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Areas of risk in IT Outsourcing process

27 February 2015

Regardless of its definition, IT outsourcing is a type of business operating strategy that will, sooner or later, significantly influence the reorganisation of corporate operations. It is no coincidence that I use the word reorganisation here. An awareness of the need to introduce the process of reorganisation in enterprise structures – along with the emergence of decisions related to the introduction of an IT services outsourcing strategy – is inseparably associated with the emergence of risk areas in the IT outsourcing process, which I would like to focus on in the subsequent parts of this article.

An outsourcing contract may bring the expected results only when a company finds answers to key questions related to an undertaking of this type in the first place, and then fulfils several relevant conditions, without which the purpose of making such a decision could not be economically justified.

One could say that making a decision to implement outsourcing projects means that an organisation will soon face business risk. Putting an appropriate level of emphasis on the process of limiting such risk may determine whether IT outsourcing eventually will succeed or, conversely, bring about increased costs and create confusion within enterprise operations, thus constituting a barrier to its development.

Over the last few years, I have managed to gather the most important sources of the emergence of risk areas in the IT outsourcing process, which I have classified as follows:

The reason why a company wishes to pursue outsourcing and determines particular business areas to be outsourced

The poorly thought-out disposal of functions which may prove important for enterprise operations and then outsourcing them to third parties could result in a loss of advantage on the market. Too much involvement in corporate expenditure cuts may lead to the contractor operating on the verge of profitability, which naturally affects the quality of the service provided. In both examples, an inappropriate approach to the issue or, in other words, the bending of requirements that determine the success of using such a solution, constitutes a significant factor which classifies outsourcing as a dubious form of service.

Vendor (IT services provider) selection process and determination of the cooperation model

Human, technological and financial potential provides great opportunities, on the condition that it is used optimally (i.e. according to the needs and capabilities of the recipient). There are numerous selection criteria. However, in each case it is important to focus on issues related to the financial circumstances of the disposing party and their experience in the implementation of similar projects, as well as the possibility of providing services swiftly, the disposing party’s willingness to share the risk and a certain amount of flexibility in mutual relations. A number of emerging risk areas originate from a lack of comprehensive analyses and answers to questions that concern such issues as expectations and goals related to the project, determination of the optimum range of services, organisation of a Client’s internal processes, their financial condition and the expected forms of financing of an outsourcing service. It is equally difficult and important to determine the quality of services that the Client expects. Contractual quality parameters cannot be set too high (otherwise, the cost of the service would increase) or too low (if so, the continuity and effectiveness of operation of the Client’s organisation would not be guaranteed). The results of this analysis are of crucial importance to an assessment of the likelihood that the project will prove successful.

Goals

This vital area concerns the relationship between outsourcing and the company’s ability to attain its long-term strategic goals, as well as to build up its competitive position. These are, of course, correlated with the quality of services that the Client expects. Quality should be improved as a result of the outsourcing process. A faulty quality estimate will lead to overinvestment or may mean that the company purchases the service at an insufficient level. Well-organised internal processes on the part of the Client play a significant role in the successful fulfilment of the terms of the contract, whereas a lack of appropriate organisation in this regard may even render the contract void. However, it remains crucial to define business goals and expectations, find the best responses towards changes taking place within enterprise processes and develop and apply appropriate methods of measuring the effects of the project. Various factors can serve as reference points here, after all, including costs incurred and financial benefits gained by the Client, as well as the availability of IT systems, vendor’s response time in emergency situations, employee or Client satisfaction, or the shorter cycle of introducing new products to the market. This area also concerns issues related to departure from the chosen outsourcing model and the partner which functioned as service provider. The lack of an exit plan – for instance, taking into consideration how to utilise insourcing or in what way the substitution of one service provider with another should be done – may prove very costly.

People

An outsourcing solution should be prepared by a person who is at least “one rung” above the team involved in the process to be outsourced (such a person is able to take a look at the “big picture” and define key roles in the newly created outsourcing relationship structure). Nevertheless, management generally believes that its power within an organisation depends on the number of subordinates. Hence it is possible to observe that some managers are clearly reluctant to reduce the workforce through outsourcing. Therefore, finding someone to become a project leader constitutes an extremely important factor in successful implementation. You should choose a person who is counted among top level managers in the Client’s organisation – who exerts considerable influence on its operations and expresses direct interest in successful implementation. Most frequently, a member of the management board will be the right person. It is the specific character of outsourcing services that forces us to adopt such an approach. Even the largest project, after placing it at the lower levels of an enterprise, becomes fragmented and ends in failure. As a rule, it is impossible to perceive the totality of a company’s specific set of circumstances and its long-term plans from the lower levels. Moreover, information concerning the project should be given in accordance with a strict criterion – keeping it cost-effective and targeted at communication limited only to the circle of those most interested in the project. It is difficult for employees on the low and middle levels of an organisation, who are responsible only for a narrow section of corporate operations, to estimate the aggregate benefits which the company would gain from an outsourcing service. Therefore, they perceive outsourcing contracts as a threat which could result, for instance, in job losses. This may even lead to acts of sabotage as regards such projects.

Communication and knowledge transfer

This area concerns the process of outsourcing itself: using control mechanisms and leaving selected competences and implementation capabilities inside a company. Unskilled management of relations with an outsourcing company or companies at the level of drawing up and signing a contract, delegating tasks and, subsequently, conducting work quality tests, constitutes one of the main threats. The area in question covers the processes of both establishing cooperation and creating an appropriate definition of working relations (including the definitions of particular roles in the outsourcing process) at all stages of the project (from negotiations concerning the contract during its term through to its completion stage). At this point, both parties have to examine in detail and determine the areas and rules of cooperation which are critical to the success of the project. It may also prove indispensable here to use the TMS (Transactive Memory System) – a tool intended for planning the process of knowledge transfer in a newly created structure. The success of outsourcing depends on the very ability of our partners to define and negotiate mutual relations (what is crucial here is the mechanism of developing a common glossary of terms which will be used by persons directly involved in the outsourcing process). It also depends on the effectiveness of cooperation methods developed under the terms of the contract. Active interest in the success of the undertaking provides both parties to the contract with a basis for earning profits.

Regardless of whether you are an entrepreneur who uses IT outsourcing, making informed choices (maybe for many years), or a person who still doubts a business model of this type (and perhaps doubts concerning the justifiability of such a solution are unfounded) – please share your experience and reflections in this regard.

PS
This article served as a component of a lecture which I delivered at the University of Bamberg on Friday, 23 January 2015. For several years, the University has successfully implemented a system of student exchanges and internship programmes in cooperation with JCommerce. The topic of my speech was the broadly understood principles of the security of outsourcing cooperation between recipients and IT service providers. The ability to define sources of the emergence of risk areas in cooperation of this type leads to a better understanding of the mechanisms that influence the finalisation of the outsourcing process and obtaining the highest possible quality of security of business relationships established in such a manner.

Pawel Mikler

Business Unit and International Sales Manager

Responsible for expansion of JCommerce’s range of software development services and products, thus extending the reach of Clients portfolio mainly throughout Europe and North America, as well as establishing strategic presence on this markets.

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