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01.02.2011 Sanjna Melwani PUB2011/02

WHAT IS OUTSOURCING? While the business world continues to advance at an unprecedented pace, at the same time, increasingly strong competition in the market forces businesses to innovate and seek ways in which to provide the same quality services at lower costs to remain competitive in the current market. One of the ways that is becoming a more common business practice is to link up with or set up outsourcing services providers/centre's ("OSPs"). These may be in lower cost jurisdictions or in same location but the overall aim is to ensure that they meet the needs of the business, such as to take on certain administrative or routine functions or to take on certain services encompassing more complex business functions. There are three main categories where OSPs have begun to flourish. 1. Technological Process Outsourcing, such as e-commerce, database and network infrastructure, general applications, telecommunications and finally website development. 2. Business Process Outsourcing ("BPO"), such as customer relations, media, marketing and technical support, equipment handling and logistics, human resources, accounting, procurement function, security, manufacturing, media, consultancy, data entry, proof-reading, editing, translating, transcription and other generic processes that cannot be handled internally such as insurance. 3. Knowledge Process Outsourcing ("KPO" -the oldest type), such as advanced research and technical analysis, research and development, intellectual property development and specialist reports. The examples given are not exhaustive and as the business world advances, so too would the scope of outsourcing services advance to encompass the changing needs of the business world. In Hong Kong and the Greater China Region, Alphalink is your ideal choice as a BPO outsourcing partner based on our expertise in providing corporate secretarial, accounting, payroll, structuring advisory, human resources services and finally business support services.

©Alphalink 2011

WHY SHOULD YOU OUTSOURCE? (BENEFITS OF OUTSOURCING) We set out below some of the business benefits of outsourcing: Higher Bottom Line Even if initial investment may be required if the business will set up its own OSP, the bottom line result should be theoretically reduced operating costs, such as salary costs for same services "at home" or administrative costs such as telephone IDD calls. Higher Quality Level Theoretically improved quality levels across the entire business operation since the OSP team is dedicated to and has expertise on this/these service(s) only while staff in other jurisdictions are freed up to provide a better quality of their service back home based on their own expertise. Workforce Motivation Employees are essential assets. No matter which industry nor the size of the business, keeping employees happy and motivated is a high priority for any business. Using an effective OSP should theoretically free them up from cumbersome administrative tasks allowing them to focus on more meaningful tasks that not only motivate them, but add value to the business. Higher Level of Service Theoretically improved service levels across the entire business operation since the OSP team is exclusively dedicated to this/these service(s) while staff in other jurisdictions are freed up to provide a better quality of their service back home based on their own expertise. Economies of Scale The entire business operation theoretically has access to consolidated "one-stop-shop" which, if correctly managed, would also help to integrate the disparate systems and processes of these operations.

Time Saving Time is money. Where an employee's time is saved by reallocating his activities and focus to other parts of the business, his productivity should increase resulting in more output from the same amount of time available in a working day. The output could be increased "revenue" or the increased intrinsic value of time itself.

Our world has changed in such a way that it may become increasingly important to consider working with an OSP in order to benefit in any of the ways detailed above. Such benefits need not necessarily be in the workplace but can be from any other perspective. As such, it is always advisable to be appreciative of the outsourcing relationships that can exist in today's world, whilst also being aware of the associated risks so that effective risk mitigation strategies can be put into place to enable a most effective outsourcing relationship.

©Alphalink 2011

WHAT SHOULD YOU CONSIDER BEFORE OUTSOURCING? (RISKS OF OUTSOURCING) Having established the benefits, there are always associated risks with entering into a relationship with an OSP: Strategic Risk

OSP understanding may not match with the actual goals of the business. This, together with insufficient resources or inadequate expertise to provide oversight on the OSP could cause a misalignment between the parties.

Solicitation Risk

OSP has access to business information, such as customers, key contacts and other internal information that is made available to the OSP to perform their duties. In their unique position, this could expose the business to OSP approaching key contacts.

Reputational Risk

The business may have a different or higher standard for interaction with their customers and other parties with whom a good business relationship must be maintained. If the OSP has a different standard for conducting the business as well as a different set of business ethics/moral codes, there arises a misalignment between the parties and so could expose the business to loss of reputation. Also, the OSP may find itself exposed to many problems such as technological failures, insufficient financial capacity to meet their obligations, insufficient or undertrained staff to handle inspections, inadequate checks and balances in place all resulting in a reputational risk to the business.

Financial Risk

There may have been capital investment to set up the OSP or the OSP may be given sufficient authority to put them in a position where they are able to make financial commitments on behalf of their client. Without the proper checks and balances in place, the OSP may begin to mis-use such authority up to and including fraud. Also, the OSP may find itself exposed to many problems such as technological failures, insufficient capacity to meet their obligations, insufficient or undertrained staff to handle inspections and so the output does not match the business requirements. Any of the above could cause serious financial harm to the business including potential costly expenses of litigation.

