Point Lookout: a free weekly publication of Chaco Canyon Consulting
Volume 9, Issue 15;   April 15, 2009: Mitigating Outsourcing Risks: I

Mitigating Outsourcing Risks: I

by

Outsourcing internal processes modifies the usual risk configuration of those processes, but it also creates a special class of risks that are peculiar to the outsourcing relationship. What are some of those risks and what can we do about them?

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.

Gut bacteria

Gut bacteria. The human gut, like the guts of most animals, is populated by hundreds of species of microorganisms. They perform dozens of useful functions for their hosts, many of which are no doubt essential. Without the microbiota, the host species would probably require additional organs to perform these functions. That might be one reason why biologists consider the gut microbiota to be a "virtual organ." In some sense, the host has "outsourced" these functions to the microbiota of the gut. Read more about the gut. Image by Janice Carr, Centers for Disease Control and Prevention, courtesy National Institutes of Health.

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 vendor
of 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.  Mitigating Outsourcing Risks: II Next issue in this series  Go to top Top  Next issue: Mitigating Outsourcing Risks: II  Next Issue

52 Tips for Leaders of Project-Oriented OrganizationsAre 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

Would you like to see your comments posted here? rbrenaXXxGCwVgbgLZDuRner@ChacDjdMAATPdDNJnrSwoCanyon.comSend me your comments by email, or by Web form.

About Point Lookout

This article in its entirety was written by a 
          human being. No machine intelligence was involved in any way.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.

This article in its entirety was written by a human being. No machine intelligence was involved in any way.

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:

A black kite, a species of hawkEmbolalia and Stuff Like That: II
Continuing our exploration of embolalia — filler syllables, filler words, and filler phrases — let us examine the more complex forms. Some of them are so complex that they appear to be actual content, even when what they contain is little more than "um."
A rescue puppyYou 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...
Bull moose sparring in Grand Teton National ParkContextual Causes of Conflict: I
When destructive conflict erupts, we usually hold responsible only the people directly involved. But the choices of others, and general circumstances, can be the real causes of destructive conflict.
FlamesHow to Get Out of Firefighting Mode: II
We know we're in firefighting mode when a new urgent problem disrupts our work on another urgent problem, and the new problem makes it impossible to use the solution we thought we had for some third problem we were also working on. Here's Part II of a set of suggestions for getting out of firefighting mode.
Agricultural silosCooperations That Need to Be Collaborations
Modern products and services are so complex that many people cooperate and collaborate to produce them. When people are cooperating but the work actually requires collaborating, risks arise that can threaten the success of the effort.

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

Forthcoming issues of Point Lookout

A manager in a posture often associated with bullyingComing September 17: Workplace Bullying Doesn't Work
A common belief about perpetrators of workplace bullying is that they have an outsized view of themselves and their power. The truth might be rather different. They could be dealing with an addiction cycle — a sense of weakness after the effects of previous bullying incidents have dissipated. Available here and by RSS on September 17.
A garden sundialAnd on September 24: Time Is Not a Resource
In the project management community, it's often said that time is the most precious resource. Although time is indeed precious, to regard it as a resource — like finance, equipment, or people — can be a dangerous mistake. Time is not a resource. Available here and by RSS on September 24.

Coaching services

I offer email and telephone coaching at both corporate and individual rates. Contact Rick for details at rbrenaXXxGCwVgbgLZDuRner@ChacDjdMAATPdDNJnrSwoCanyon.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:

Reprinting this article

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 500-1000 words in your inbox in one hour. License any article from this Web site. More info

Follow Rick

Send email or subscribe to one of my newsletters Follow me at LinkedIn Follow me at Bluesky, or share a post Subscribe to RSS feeds Subscribe to RSS feeds
The message of Point Lookout is unique. Help get the message out. Please donate to help keep Point Lookout available for free to everyone.
Technical Debt for Policymakers BlogMy blog, Technical Debt for Policymakers, offers resources, insights, and conversations of interest to policymakers who are concerned with managing technical debt within their organizations. Get the millstone of technical debt off the neck of your organization!
Go For It: Sometimes It's Easier If You RunBad boss, long commute, troubling ethical questions, hateful colleague? Learn what we can do when we love the work but not the job.
303 Tips for Virtual and Global TeamsLearn how to make your virtual global team sing.
101 Tips for Managing ChangeAre you managing a change effort that faces rampant cynicism, passive non-cooperation, or maybe even outright revolt?
101 Tips for Effective MeetingsLearn how to make meetings more productive — and more rare.
Exchange your "personal trade secrets" — the tips, tricks and techniques that make you an ace — with other aces, anonymously. Visit the Library of Personal Trade Secrets.
If your teams don't yet consistently achieve state-of-the-art teamwork, check out this catalog. Help is just a few clicks/taps away!
Ebooks, booklets and tip books on project management, conflict, writing email, effective meetings and more.