Outsourcing Risks – a re-considered viewpoint.
by Ramesh Dorairaj, Vice President of IT and product engineering services company MindTree Ltd
Thursday, April 19, 2012
In a flattened world, companies that effectively leverage the global delivery model stand to gain in several areas, ranging from cost advantages to access to talent to the ability to innovate rapidly.
However, outsourcing to another entity in another country where the culture, legal framework, language and commercial contexts are very different from one’s own, tends to increase the perception of the risks. While distance makes the heart grow fonder, it does make the risks seem larger. Partner selection and how you engage with the partner are the two fundamental aspects of managing outsourcing risks.
Traditionally, assessments of partner capability, size, financial stability, track record, references and perceived ease of working together were the criteria for choosing a partner; while in-house capabilities and confidence in the partner were prime factors in determining the model of outsourcing. The assumption was that if the partner was stable and had the ability to deliver, then the programme risk will be the aggregate of the individual project risks and that these can be tackled in a tactical manner.
While this model has its merits, it can tend to distort the decision criteria, leading to an uneasy relationship that become an increasing burden for both parties. Therefore, I believe that the time has come to rewire the decision making process along these lines:
1. Strategic Position: What is the industry in which you operate? Are you in a crowded market place looking to eke out a few basis points of profit over competition, or are you in the rather nice position of being able to command premium pricing due to your differentiated offerings? The truth, usually, is somewhere in the middle. Based on your competitive position, choose your partner.
If most of your business is commoditised and you are looking for some cost leadership, then go with a partner who can bring in efficiencies (over and above cost arbitrage). Structure your contracts in a manner that improves your costs year on year, in an aggressive manner – but think of partner risks in terms of the ability of the partner to recover from project or programme crashes and deliver.
However, if your competitive position does not demand focus on costs as much as building for the future, then you can choose partner(s) with track records that showcase greater capability to deliver innovative solutions, rather than their capability to reduce costs.
2. Your Learning Needs: Are you an organisation that needs to learn to continuously to retain market position? Are you in a place where you are constantly under threat from competition’s innovation? How much of your IT needs to be in step with the business in learning and innovating? Again, the answer these questions not only determine your partner selection, but also the extent to which you are willing to outsource and the commercial model of engagement.
3. Recoverability: How quickly can you recover from a bad choice of partner or engagement? While legal protections should exist, they can neither guarantee successful execution nor can they ensure that things can be recovered without significant impact on business. Evaluate your eventual dependence on the partner – and the costs of having critical internal knowledge outside your organisation. Calibrate your engagement model accordingly.
4. Depth of Partner Management: While it is definitely an ego-boost to have the CEO or senior executives of your partner company promising to be available to you for any issues, explore if there are people on the ground empowered to take decisions. Try to gain an understanding of the organisation structure and see if the people who are immediately above the partner people in your engagement are capable and empowered.
5. Your Roadmap: Do you have a technology roadmap laid out? Is your enterprise architecture in place? If so, look for partners who have made a commitment to the technologies that are part of your roadmap and your enterprise architecture choice. If you have, for example, chosen J2EE as your basic technology, then there is little merit in choosing a partner who has a significantly larger number of people and investments on the Microsoft Technology Stack.
There you have it, the five factors that are very relevant and will help minimise the risks of offshoring.