What are the geopolitical risks of offshore outsourcing?

What are the geopolitical risks of offshore outsourcing?

Offshore outsourcing has always been linked to geopolitical risks, and the COVID-19 pandemic only added to them. Global companies have to deal with many threats when considering offshore outsourcing for their projects. A variety of political scenarios, such as antagonistic or unstable governments, power shifts, economic constraints, more stringent regional regulations, terrorist threats, the constantly changing pandemic, and other unforeseen events, are among the main risks.

These are all examples of geopolitical risks that have the potential to seriously upset and harm both your vendor/partner relationships in offshore outsourcing and the global economy as a whole. It is essential to be aware of these hazards when deciding whether to pursue an offshore outsourcing strategy and to take steps to mitigate them. 

Companies should develop strategies to manage them, such as having an emergency plan, conducting regular risk assessments, and forming solid relationships with partners and vendors. Knowing about all those geopolitical risks is the best way to mitigate them, and this article will help you do it. Read more.

What are the types?

According to the extent of their influence, offshore outsourcing entails a variety of geopolitical risks, which can be categorised into two categories. They are macro risks and micro risks.  Macro risks are external risks that affect the entire global economy. In contrast, micro risks are smaller and more specific risks that can affect individual companies. Companies should be aware of both types of geopolitical risks in order to minimise them. In this section, you will read about macro risks and micro risks.

  • Macro risks
  • Micro risks 

1. Macro risks 

These are significant problems that call for drastic adjustments in certain nations or areas. They include high-level risks such as long-term trade disputes, regional or civil wars, significant power shifts (like Brexit), and others. Such risks are difficult to manage, and supply chains can be vulnerable to disruption at any time. Companies can avoid such risks by developing strategies to reduce their exposure to geopolitical risks, such as diversifying their supply chains and using risk management tools. 

2. Micro risks

The term “micro risks” describes tiny risks that have the potential to impact specific businesses. Natural disasters, labour strikes, and economic downturns are a few instances of micro risks. It will only have an impact on particular industries, such as those with taxes, export or import caps, export or import restrictions, short-term restrictions, or challenges getting a visa to or from the country you are considering outsourcing. Companies can guarantee that their operations are not interrupted by minimising the risks by evaluating them and creating plans to do so.

Six common geopolitical risks for global businesses

While considering macro risks and micro risks, you should also take into account some of the most common geopolitical risks for global (multinational) companies, including the risks associated with:

  • Outsourcing to developing or unstable markets: In some countries, due to the physical and geographical locations of the organisations, the risks of terrorist attacks, civil wars, religious unrest, expropriation of assets, etc., can be higher. 
  • Risks to the safety of the workforce: When it comes to markets that are vulnerable to risk, employee migration and international travel for work can be dangerous.
  • Involvement of central organisations: Involvement of central organisations when mitigating regional risks causes risks of delayed decision-making.
  • Supply chain operations: Unpredictable geopolitical events can cause massive enterprises that rely heavily on global supply chain networks to lose much more than just a tonne of money.
  • Political unrest or modifications to local or regional laws and regulations may result in capital losses or delays in the completion of the projects.
  • The most significant risks of the twenty-first century are cyberattacks and data vulnerabilities, which affect every online business and put entire industries at risk.

Countermeasures to reduce these geopolitical risks

The following are some of the countermeasures global businesses can opt for to reduce the geopolitical risks mentioned above.

  • Get adequate insurance
  • Distributing Important Resources 
  • Intelligent and proactive risk management approach
  • Banking with a political mind
  • Good lines of communication when things go bad
  • Consult local experts for advice
  • Outsourcing to trusted service providers

1. Get adequate insurance

Insurance is a mandatory measure to take to keep your business insured at all times, not just when offshore outsourcing. Most companies tend to avoid buying inadequate insurance. Thus, comprehend your company, assess your resources, and seek professional guidance before making any insurance purchases that will adequately cover all of your possible risks over a sufficient period. 

2. Distributing Important Resources

Divide up your essential resources. Take breaks from concentrating all of your efforts in one area. In order to deal with unfavourable situations that arise from any geopolitical unrest, the company needs to quickly build buffers, assign critical assets, and create contingency supply chain networks and vendors. 

3. Intelligent and proactive risk management approach

International corporations must adopt an intelligent and proactive strategy for risk management. In addition to AI and machine learning, watchful project managers are essential in predicting problems before they arise and alerting upper management so they can take preventative action. In order to shorten the time between actions and give strategic decisions enough time to be implemented, it is also imperative to set up automated response systems that follow strict protocols.

4. Banking with a political mind

The recent significant fluctuations in the value of the global reserve currency have made it essential for businesses to incorporate more effective banking strategies to manage their cash flow. Achieving a sustainable approach to managing your daily cash flows and currency conversions requires thorough research into the best banking practices in each country where you wish to outsource.

5. Good lines of communication when things go bad

In the case of a terrorist attack or a pandemic in the country where you outsourced your projects, you may fail to communicate with your outsourcing partners. So, think about such circumstances beforehand and establish systems to resolve communication. Having robust and secure communication systems, like radio transmitters or automated warning signals, can help you mitigate such communication issues by enabling you to report problems promptly and take the most efficient possible care of them.

6. Consult local experts for advice

Consulting local experts, industry insiders, and other expert professionals can help you evaluate the political climate of the given country or region in which you wish to do offshore outsourcing or already have. Rather than depending solely on the tactics developed by centralised management, it is preferable to speak with anyone in the relevant territory in order to incorporate the advice and opinions of these local experts. It will significantly help to avoid geopolitical risks.

7. Outsourcing to trusted service providers

The offshore partners you choose to do your outsourcing have a significant role in reducing the risks involved. If you select a trustworthy, dynamic, and agile partner, it can successfully help solve many geopolitical risks. As such, when choosing them, do your homework and always depend on partners who have a robust infrastructure, a global presence, and a well-connected network.

So, the article discussed the geopolitical risks and the countermeasures to mitigate them. Failing to pay attention to any of the risks mentioned in the article can negatively affect you when considering offshore outsourcing and will surely take its toll one way or another. Therefore, address them properly using the countermeasures mentioned in the article. Also, partner with experienced and reliable partners.

Interesting Links:

Check out some of the geopolitical risks of Offshore Outsourcing

Geopolitical Uncertainty Brings Risk To Offshoring

Pictures: Canva

The author: Sascha Thattil works at Software-Developer-India.com which is a part of the YUHIRO Group. YUHIRO is a German-Indian enterprise which provides programmers to IT companies, agencies and IT departments.

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