“Process risk” refers to the possibility that the processes used to deliver a service might need to change dramatically during the term of a sourcing arrangement. This can be favorable, as in the case of “Moore’s Law” (on the predictability of rapid doubling of semiconductor processing capacity), or unfavorable, as in the case of patent infringement, licensing termination, bankruptcies of process suppliers and other adverse events.
Since processes will likely change, the parties need to identify the significant processes that form the basis of the bargain and that, if impacted by a change, could justify a renegotiation, termination, repricing or expansion or contraction of the scope of service.
Process risk denotes the risk that the processes adopted by the service provider will not fit the needs of the enterprise customer. This risk is somewhat complex.
- There may be process risks during the transition period where the service provider was not aware of important existing processes that were underlying the general services in the outsourcing agreement.
- Process risk may also arise due to changes, over time, of the enterprise customer’s needs and the “best practices” in the relevant business process.
- Some processes may become illegal or subject to regulation, while other processes may become technologically outdated.
- The duration of the contract might be so long that the parties do not clearly understand the open nature of the commitments, promises and emerging needs of each other.
Process risk can be managed by appropriate due diligence, contract planning, negotiation, transitioning, integration management and relationship governance. Legal planning techniques can also be used, particularly those relating to termination for convenience and termination for failure to manage the processes in an agreed fashion.