Due diligence on outsourcing companies
More and more organizations are utilizing third parties to increase efficiency. One of the ways they are doing this is by working with outsourcing companies to meet the human resource needs for business support activities. In principle, outsourcing companies take over processes that are not related to the core business of a company, for example, security and cleaning services.
Unfortunately, there are many outsourcing businesses that operate in ways that contravene relevant contracts and rules. This clearly poses a lot of risks for organizations that employ their services, including reputational risks.
Yos Rizal Setiawan, an experienced HR practitioner who has worked in numerous national and global firms for over two decades, has witnessed this first-hand.
Organizations must realize that although they may outsource certain business functions, they cannot relegate the risks. As a result, it is critical that they conduct extensive due diligence on the outsourcing companies with whom they wish to cooperate.
Modus operandis and reputational risks
“Usually, cooperation agreements are signed between outsourcing companies and the organizations they work with, containing terms such as not collecting recruitment fees or cutting wages, applying minimum wage (UMR), and so on. However, in practice, there are many outsourcing companies that violate these terms,” explained Rizal.
“In fact, some outsourcing companies cut employees’ salaries for the first 3 months by up to 50% with the pretext of paying for transportation, recruitment fees, and so on,” he continued.
The cooperation contract between the outsourcing company and the organization generally includes costs outside of the employee’s salary. According to him, practices of this kind of violation are still often found, especially in Indonesia.
This type of fraud has an impact on the reputation of the organization using the outsourcing service. Outsourced employees may think that it is the organization where they are placed that is cutting their salary.
Due diligence minimizes losses
“Based on my observations, many organizations do not carry out thorough due diligence before they work with outsourcing companies,” he said.
“An example of in-depth due diligence is a direct visit to the outsourcing office to ensure that the physical office really exists, work support facilities are available for employees, and various matters related to their business,” continued Rizal.
Due diligence is a compliance tool that helps organizations minimize inherent risks that arise from partnerships. In practice, what the organization wants to assess can be adjusted to the needs and type of industry.
This investigative method can generally be utilized by combining offline searches, including site visits, verification of tax withholding slips, interviews with principals, interviews with employees, and so on. It can also be done online, using a method known as a media search.
Using all the information obtained, organizations can ensure that potential third parties will operate in compliance with the cooperation agreement they have signed, which in turn protects the company from reputational damage, legal violations, and even greater material losses.