In the rapidly evolving global marketplace in which outsourcing is ubiquitous, organizations need to be vigilant in their management of risk. Enterprise Risk Management (ERM) is a growing paradigm in which business leaders seek to effectively identify, mitigate, and manage risks across all aspects of the business as a whole. The ERM model classifies business risk into seven distinct, but inter-related categories: 1) strategic market risks, 2) operating risks, 3) finance risks, 4) human capital risks, 5) Information Technology (IT) risks, 6) legal risks, and 7) reputation risks. (Beasley, Bradford, and Pagach, 2004) A proposed outsourcing of any business process needs to carefully evaluate how the proposed change may create, increase, or reduce risks in each of these business areas. This paper will examine a proposed change from a legacy payroll system to an outsourced solution and evaluate the costs, benefits, and risks of the proposed change. Additionally, it will suggest how to effectively manage such a transition.
COSTS AND BENEFITS
When considering the costs versus benefits of a business decision, both costs and benefits can be categorized as either direct or indirect. Direct costs refers to those activities that require a quantifiable and foreseeable outlay of the organization’s assets. Indirect costs, however, refer to potential costs that may arise. Direct benefits refers to those activities that either increase revenue or reduce cost. As with direct costs, direct benefits can be easily quantified. Likewise, indirect benefits are more difficult to foresee and quantify. Following is a cost-benefits analysis matrix representative of the proposed payroll outsourcing project.
| Direct | Indirect |
Benefits | Revenue Enhancements | | |
| Cost Reductions | Reduction in man-hours | Increased efficiency Avoidance of noncompliance fines and penalties |
Costs | Implementation costs | Vendor feesService agreement fees | Disruption to payroll...