April 22, 2009	Volume 9, Issue 16
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Mitigating Outsourcing Risks:
Part II

by Rick Brenner

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.

ast time ("Mitigating Outsourcing Risks: Part 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

Intent on maximizing short-term
expense reductions, many customers
lay off those who might have
understood the vendor's improvements

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 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   Top    Next Issue

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