Off Shoring Audit Implications IIA Detroit Chapter Dinner Meeting Vis Ta Tech Conference Center November 11, 2008 Daniel Wiechec General Director, Automotive Audit General Motors Corporation Stuart McCubbrey Director, Information Technology Audit General Motors Corporation 1
AGENDA Background Risks with off shoring business processes and IT Audit Implications Questions and Answers 2
Background 3
What is Off-Shoring? Off-shoring is a type of outsourcing. Off-shoring refers to the rapidly growing tendency of companies to send both knowledge-based and manufacturing work to third-party firms in other nations. The intent of off-shoring is to typically reduce labor costs, to enter new markets, and to take advantage of more favorable laws and regulations. Near-Shoring is outsourcing to a nearby country, such as Mexico and the U.S. 4
Off-shore vs. Near-Shore? Source: InformationWeek, 9/22/08 5
Why do companies look to off-shore? Based upon a research project by Ventoro in 2004, off-shoring was performed by companies for the following reasons: Achieve cost savings Improve quality Improve time to market Gain technical skill sets Forced strategy Cost predictability Penetrate market Gain industry experience 6
What are the trends? Based upon the Ventoro research project in 2004, 19% of company executives surveyed indicated that they had off-shore operations 95% of Fortune 1000 firms, however, indicated that they had off-shore operations Forrester Research indicates that off-shoring will grow 30 to 40% a year over the next 5 years By 2015, US companies will move 3.3 million services jobs, accounting for $136 billion in wages 7
What are the trends? 8
What are the trends? Off-shoring continues to move to Latin America, Eastern Europe and Asia Pacific Common functions being outsourced include: Transactional processing, i.e. accounts payable, accounts receivable, payroll, etc. Information technology, both from a system development and infrastructure management perspective Call centers and help desks Services, i.e. Logistics, Procurement, Benefit Administration, etc. 9
Risks With Off Shoring Business Process & IT 10
Reasons for Outsourcing Failures 11
Off-Shoring Risks Not realizing expected cost savings Travel costs, management oversight, rework, rising wages for workers in demand by other companies, culture and language training Poor English communication skills Accents for IT Help Desk personnel, unclear understanding of nuance and culture Degradation/Loss of internal technical skill sets For multi-year contracts, your third party is learning more about your business than your own staff; Hurt internal staff morale 12
Off-Shoring Risks Time zone differences Hampers projects/processes that require constant personal communication High turnover of outsourced personnel Working the night shift in Asia to support the U.S. Security of Intellectual Property Sensitive data in the hands of foreign nationals, some in countries with poor track records for privacy, security and industrial espionage 13
Off-Shoring Risks Public backlash/public relations cost Negative political reaction to sending jobs overseas Requires different internal employee skills Need more contract, vendor and project management skills than you may currently have Complexity of unknown local requirements Lack of experience with local country legal, political and cultural requirements; Physical infrastructure constraints 14
Off-Shoring Risks Lack of specific contract deliverables Lack of specific and measurable contract deliverables to hold outsourcer accountable; May lead to expectations gap later on Not retaining strategic management oversight and direction Outsourcing tasks AND overall responsibility Main outsourced provider sub-contracting to other suppliers Do you even know who you re dealing with? 15
Audit Implications 16
Audit Implications When considering the audit implications, consider what can go wrong. Remember the reasons why off-shoring has failed 17
Audit Implications Get involved with off-shoring initiatives early in the process Participate in due diligence activities prior to signing offshoring contracts Ensure that off-shoring contracts contain Right to Audit clauses Where possible, request off-shoring vendors to provide SAS 70 reports regarding the outsourced operations Ensure that service level agreements and key performance indicators are established Evaluate assumptions used in the cost/benefit analysis Understand the maturity of the process being outsourced 18
Audit Implications Assess management oversight and accountability Just because a process has been outsourced, doesn t mean that responsibility for the process is also outsourced Understand how roles and responsibilities are defined Ensure that service level agreements and key performance indicators are being monitored Ensure that management sets the proper tone about their responsibilities and those of the outsourcer Ensure that management truly understands the process as it is performed today Has the outsourcer outsourced some of their functions? 19
Audit Implications Assess the implementation/management of the outsourced process Ensure that desk procedures exist and properly reflect the process outsourced Ensure that personnel have been trained and understand their responsibilities Outsourced providers Internal resources Ensure that management understands the local culture, customs and laws and regulations Ensure that the outsourced provider understands the company s policies and procedures Evaluate the reasonableness of the SLAs and KPIs established Do they really identify what is critical to the business? 20
Questions and Answers 21