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 isnøt 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.  Next 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? rbrenDwPfEJDQHXpNilaXner@ChacFOMKKjFaeMSNeUZIoCanyon.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:

Wooden shoesWhat Haven't I Told You?
When a project team hits a speed bump, it often learns that it had all the information it needed to avoid the problem, sometimes months in advance of uncovering it. Here's a technique for discovering this kind of knowledge more systematically.
A sandwich piled highWorking Lunches
To save time, or to find a time everyone has free, we sometimes meet during lunch. It seems like a good idea, but there are some hidden costs.
Benjamin FranklinProblem-Solving Ambassadors
In dispersed teams, we often hold meetings to which we send delegations to work out issues of mutual interest. These working sessions are a mix of problem solving and negotiation. People who are masters of both are problem-solving ambassadors, and they're especially valuable to dispersed or global teams.
A 1928 Ford Model A Business CoupeClueless on the Concept
When a team member seems not to understand something basic and important, setting him or her straight risks embarrassment and humiliation. It's even worse when the person attempting the "straightening" is wrong, too. How can we deal with people we believe are clueless on the concept?
Magic Lantern Slide of a dog jumping through a hoopJust-In-Time Hoop-Jumping
Securing approvals for projects, proposals, or other efforts is often called "jumping through hoops." Hoop-jumping can be time-consuming and frustrating. Here are some suggestions for jumping through hoops efficiently.

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

Forthcoming issues of Point Lookout

Jeffrey Skilling, in a mug shot taken in 2004 by the United States Marshals ServiceComing May 23: Narcissistic Behavior at Work: IX
An arrogant demeanor is widely viewed as a hallmark of the narcissist. But truly narcissistic arrogance is off the charts. It's something beyond the merely annoying arrogance of a sometimes-obnoxious individual. What is narcissistic arrogance and how can we cope with it? Available here and by RSS on May 23.
The end of the line for a railroad trackAnd on May 30: Chronic Peer Interrupters: I
When making contributions to meeting discussions, we're sometimes interrupted. Often, the interruption is beneficial and saves time. But some people constantly interrupt their peers or near peers, disrespectfully, in a pattern that compromises meeting outcomes. How can we deal with chronic peer interrupters? Available here and by RSS on May 30.

Coaching services

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

Technical Debt Management: Making the Business Case
This Technical Debt Management: Making the Business Caseprogram outlines the steps necessary for deploying a program for rational management of technical debt. For many organizations, adopting a program for rationally managing technical debt entails organizational change. And unlike some organizational changes, this one touches almost everyone in the organization, because technical debt isn't merely a technical problem. Technical debt manifests itself in technological assets, to be sure, but its causes are rarely isolated to the behavior and decisions of engineers. We can't resolve the problem of chronically excessive levels of technical debt by changing the behavior of engineers alone. Technical debt is the symptom, not the problem. In this program we outline the essential elements of an effective business case for adopting a rational technical debt management program. But this business case, unlike many business cases, cannot be captured in a document. We must make the case not only at the leadership level of the organization, but also at the level of the individual contributor. Everyone must understand. Everyone must contribute. We explore five issues that make technical debt so difficult to manage, and develop five guidelines for designing technical debt management strategies for the modern enterprise. Read more about this program. Here's a date for this program:

The Race to the South Pole: The Power of Agile Development
On 14The Race to the Pole: An Application of Agile Development 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. Lessons abound. Among the more important lessons are those that demonstrate the power of the agile approach to project management and product development. Read more about this program. Here's a date for this program:

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.

Follow Rick

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