April 15, 2009	Volume 9, Issue 15
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Mitigating Outsourcing Risks:
Part I

by Rick Brenner

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?

hen 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. Outsourcing elements of internal
processes inevitably transfers
internal knowledge to the vendor

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 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 is not 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 of outsourcing it. Next in this series   Top    Next Issue

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The Race to the South Pole: Ten Lessons for Project Managers

On 14 December 1911, four men led by Roald Amundsen reached the South Pole. Thirty-five days later, Robert F. Scott and four others followed. Amundsen had won the race to the pole. Amundsen's party returned to base on 26 January 1912. Scott's party perished. As historical drama, why this happened is interesting enough, but to project managers, the story is fascinating. Lessons abound. Read more about this program. Here are some upcoming dates for this program:

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  your calendarAppleton, Wisconsin: September 13, Monthly Meeting, Northeast Wisconsin Chapter of the Project Management Institute.
   
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  your calendarMITRE, in Bedford, MA: February 15, 2011, Monthly Meeting, Boston SPIN.
   

Organizational Politics for People Who Hate Politics

Have you ever felt powerless to implement an important new idea? Have you ever been "blind-sided" at a meeting? Have you ever lost two good employees because you could find no way to keep them from attacking each other? These are some of the issues of organizational politics. Many of us have become enmeshed in them from time to time, but we've also known some people who seem to be able to engage and prosper. How is that done? We'll inventory the challenges of organizational politics, and provide tools for anticipating and addressing them. The focus of this program is practical — attendees learn concrete techniques for dealing with the problems that arise in workplace politics, while keeping their integrity intact. Read more about this program. Here's an upcoming date for this program:

• Download to
  your calendarOverland Park Convention Center, 6000 College Blvd., Overland Park, KS 66211: October 5, Professional Development Day, Kansas City Chapter of the Project Management Institute. Register now.
   

Managing Virtual Teams for Real Results

Managing global or dispersed teams is challenging — miscommunications, misunderstandings, and interpersonal conflict all thrive in the typical environment of the distributed team. And they're even more common in global teams, because of time-zone offsets and language and cultural differences. We'll inventory the challenges distributed and global teams face, and provide tools for anticipating and addressing them. The focus of this program is practical — attendees will learn concrete techniques for preventing and dealing with the problems that accompany global and distributed teams. Read more about this program. Here's an upcoming date for this program:

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Person-to-Person Communications: Models and Applications

When we talk, listen, send or read emails, read or write memos, or when we leave or listen to voice mail messages, we're communicating person-to-person. And whenever we communicate person-to-person, we risk being misunderstood, offending others, feeling hurt, and being confused. There are so many ways for things to go wrong that we could never learn how to fix all the problems. A more effective approach avoids problems altogether, or at least minimizes their occurrence. In this very interactive program we'll explain — and show you how to use — a model of inter-personal communications that can help you stay out of the ditch. We'll place particular emphasis on a very tricky situation — saying no to power. In those moments of intense involvement, when we're most likely to slip, you'll have a new tool to use to keep things constructive. Read more about this program. Here's an upcoming date for this program:

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Person-to-Person Communication for Project Managers

When we talk, listen, send or read emails, read or write memos, or when we leave or listen to voice mail messages, we're communicating person-to-person. And whenever we communicate person-to-person, we risk being misunderstood, offending others, feeling hurt, and being confused. There are so many ways for things to go wrong that we could never learn how to fix all the problems. A more effective approach avoids problems altogether, or at least minimizes their occurrence. In this very interactive program you'll learn a model of inter-personal communications that can help you stay out of the ditch. In those moments of intense involvement, when we're most likely to slip, you'll have a new tool to use to keep things constructive. Read more about this program. Here's an upcoming date for this program:

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The Race to the South Pole: Lessons in Risk Management for Leaders

On 14 December 1911, four men led by Roald Amundsen reached the South Pole. Thirty-five days later, Robert F. Scott and four others followed. Amundsen had won the race to the pole. Amundsen's party returned to base on 26 January 1912. Scott's party perished. As historical drama, why this happened is interesting enough. But to organizational leaders and project managers, the story is fascinating. We'll use the history of this event to explore lessons in risk management and its application to organizational efforts. A fascinating and refreshing look at risk management from the vantage point of history. Read more about this program. Here's an upcoming date for this program:

• Download to
  your calendarWherever you are: it's a teleseminar: February 2, 2011, Teleseminar, Computer Aid, Inc. (CAI).
   

The Organizational Politics of Risk Management

Organizational politics presents a risk not often accounted for by risk models. It creates one of the many components of risk management risk — the risk that the risk management process itself is inadequate. Political considerations can lead to risk products that seem acceptable but which are fatally flawed; or worse, the risk products are plainly unserviceable, but everyone chooses not to acknowledge the problem. In this program we'll examine how organizational politics influences risk management, and discuss several measures for mitigating its effects. Read more about this program. Here's an upcoming date for this program:

• Download to
  your calendarWherever you are: it's a teleseminar: September 1, 2011, Teleseminar, Computer Aid, Inc. (CAI).