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Sunday, 06 April 2008 19:35

Basic risks, concerns and strategy of outsourcing

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I wrote this in response to a friends inquiry about Outsourcing. The basic risks, concerns and strategy of outsourcing as I see them today are: The basic risks, concerns and strategy of outsourcing as I see them today are:

1.    Language Barrier - this often makes requirements gathering sessions harder. It takes longer which is more costly both in terms of capital dollars and opportunity costs.

a.    Example #1. This one is simple. Most outsourced projects I’ve done are with a PM company that charges an hourly rate for their employee. The constant need to reiterate the requirements and provide clarification due to misunderstandings created by the language barrier can be very costly, detrimental to the project deliverables, cause for re-work and so on.
b.    Example #2. Opportunity costs come in the form of speed to market. Say for example I outsource the IT portion of my new product, which is a ground breaking product in its market. The time I lose in the requirements gathering phase as a result of language barrier impacts my ability to recoup my initial investments by delaying my ability to take the product to market. As a business, this mean I now lose some of my  flexibility in reacting to changing business conditions.

2.    Communications Challenges
a.    For me these come in the form of information sharing which can be summarized between time zones and remote management techniques. It can also represent a decline in managerial control, because it is often more difficult to manage outside service providers than managing one’s own employees working possibly in the same building.  
i.    Time zone is an issue simply because I’m sleeping while they are working and vice versa. For me, this means it will be the next business day before my concerns are dealt with or any updates are available.
ii.    Remote Management is a concern because it requires “Tools” for virtual team management. These may come in the form of online document repositories or time management tools (just to name a few). If my business does not outsource on a regular basis, these may be new expenses.  

3.    Legality – Outsourcing requires unique International Law expertise. This is costly and time consuming unless you are outsourcing on a large scale with a defined set of vendors.
a.    Legal costs can be difficult to calculate and prepare for. These include legal costs related to putting together a contract between two companies and the time spent to coordinating the contract. Along with this we should include the costs of managing and defending the terms of the contract when necessary. In the end I must invest in overseeing the partnership for the long term. This includes establishing a dedicated team of people to ensure compliance and adherence to agreed-upon service levels.
b.    The security and confidentiality of information is a concern. If you are outsourcing processes like payroll or other confidential information you must be careful in choosing which process you outsource. Vendor selection now becomes of the utmost importance.
c.    We also have to include unfavorable contract lengths, problems in contract renewal, and contractual misunderstandings as cost and risk factors in an outsourced environment.

1.    Get Knowledgeable about other countries: Any outsourced strategy should start with a study considering costs, cultural and language barriers, infrastructure and tax laws, natural hazards, the financial stability of the vendor among other factors, before making a decision. India may not always be the right answer.

2.    In-Source whenever possible: For large companies, outsourcing can be demoralizing for employees, fearful that their job is next to go. Weigh the cost of doing the project internally or at a minimum using in country short term contract labor vs. the cost of low morale as a result of outsourcing. Depending on how you weigh and value your employees moral this can be a significant factor.  

3.    Spread the risk: Decide if it makes sense to use multiple service providers or outsource to multiple countries. Don’t put yourself in a lose-lose situation with all of your eggs in a single basket.

4.    Document and agree upon the communications plan in the contract. Know when you’re getting updates! This is vital to your ability to control the process. This should include any tools that are to be used to communicate effectively.

5.    Protect yourself from cost overruns and “hidden” costs. Here again, I recommend that you document and agree upon the methods in which cost overruns are handled. If you properly managed your vendor selection processes, you should have a detailed statement of work and/or a line item quote for the work to be performed. Ask the service provider to highlight the areas where they typically experience cost overruns. Compare that to your teams experience and make some educated decisions about budget. In the end, you have a choice on how you handle costs, after all it’s your money.

6.    Leave an open door to renegotiate: This is especially important if you are entering into multi-year contracts. Time, scale, market and economic conditions can dictate costs and cost savings. Leave the door open to take advantage where possible.

7.    Never outsource on cost alone: Clearly define the perceived value of outsourcing. If all signs are pointing back to nothing more than cost savings, you haven’t done your homework properly and you obviously haven’t looked at what you’re really having to give up.

8.    Prepare for the worst: Have a contingency plan for “IF”. If the service provider fails to deliver on time, on budget or delivers a less than adequate product. Properly prepare by spending time on the what if scenarios before you get in over your head.

Read 7943 times Last modified on Thursday, 10 December 2009 21:52

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