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

Mitigating Outsourcing Risks: II

by

Last updated: January 17, 2021

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? rbrenhZLYrRMtUnyjppRsner@ChacotqZAFalhYTBMgJWoCanyon.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:

Time is moneyTaming the Time Card
Filling out time cards may seem maddeningly trivial, but the data they collect can be critically important to project managers. Why is it so important? And what does an effective, yet minimally intrusive time reporting system look like?
If only I were a florist?Don't Worry, Anticipate!
Dramatic changes in policy or procedure are often challenging, especially when they have some boneheaded components. But by accepting them, by anticipating what you can, and by applying Pareto's principle, you can usually find a safe path that suits you.
Apollo 13 Shoulder PatchFilms Not About Project Teams: I
Here's part one of a list of films and videos about project teams that weren't necessarily meant to be about project teams. Most are available to borrow from the public library, and all are great fun.
A single-strand knotTangled Thread Troubles
Even when we use a facilitator to manage a discussion, managing a queue for contributors can sometimes lead to problems. Here's a little catalog of those difficulties.
The flagship store of the Market Basket supermarket chainCreating Toxic Conflict: I
Many managers seem to operate as if their primary goal is to create toxic conflict among their subordinates. Here's a collection of methods for sowing toxic conflict that can help bad managers become worse managers.

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

Forthcoming issues of Point Lookout

stacks of gold coinsComing January 27: Cost Concerns: Comparisons
When we assess the costs of different options for solving a problem, we must take care not to commit a variety of errors in approach. These errors can lead to flawed decisions. One activity at risk for error is comparing the costs of two options. Available here and by RSS on January 27.
A vial of COVID-19 vaccineAnd on February 3: Cost Concerns: Bias
When we consider the costs of problem solutions too early in the problem-solving process, the results of comparing alternatives might be unreliable. Deferring cost concerns until we fully understand the problem can yield more options and better decisions. Available here and by RSS on February 3.

Coaching services

I offer email and telephone coaching at both corporate and individual rates. Contact Rick for details at rbrenhZLYrRMtUnyjppRsner@ChacotqZAFalhYTBMgJWoCanyon.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

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.