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Contents 
Outsourcing risk
High-risk areas
Mitigate don't hesitate
Written in ink?
IDC: Loss of control the biggest risk
Gartner's Oz VP sourcing |
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End users felt that over a period of time the service levels degrade. The reason for this again could again be a lack of clarity in agreements at the outset of the contract and with the demanding end users expecting more for less over the period of the contract, the vendors are sometimes forced to protect their bottom line margins and this could lead to a reduction in service levels.
In contrast, a look at the 2003 survey showed that potential loss or reduction in service levels was the second major risk of outsourcing followed by unrealised cost savings. The 2004 survey places unrealised cost savings at the second place and potential loss of service levels has been pushed further down. There is a positive indication in this, which shows that vendors have definitely focused on improving their service deliverables to their customers and defining strategies for reducing risk before the outsourcing contracts are signed off.
Some of the other risks associated with outsourcing were:
- Maintenance of third-party relationships
- Security issues with revealing internal processes
- Lack of staff continuity resulting in disruption of service
- Response times not as per expectations
- Financial viability of the service providers
When compared to the 2003 survey, other pitfalls such as the outsourcer not saving an understanding of the customer's business, needs or the culture, or hidden surprises in the contract, are missing from the 2004 survey.
This might indicate that the outsourcing vendors are focusing on equipping themselves with vertical domain skills to understand the business requirements of the customers and the deliverables of the contract in terms of business value. Both the vendor and the customer are undertaking due diligence to define better processes and measure performance with tools like balanced scorecard metrics.
IDC suggests the following strategies for reducing risks:
- Decide on a nearshore, offshore, or onshore strategy after a due diligence specific to a company's individual situation.
- Both vendor and the end user should formulate a business continuity plan at the very outset of the contract in case of a disaster.
- Analyse risks objectively and do an impact analysis of the various kinds and levels of risks from a country, vendor, and delivery model perspective.
- Have a good market intelligence of the country you are planning to offshore.
- Education to understand cultural differences and developing team building exercises to encourage intercultural liaisons and personal relationships.
- Choose vendors with lower employee turnover and with PCMM (People capability maturity model) certifications.
- To avoid disruption it is extremely important to understand the communication , redundancy and, infrastructure setup in the country you are planning to offshore to. So devising an effective disaster recovery plan integrated with that of the vendor is critical.
- Transitioning process has to be monitored very closely with a good mix of the onshore and offshore delivery model. This should include processes for knowledge transfer and incorporating an effective knowledge management system.
- Devise a change management strategy and communicate the changes, benefits, and staff redeployment plans openly to all employees.
- Develop a proper reporting structure with program managers and project managers from both the vendor and the end user side to have a clear responsibility matrix.
- Research the vendor's financial viability through offshore third parties and secondary research through case studies.
- Handle unexpected inflation in prices by specifying the uppermost limits during contract negotiations keeping in consideration the local inflation rates.
- Understand the total cost of ownership of the entire project at the very outset.
