Companies that choose to outsource work to save money may be buying themselves more legal trouble than it's worth. That's one conclusion from Kroll Inc.'s annual global corporate fraud survey released Monday.
Asking if outsourcing is really worth the risk, the survey says companies often make the decision "without a thorough assessment of the risks involved in determining what is to be outsourced, and to whom." As examples, it cites the January 2009 Satyam Computer Services case in India, when the then-fourth largest outsourcing company in the world admitted that it had inflated revenue and profits for years. The corporation was eventually sold to another Indian company.
The survey also cites the February 2008 case involving the Bank of New York Mellon, when the bank was the victim of a data breach while under the responsibility of an outsourced company. In that instance, tapes containing personal banking information of some 12 million customers disappeared during transport to an off-site facility. The bank ended up paying for an internal investigation as well as credit monitoring and other protection for the 12 million customers, even though no misuse of the information was found.
The lesson learned: Companies shouldn't just assume that the outsourcing business they hire has the same security procedures as their own, the report warns.
David Holley, senior managing director of Kroll's Boston office, says other areas of the survey also showed interesting trends. For example, the professional services industry -- which includes lawyers -- saw fraud more than double, with companies reporting an average $2.9 million loss over three years, compared to last year's loss figures of $1.4 million.
The most common types of fraud experienced by professional services companies included theft of physical assets, information theft or attack; management conflict of interest; and regulatory or compliance breach. But professional services' fraud losses weren't the worst. That honor falls to the financial services industry.
Amy Malsin, senior marketing director and U.S. regional head of investigations in New York, says financial services suffered in part because the contracting of business made obvious some frauds that only come to light when the market goes wrong. "It's like they say, when the tide goes out, the rocks are exposed," Malsin explains.
Three other industries with increased fraud were health care, pharmaceuticals and biotechnology; retail, wholesale and distribution; and travel, leisure and transportation. Five sectors experienced fraud declines -- manufacturing; technology, media and telecom; natural resources; consumer goods; and construction.
The declines helped keep the fraud activity worldwide fairly steady in 2009. Companies lost an average $8.8 million to fraud over the past three years, up just seven percent from last year's figure of $8.2 million.
The findings are the result of a survey Kroll commissioned from the Economist Intelligence Unit of more than 700 senior executives worldwide. The report was released at the Association of Corporate Counsel's 2009 Annual Meeting in Boston. Holley says more than half of Kroll's clients in 29 countries are in-house or outside counsel who seek Kroll's consulting advice or investigatory skills.
Pop-Up Chart: Report Card on Professional Services (pdf)
Pop-Up Chart: Report Card on Financial Services (pdf)
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