Outsourcing refers to contracting external vendors to handle business functions that were previously managed in-house.
While it can reduce costs and improve efficiency, it increases reliance on external suppliers for critical services.
Why Increased Dependence on Suppliers is the Most Likely Result:
Loss of Internal Control: Companies lose direct oversight over quality, delivery times, and operational processes, depending on the supplier’s performance.
Risk of Supplier Disruptions: If the supplier faces financial difficulties, operational failures, or compliance issues, the outsourcing company is directly affected.
Vendor Lock-in: Over time, switching suppliers becomes difficult due to integration costs and proprietary dependencies.
Why Other Options Are Incorrect:
B. Increased importance of market strategy – Incorrect.
While outsourcing can free up resources to focus on core business strategy, it does not necessarily increase the importance of market strategy.
C. Decreased sensitivity to government regulation – Incorrect.
Outsourcing often increases regulatory risks, as companies must ensure third-party compliance with data protection, labor laws, and industry regulations.
D. Decreased focus on costs – Incorrect.
Outsourcing is typically done to reduce costs, not decrease cost focus. Organizations still monitor costs closely to ensure vendor contracts remain cost-effective.
IIA’s Perspective on Outsourcing and Risk Management:
IIA Standard 2120 – Risk Management requires internal auditors to evaluate risks associated with outsourcing.
IIA GTAG (Global Technology Audit Guide) on Third-Party Risk Management highlights risks related to supplier dependence, service quality, and compliance.
COSO ERM Framework recommends ongoing supplier performance monitoring to mitigate risks of over-dependence.
IIA References:
IIA Standard 2120 – Risk Management & Vendor Oversight
IIA GTAG – Third-Party Risk Management
COSO ERM – Managing Outsourcing Risks
Thus, the correct and verified answer is A. Increased dependence on suppliers.
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