Point Lookout: a free weekly publication of Chaco Canyon Consulting
Volume 9, Issue 16;   April 22, 2009: Mitigating Outsourcing Risks: II

Mitigating Outsourcing Risks: II

by

Last updated: August 8, 2018

Outsourcing internal processes exposes the organization to a special class of risks that are peculiar to the outsourcing relationship. Here is Part II of a discussion of what some of those risks are and what can we do about them.
The bark of the American Sycamore

The bark of the American Sycamore. This tree, like many others, sheds bark the year round. Some trees shed seasonally. Hypotheses explaining why some trees shed bark and some don't are varied, but one possibility is that bark shedding also sheds any parasites that use the bark to anchor themselves. One type of parasite is the class of structural parasites, which includes vines. Vines use self-supporting trees to reach higher into the forest canopy, in effect, hitching a ride on the sycamore. The vines have thus outsourced structural strength to the sycamore, which eventually shrugs them off by shedding bark. The vine is thus the customer, and the sycamore is the vendor. When the vendor's (the sycamore's) business goals no longer match the needs of the customer (the vine), the vendor sheds the customer by raising prices, or by ending support for an operating system the customer needs. Photo courtesy Virginia Department of Forestry

Last time ("Mitigating Outsourcing Risks: I," Point Lookout for April 15, 2009) we explored outsourcing risks associated with knowledge migration. In this Part II, we examine risks associated with the processes we outsource. As in Part I, the term "customer" refers to the organization that decided to outsource something, and "vendor" refers to the organization that carries out the outsourced activity.

Here are three risks associated with the processes we outsource.

Process stiffening
Outsourcing agreements typically include assumptions about the nature of the outsourced processes. These assumptions can vary widely — they might pertain to the frequency of changes in requirements, or to the requirements themselves, or to how well documented the processes are. Changes to these assumptions usually entail negotiation with the vendor. Sometimes those changes go beyond the scope of the contract, which makes the negotiations challenging. In effect, these sometimes-hidden assumptions can stiffen the processes that are outsourced. In dynamic organizations, process stiffness is a liability.
Vendors and customers who can make assumptions explicit during initial contracting will be able to devise more flexible and durable contract arrangements.
Wagging the dog
Occasionally the vendor wants a change that the customer didn't request. For instance, the vendor might want to cease support of an operating system or operating system version. Usually, continued support is available at a higher price, but that might not make economic sense to the customer. In this way, vendor priorities can become customer priorities, whether the customer likes it or not. The tail wags the dog.
Contracts that address this issue are more durable. They permit both parties to plan for change from the beginning of their collaboration.
Insulation from improvements and economies
Once a process is outsourced, the vendor might have an incentive to improve it. If lower-cost methods for producing the required deliverables are consistent Intent on maximizing short-term
expense reductions, many customers
lay off those who might have
understood the vendor's improvements
with the contract, the vendor might be able to retain all or some of the resulting savings. Often, the vendor is not even obliged to transfer knowledge of the improvements to the customer. Even when knowledge transfer occurs, many customers might no longer have employees who can understand what is transferred. In effect, the customer is insulated from process improvements and cannot benefit from them. When the customer moves to a new vendor, those improvements are often lost.
Customers who retain employees who are fully capable of understanding the details of the activities that were outsourced, and who are allocated to supporting the outsourcing relationship, have a better chance of capturing any process improvements the vendors produce. Intent on maximizing short-term expense reductions, many customers are unwilling to maintain such staff. But even those customers who do maintain an internal capability must rely on the willingness of their vendors to disclose any such improvements.

When modeling the economics of a decision to outsource, these risks are important. Including them in your decision process will produce higher-quality results. First in this series  Go to top Top  Next issue: Political Framing: Communications  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? rbrenmhXARWRMUvVyOdHlner@ChacxgDmtwOKrxnripPCoCanyon.comSend me your comments by email, or by Web form.

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:

A bear trapThe Mind Reading Trap
When we think, "Paul doesn't trust me," we could be fooling ourselves into believing that we can read his mind. Unless he has directly expressed his distrust, we're just guessing, and we can reach whatever conclusion we wish, unconstrained by reality. In project management, as anywhere else, that's a recipe for trouble.
Bowling pins for ten-pin bowlingPygmalion Side Effects: Bowling a Strike
Elise slowly walked back to her office, beaten. Her supervisor, Alton, had just given Elise her performance review — her third consecutive "meets expectations." No point now to her strategy of giving 120% to turn it all around. She is living a part of the Pygmalion Effect, and she's about to experience the Pygmalion Side Effects.
Mars as seen by Hubble Space TelescopeWho Would You Take With You to Mars?
What makes a great team? What traits do you value in teammates? Project teams can learn a lot from the latest thinking about designing teams for extended space exploration.
A team raises a wall of a new home sponsored by the U.S. Department of Housing and Urban DevelopmentWorkplace Barn Raisings
Until about 75 years ago, barn raising was a common custom in the rural United States. People came together from all parts of the community to help construct one family's barn. Although the custom has largely disappeared in rural communities, we can still benefit from the barn raising approach in problem-solving organizations.
Vincent's Bedroom in Arles, by Vincent Van GoghVirtual Conflict
Conflict, both constructive and destructive, is part of teamwork. As virtual teams become more common, we're seeing more virtual conflict — conflict that crosses site boundaries. Dealing with destructive conflict is difficult enough face-to-face, but in virtual teams, it's especially tricky.

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

Forthcoming issues of Point Lookout

Assembling an IKEA chairComing October 7: Seven More Planning Pitfalls: III
Planning teams, like all teams, are vulnerable to several patterns of interaction that can lead to counter-productive results. Two of these relevant to planners are a cognitive bias called the IKEA Effect, and a systemic bias against realistic estimates of cost and schedule. Available here and by RSS on October 7.
Crows mobbing a red-tailed hawkAnd on October 14: Power Mobbing at Work
Mobbing is a form of group bullying of an individual — the target. Power mobbing occurs when a politically powerful person orchestrates the mobbing. It's a form of bullying that is especially harmful to the target and the organization. Available here and by RSS on October 14.

Coaching services

I offer email and telephone coaching at both corporate and individual rates. Contact Rick for details at rbrenmhXARWRMUvVyOdHlner@ChacxgDmtwOKrxnripPCoCanyon.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 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 The Power Affect: How We Express Personal Powerpeople 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.

Bullet Points: Mastery or Madness?

DecisBullet Point Madnession-makers in modern organizations commonly demand briefings in the form of bullet points or a series of series of bullet points. But this form of presentation has limited value for complex decisions. We need something more. We actually need to think. Briefers who combine the bullet-point format with a variety of persuasion techniques can mislead decision-makers, guiding them into making poor decisions. Read more about this program.

Follow Rick

Send email or subscribe to one of my newsletters Follow me at LinkedIn Follow me at Twitter, or share a tweet 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.