Mitigating Outsourcing Risks: I

When we outsource internal processes, we create risk. It's no surprise that the risk created varies with the kind of services outsourced. For instance, outsourcing cubicle maintenance creates risks that differ from those created by outsourcing IT, software testing, or product development. When the risks of outsourcing create threats to the enterprise, we mitigate them — if we fully appreciate the risks.

Since some risks associated with outsourcing are inherent to outsourcing, many decision makers haven't encountered them before. Some of these risks are intuitively clear, or have been widely discussed. For example, outsourcing a customer relationship software maintenance task entails some risk of exposure of proprietary information.

But there are other outsourcing risks that are a little less obvious. In the descriptions below, "customer" refers to the organization that decided to outsource some activity, and "vendor" refers to the organization that carries out the outsourced activity.

Part II explores risks associated with the evolution of the processes that are outsourced. In this Part I, I describe risks related to the migration of knowledge to the customers' competitors.

Knowledge of the outsourcing process

Knowledge of and experience with the process of outsourcing itself is a customer asset. An example of valuable knowledge: contractual artifacts for managing outsourcing risk. As the customer engages with a vendor, it inevitably transfers that knowledge to the vendor, and from there, the knowledge can migrate to competitors of either party.

Customers can mitigate this risk by taking care not to reveal intentions during the initial negotiation. Vendors who understand this customer concern can gain trust and loyalty by promising to treat — and then actually treating — contractual terms as if they were the intellectual property of the customer. Often, in effect, they are.

Improving competitors' processes

Outsourcing elements Outsourcing elements of internal
processes inevitably transfers
internal knowledge to the vendorof internal processes inevitably transfers internal knowledge to the vendor. When the customer outsources, the vendor necessarily acquires knowledge that previously had been internal to the customer. For instance, the customer might have developed an automated tool for transferring data from one commercial customer relationship management system to another — a tool that isn't available commercially. That knowledge might then propagate to arrangements between the vendor and other customers. Nor is such propagation limited to that one vendor, because its employees carry that knowledge with them when they move to other vendors.

Vendors who accept business only from selected customers who do not compete with each other provide some mitigation of this risk. Customers can mitigate this risk by favoring vendors who don't serve competitors.

The significance of any risk related to outsourcing depends upon the importance of the outsourced process in differentiating the customers' offerings from the offerings of competitors. The more significant a differentiator the outsourced process is, the greater the risk incurred by outsourcing it.  Next in this series  Top    Next Issue

Are your projects always (or almost always) late and over budget? Are your project teams plagued by turnover, burnout, and high defect rates? Turn your culture around. Read 52 Tips for Leaders of Project-Oriented Organizations, filled with tips and techniques for organizational leaders. Order Now!

Your comments are welcome

About Point Lookout

Thank you for reading this article. I hope you enjoyed it and found it useful, and that you'll consider recommending it to a friend.

Point Lookout is a free weekly email newsletter. Browse the archive of past issues. Subscribe for free.

Support Point Lookout by joining the Friends of Point Lookout, as an individual or as an organization.

Do you face a complex interpersonal situation? Send it in, anonymously if you like, and I'll give you my two cents.

Related articles

More articles on Personal, Team, and Organizational Effectiveness:

What Haven't I Told You?

When a project team hits a speed bump, it often learns that it had all the information it needed to avoid the problem, sometimes months in advance of uncovering it. Here's a technique for discovering this kind of knowledge more systematically.

Be With the Real

When the stream of unimportant events and concerns reaches a high enough tempo, we can become so transfixed that we lose awareness of the real and the important. Here are some suggestions for being with the Real.

Some Hidden Costs of Business Fads

Adopting business fads is an expensive organizational pattern, with costs that extend beyond what can be measured by the chart of accounts most organizations use. Here are some examples of the hidden costs of business fads.

Guidelines for Sharing "Resources"

Often, team members belong to several different teams. The leaders of teams whose members have divided responsibilities must sometimes contend with each other for the efforts and energies of the people they share. Here are some suggestions for sharing people effectively.

You Can't Control What Other People Think

Ever think that the world would be a much better place if you could control what other people think? Maybe it would be. And maybe not...

See also Personal, Team, and Organizational Effectiveness for more related articles.

Forthcoming issues of Point Lookout

Coming December 19: Embarrassment, Shame, and Guilt at Work: Creation

Three feelings are often confused with each other: embarrassment, shame, and guilt. To understand how to cope with these feelings, begin by understanding what different kinds of situations we use when we create these feelings. Available here and by RSS on December 19.

And on December 26: Embarrassment, Shame, and Guilt at Work: Coping

Coping effectively with feelings of embarrassment, shame, or guilt is the path to recovering a sense of balance that's the foundation of clear thinking. And thinking clearly at work is important if you want to avoid feeling embarrassment, shame, or guilt. Available here and by RSS on December 26.

Coaching services

I offer email and telephone coaching at both corporate and individual rates. Contact Rick for details at rbrentAsXXpmwVclmOSygner@ChacXugFYQAPEsXnVytXoCanyon.com or (650) 787-6475, or toll-free in the continental US at (866) 378-5470.

Get the ebook!

Past issues of Point Lookout are available in six ebooks:

• Get 2001-2 in Geese Don't Land on Twigs (PDF, USD 11.95)
• Get 2003-4 in Why Dogs Wag (PDF, USD 11.95)
• Get 2005-6 in Loopy Things We Do (PDF, USD 11.95)
• Get 2007-8 in Things We Believe That Maybe Aren't So True (PDF, USD 11.95)
• Get 2009-10 in The Questions Not Asked (PDF, USD 11.95)
• Get all of the first twelve years (2001-2012) in The Collected Issues of Point Lookout (PDF, USD 28.99)

Are you a writer, editor or publisher on deadline? Are you looking for an article that will get people talking and get compliments flying your way? You can have 500 words in your inbox in one hour. License any article from this Web site. More info

Public seminars

The Power Affect: How We Express Our Personal Power

Many people who possess real organizational power have a characteristic demeanor. It's the way they project their presence. I call this the power affect. Some people — call them power pretenders — adopt the power affect well before they attain significant organizational power. Unfortunately for their colleagues, and for their organizations, power pretenders can attain organizational power out of proportion to their merit or abilities. Understanding the power affect is therefore important for anyone who aims to attain power, or anyone who works with power pretenders. Read more about this program.

• A recording of a program presented 6:00 PM June 29 (Eastern Time), Monthly Webinar, Technobility Webinar Series. You can earn 1.0 Category 'A' PDU by viewing this program. View this program now.