Time Risk

Time may be spent by the business personnel in liaising with OSP to obtain processes, data, controls, information required by regulators or any other output for which the OSP has been engaged. If the OSP is unable to cope with the demands of the business, various and multiple types of delay could occur that end up defeating the purpose for which the decision to outsource was made.

Operations/Compliance/Quality Risk

The OSP may find itself exposed to many problems such as technological failures, insufficient financial capacity to meet their obligations, insufficient or undertrained staff to handle inspections, inadequate checks and balances in place so that the quality of the output by the OSP does not match the desired levels of quality of the business.

Dependency Risk

The OSP may be extremely successful in its operations or become market experts in their particular brand of expertise so that the business and its operations become more dependent on the OSP and provide more and more authority to the OSP. Also, there may be insufficient or undertrained staff/insufficient intellectual property back home so that ending the relationship becomes more difficult over time.

Access Risk

OSP understanding may not match with the actual goals of the business. This, together with insufficient resources or inadequate expertise to provide oversight on the OSP could cause a misalignment between the parties and delayed access to information particularly in a situation where the OSP is performing poorly and does not understand the urgency of keeping information transparent and immediately available to those in need of up-to-date information from the business's perspective. Although not immediately apparent, government and stability of the business environment of OSP may also affect access when economic climate is under threat. The OSP may be extremely successful in its operations or become market experts in their particular brand of expertise so that the business and its operations become more dependent on the OSP and provide more and more authority to the OSP. Also, there may be insufficient or undertrained staff/insufficient intellectual property back home so that ending the relationship becomes more difficult over time. Additionally, if capital investment was made and the OSP relationship is not successful, the original costs of investment (and withdrawal costs) are an important factor when determining how best to exit from a relationship with the OSP. Finally, although not immediately apparent, government and stability of the business environment in which OSP is located may also play a significant role in the access to information when economic climate is under threat resulting in additional exit risk.

The OSP may be given sufficient authority to put them in a position where they are able to make representations on behalf of their client and without proper checks and balances in place, the OSP may begin to mis-use such authority up to and including fraud. Also, OSP has access to business information, such as customers, key contacts and other internal information that is made available to the OSP to perform their duties. In their unique position, in case of breakdown of relations, this could expose the business to legal risk if OSP is in a position to leak the business's confidential information. Finally, the OSP has insufficient knowledge of the applicable laws, regulations, and standards of the locations they are servicing. Any noncompliance with these could have a significant legal impact on the business. By the same token, the business may have insufficient knowledge of the applicable laws, regulations, and standards of the location where the OSP is based nor of the economic climate of OSP location so that legal risks may be involved if there are fluctuations in Government standards.

Legal Risk

Exit Risk

©Alphalink 2011

HOW TO CHOOSE THE IDEAL OSP Needless to say, any of the risks above, if not controlled can become serious enough to render the ends not justifying the means, i.e. in some way, the scale tips and the costs outweigh the benefits. It is therefore crucial for the business to know that the decision to outsource should not be taken lightly. Nevertheless, with the right tools, management would be able to address all the risk components and business impact and align these with their own service delivery metrics and expected output from the service provider to arrive at a decision whether to proceed with an OSP. For the business owners and managers, the ideal would be that the OSP is able to provide a quality of service/product that is at least the same if not better than the business model being run in their other high cost locations while remaining cost effective and also administratively effective. As can be seen above, not only are there benefits to an outsourcing relationship, but there are also significant risks that have to be considered as an integral part of enterprise risk management in choosing the ideal OSP for the business. Even something as simple as the choice of health benefits scheme could add value or cause reputational damage if the employees are disgruntled with management choices. Therefore, management must make careful analysis before deciding to enter into a relationship with an OSP. In order to do this, they can use a combination of management tools as well as risk management evaluation, together with due consideration given to the benefits of outsourcing in order to determine if the reward outweighs the risk. The following is a simple outline of stages of analysis in order to arrive at the ideal OSP. Step 1 ­ Initial Evaluation

©Alphalink 2011

Step 2 ­ Streamlining Having identified there is a sound business need for an OSP, the following should then be considered in order to develop an appropriate action plan to enter into a relationship with or set up an OSP: Is management structure needed to oversee OSP or can it be independent? Consideration should be given to the risks of allowing the OSP to operate independently

Should OSP be chosen by tender, referral or set up directly by the business? Before taking this decision, management may want to deploy staff to see if there are OSPs in the market with skills in the required area, speak with other sources on possible referrals and finally determine the costs (financial and risk) of setting up own OSP vs using an established OSP.

