiency Speed & Scalability
Reduced labor & production costs Rapid ramp-up of production (e.g.,
($30 vs. $300/unit labor cost) 8,000 workers hired overnight)
Access to Skilled Labor Strategic Flexibility
In China, Apple's suppliers have Allows more focus on core
access to a vast pool of technically strengths like design, marketing,
trained workers for electronics and ecosystem integration
Innovation Speed
manufacturing.
Fast engineering changes via tight
supplier networks
IBM & QUEENSLAND
HEALTH PAYROLL
SYSTEM FAILURE
In 2007, the Queensland Government hired IBM for
A$6.19M to modernize Queensland Health’s payroll
system for over 80,000 staff using SAP software.
Thousands of workers had incorrect or delayed salaries
The system experienced frequent crashes
There was public outrage and a massive loss of trust in
the government
IMPACT OF OUTSOURCING
TO QUEENSLAND HEALTH
Financial Losses Escalated
Final costs surpassed A$1.2 billion,
burdening taxpayers and government Severe Consequences Followed
resources. Led to senior resignations and a ban on
IBM from future contracts.
Audit & Oversight Broke Down
Massive audit failures revealed poor
vendor oversight and unclear
responsibilities.
Operational Strain Increased
HR and finance teams were
overwhelmed, hence manual processing
Public Confidence Undermined surged to fix issues, disrupting normal
Citizens lost trust in the government’s operations.
ability to manage large IT projects.
Apple manufactures all of its
products in-house to maintain
control.
GREEN FLAG RED FLAG
IBM’s project with Queensland
Health was a successful
example of outsourcing.
GREEN FLAG RED FLAG
RECOMMENDATIONS
Strengthen Contract Management: Prioritize Testing & Risk Mitigation:
Ensure clear responsibilities, enforce Never launch systems without full testing;
performance-based contracts, and prepare contingency plans to manage
conduct regular audits to maintain disruptions and reduce operational risks.
accountability and quality.
Focus on Core Competencies: Maintain Strong Oversight
Outsource non-core functions (e.g., and Quality Control:
manufacturing, logistics) to increase Implement robust monitoring systems to
efficiency while concentrating internal manage global suppliers and ensure
efforts on design, and strategic control. standards across all outsourced operations.
THANK YOU!
REFERENCES
Chambers, A., & Rand, G. (2010). The Operational Auditing Handbook:
Auditing Business and IT Processes. John Wiley & Sons.
J, A. (2021, January 25). What is Outsourcing? definition, types. 20
outsourcing companies, benefits and limitaions - The Investors Book.
The Investors Book. https://theinvestorsbook.com/outsourcing.html
Sunny, K. (2023, December 19). Unpacking Apple’s Strategic Outsourcing: A
Deep Dive into Why iPhones Aren’t Made in America. Medium.
https://medium.com/@kmmy.legal/unpacking-apples-strategic-
outsourcing-a-deep-dive-into-why-iphones-aren-t-made-in-america
Lorna Alvarado
SHORT QUIZ
1. IDENTIFICATION: 6. IDENTIFICATION:
This type of outsourcing involves
What is the other term commonly used
delegating customer service or HR tasks
for "outsourcing"?
to a third-party company.
2. TRUE OR FALSE: 7. TRUE OR FALSE:
Outsourcing non-core activities can help Cost-benefit analysis means hiring the
a company focus more on its strengths. cheapest contractor to save the most
money.
3-5. ENUMERATION: 8-10. ENUMERATION:
Give three key principles or practices that
Give three recommendations to help
companies should follow when outsourcing.
organizations outsource effectively.
QUIZ 10
OUTSOURCING
1. IDENTIFICATION:
What is the other term commonly
used for "outsourcing"?
1. IDENTIFICATION:
What is the other term commonly
used for "outsourcing"?
2. TRUE OR FALSE:
Outsourcing non-core activities can help a
company focus more on its strengths.
1. IDENTIFICATION:
What is the other term commonly
used for "outsourcing"?
2. TRUE OR FALSE:
Outsourcing non-core activities can help a
company focus more on its strengths.
3-5. ENUMERATION:
Give three key principles or practices that
companies should follow when outsourcing.
6. IDENTIFICATION:
This type of outsourcing involves delegating customer
service or HR tasks to a third-party company.
6. IDENTIFICATION:
This type of outsourcing involves delegating customer
service or HR tasks to a third-party company.
7. TRUE OR FALSE:
Cost-benefit analysis means hiring the
cheapest contractor to save the most money.
6. IDENTIFICATION:
This type of outsourcing involves delegating customer
service or HR tasks to a third-party company.
7. TRUE OR FALSE:
Cost-benefit analysis means hiring the
cheapest contractor to save the most money.
8-10. ENUMERATION:
Give three recommendations to help
organizations outsource effectively.
