Mitigating Outsourcing Risks: II

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 improvementswith 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   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:

Please Remove My Appendix

When an organization is experiencing problems with conflict, "pushback," or "blowback," managers often hire trainers to present programs on helpful topics. But self-diagnosis can be risky. Often, there are more direct and focused options that can help more and cost less.

Games for Meetings: III

We spend a lot of time and emotional energy in meetings, much of it engaged in any of dozens of ritualized games. Here's Part III of a little catalog of some of our favorites, and what we could do about them.

Choices for Widening Choices

Choosing is easy when you don't have much to choose from. That's one reason why groups sometimes don't recognize all the possibilities — they're happiest when choosing is easy. When we notice this happening, what can we do about it?

Obstacles to Compromise

Compromise is the art of devising an approach acceptable to all parties. A talent for compromise is rare. What makes finding compromises so difficult?

Let's Revise Our Rituals

Throughout the workday, we interact with each other on many levels. Some exchanges are so common and ritualized that we're no longer aware of them. If we revise these rituals slightly, we can add some zing to our lives.

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

Forthcoming issues of Point Lookout

Coming October 5: Downscoping Under Pressure: I

When projects overrun their budgets and/or schedules, we sometimes "downscope" to save time and money. The tactic can succeed — and fail. Three common anti-patterns involve politics, the sunk cost effect, and cognitive biases that distort estimates. Available here and by RSS on October 5.

And on October 12: Downscoping Under Pressure: II

We sometimes "downscope" projects to bring them back on budget and schedule when they're headed for overruns. Downscoping doesn't always work. Cognitive biases like the sunk cost effect and confirmation bias can distort decisions about how to downscope. Available here and by RSS on October 12.

Coaching services

I offer email and telephone coaching at both corporate and individual rates. Contact Rick for details at rbrendbTtLLSVlUPPCNkAner@ChacthFxWKdRwnLylOCDoCanyon.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, )
• Get 2003-4 in Why Dogs Wag (PDF, )
• Get 2005-6 in Loopy Things We Do (PDF, )
• Get 2007-8 in Things We Believe That Maybe Aren't So True (PDF, )
• Get 2009-10 in The Questions Not Asked (PDF, )
• Get all of the first twelve years (2001-2012) in The Collected Issues of Point Lookout (PDF, )

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