Due diligence on existing OSP (whether same location or overseas):

technical capabilities managerial skills financial viability technological skills staff capacity language skills visa restrictions market reputation familiarity with the services industry capacity and understanding to produce timely and relevant output INCLUDING AN UNDERSTANDING OF THE SERVICES/OUTPUT REQUIRED BY THE BUSINESSS and capability of OSP to match service and output with the business's international standards well demonstrated capacity to keep pace with innovation in the marketplace real-time visibility into processes stable economic climate ease of litigation and Government attitude in cases of fraud

Due diligence on setting up own OSP (whether same location or overseas):

financial plan and budgets to cover costs of set up / projected gains thereafter (if the expected gain is of cash value) sites for rental/purchase access to appropriate equipment for setting up the OSP sufficient workforce available with correct language/IT skills/services skills visa restrictions on staffing the OSP ease of enabling real-time visibility into processes stable economic climate ease of litigation and Government attitude in cases of fraud industry standards that match international business standards

Risks? There can be no consideration given to moving forward AT ANY STAGE if the risks identified are determined to be greater than the benefits of outsourcing.

Once the staff has come back with the results, management should then match the results against the associated risks and develop risk mitigation plans (covering monitoring, testing and final action) to target each of the associated risks especially when working on the final service agreement.

©Alphalink 2011

Step 3 ­ The Service Agreement: Risks, Deliverables, Controls, Accountability and Oversight Role Is there strategic risk? Solutions: Have the OSP management attend training to understand the business goals periodically (time frame to be established by the business based on the level of their budget for transportation/training sessions). Is there solicitation risk? Solutions: Negotiate a clearly defined service agreement that clearly articulates the non-solicitation clauses, the timeline, and the parties covered. Although this may mitigate risk, management should be clear of the local laws of the OSP along with costs and length of procedure for litigation. Is there reputational risk? Solutions: Negotiate a clearly defined service agreement that clearly articulates the business standards as well as ethical and moral codes that should be applied when dealing with the business's customers and other parties with whom a good business relationship must be maintained. Is there financial risk? Solutions: Negotiate a clearly defined service agreement that is operationally flexible and clearly articulates the expectations and responsibilities of both sides as well as comprehensive clauses to cover the decision, transaction, reporting, auditing and operations phases along with relevant security controls and retention of ownership of assets held in OSP location, if applicable. Have the OSP management attend training to understand the business goals periodically (time frame to be established by the business based on the level of their budget for transportation/training sessions). Establish timeline (e.g. quarterly) for OSP management to send financial reports for due diligence analysis. Is there time risk? Solutions: Without clearly established time lines, there could be serious breakdown in communications with what is expected of the OSP as well as when this is to be delivered. It is imperative to negotiate a clearly defined service agreement that is operationally flexible and clearly articulates the expectations and responsibilities of both sides as well as comprehensive clauses to cover all aspects of the deliverables of the OSP up to and including exception handling (i.e. immediate reporting of delays). Have the OSP management attend training to understand the business goals periodically (time frame to be established by the business based on the level of their budget for transportation/training sessions). Is there operational/quality risk? Solutions: Negotiate a clearly defined service agreement that is operationally flexible and clearly articulates 1) the transition methodology 2) the control 3) the expectations and responsibilities of both sides as well as comprehensive clauses to cover i) the operations phases ii) the reporting stages with timeline for OSP management to send operation/quality control reports for due diligence analysis iii) HR deployment and other HR issues iv) performance measures v) industry standards vii) consistent application/monitoring of processes for arriving at the right output 100% of the time viii) retention of ownership of assets held in OSP location, if applicable. Have a trial stage before going live so that any problems can be addressed and rectified. Have the OSP management attend training to understand the business goals periodically. Is there compliance risk? Solutions: Negotiate a clearly defined service agreement that is operationally flexible and clearly articulates the transition methodology and control as well as the expectations and responsibilities of both sides as well as comprehensive clauses to cover all aspects of the compliance and controls process up to and including exception handling. Have the OSP management attend training to understand the business goals periodically (time frame to be established by the business based on the level of their budget for transportation/training sessions). Establish timeline (e.g. quarterly) for OSP management to send compliance/control/exception reports for due diligence analysis.

©Alphalink 2011

Is there dependency risk? Solutions: Establish personnel within the business (and back up personnel) who will oversee the OSP function so that even if they do not do the physical work, they are always aware of the functions and operations of the OSP as well as the output generated by the OSP. Management should establish back up personnel to take back the work in case of terminating the OSP relationship. Flowcharts can be set up for this purpose to arrive at a feasible working solution for exiting the relationship/country of the OSP and contingency plans should be established upfront in case of breakdown of relationship with OSP, such as list of alternative OSPs (another geographical location or within same country of OSP) or clearly defined strategy on how to bring the outsourcing service back home to once again be handled within the business.

Is there access risk? Solutions: Negotiate a clearly defined service agreement that is operationally flexible and clearly articulates the expectations and responsibilities of both sides as well as comprehensive clauses to cover how information is to be disseminated by OSP to the business unit's up to and including real-time access (and even "predictive" ability for potential situations), if feasible. Establish HR points of contacts in the OSP in this respect. Have the OSP management attend training to understand the business goals periodically (time frame to be established by the business based on the level of their budget for transportation/training sessions). Flowcharts can be set up for this purpose to arrive at a feasible working solution for regular access as well as exceptional access and contingency plans should be established upfront in case of breakdown of communications with OSP. Is there legal risk? Solutions: Negotiate a clearly defined service agreement that clearly articulates the business standards as well as ethical and moral codes that should be applied when dealing with the business's customers and other parties with whom a good business relationship must be maintained. Also, articulate the applicable laws, regulations, and standards of the locations the OSP is servicing. Although this may mitigate risk, management should be clear of the local laws of the OSP along with costs and length of procedure for litigation. Finally, accountability for actions should be clearly addressed, so that there is recourse in case of low or poor performance of the OSP. Is there exit risk? Solutions: Negotiate a clearly defined service agreement that is operationally flexible and clearly articulates when exit is needed including time line for ending the relationship, as well as return of proprietary information/assets. Clauses for events that could result in litigation should be written into the contract, such as misrepresentation by the OSP, fraud, theft or other misconduct. Establish HR points of contacts in the OSP in this respect. Flowcharts can be set up for this purpose to arrive at a feasible working solution for exiting the relationship/country of the OSP and contingency plans should be established upfront in case of breakdown of relationship with OSP, such as list of alternative OSPs (another geographical location or within same country of OSP) or clearly defined strategy on how to bring the outsourcing service back home to once again be handled within the business. For all the above, it is essential that the business creates a structure that establishes, manages, monitors and provides strategic direction for the OSP while having key personnel in the OSP who are also responsible to for the same so that both sides can be pro-active in promptly addressing and defusing problems as well as resolving conflicts in a smooth and efficient manner. Alphalink, as your preferred service provider, would be happy to work with you to tailor make the service agreement in such a way that all deliverables and all risks are fully addressed so that you are given the highest assurances of our quality as well as our timeliness of output. Our underlying aim is to give you confidence in working with our group throughout a long and mutually beneficial relationship.

©Alphalink 2011

Step 4 ­ Periodic Review Even though there is a risk that the OSP walks away from a relationship, it is always advisable to have a fixed term service agreement, i.e. so that it is reviewed, renegotiated and renewed periodically for target service levels or other performance indicators so that the OSP always strives to provide excellent service and does not become complacent believing that the relationship will never end. CONCLUSION Whether the aim of using an OSP is to lower costs, increase production or improve customer service, the process of should always remain the same, i.e. establish your end game, and then work backwards to make sure all the issues are clearly identified and covered in the service agreement, such as all aspects of deliverables, risks, controls, accountability and oversight role so that both sides are clear on each step of the process and to that there is no ambiguity on any matter. In this way, neither conflicts nor output problems could arise and with this type of set up, the ends could definitely justify the means making your business a market leader in the industry. If you would like to discuss this in more detail please do not hesitate to approach any of the contacts below:

CONTACTS

Corporate Secretarial Services Grace Siow Director Tel: (852) 2583 0633 Email: [email protected] Accounting Services Structuring Advisory Services Human Resources Services

Gloria Lee Manager Tel: (852) 2583 0678 Email: [email protected]

Dorothy Ng Manager Tel: (852) 2583 1337 Email: [email protected]

Sanjna Melwani Senior Manager Tel: (852) 2583 0677 Email: [email protected]

OFFICES

Hong Kong: Room 2302, 23/F. Caroline Centre, Lee Gardens Two, 28 Yun Ping Road, Hong Kong Room 502, China Resources Building, No. 5001, East Shennan Road, Shenzhen, China Unit 1011, 10/F, Chuangzhan Building, 928 Xikang Road, Shanghai, 200040, China Suite 1720, Sunflower Tower, 37 Maizidian Street, Beijing 100026, China Tel: +852 2583 0688 Fax: +852 2881 0328

Shenzhen:

Tel: +86 755 8266 8400

Fax: +86 755 8266 8244

Shanghai:

Tel: +86 6104 2667

Fax: +86 6277 5791

Beijing:

Tel: +8610 8527 5777

Fax: +8610 8527 5701

©Alphalink 2011

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