Outsourcing, as a strategic decision to transfer business processes to external executives, SpdLoad wrote a big article about all aspects in web development outsourcing. Outsourcing is essentially the transfer by an organization of one or more of its functions (processes) to both primary and secondary third-party companies.
The experience gained by companies around the world shows that only a third of companies achieve their goals related to the transfer of processes to outsourcing. The remaining two-thirds of the outsourcing agreements do not bring the planned benefits and do not create the desired value for the owners of the company due to management errors.
1. Choosing the wrong processes to outsource
The decision to outsource the associated processes must be balanced. Companies should independently conduct in-depth analysis and the role of the process they wish to outsource in the production chain (in terms of process and system approaches).
Possible management mechanisms: Tools for describing business processes of the Company’s management system (IDEF-0 methodology, Operogram, etc.). Selection and analysis of processes for outsourcing: the Khlebnikov matrix, McKinsey, the IBS matrix, and the Boston Consulting Group.
2. Slowing innovation
As part of the analysis of the process through the prism of the process and systemic approaches, one should not forget about the life cycle of a “product”. If the product or service that you outsource as an element of the system should be updated and reviewed every month/quarter / half a year, the low cost of producing an individual service/product due to unaccounted for risks may result in higher costs.
As a rule, a remote introduction of innovations on an ongoing basis costs companies more expensive.
Possible management methods: Process analysis from the point of view of the process and system approach, process structuring, analysis of the life cycle of a product/service.
3. The use of incorrect data to analyze the effectiveness of the transfer of processes to outsourcing
When analyzing the feasibility of using long-term outsourcing, companies should not rely on crude short-term settlements that guarantee high profits. It is necessary to collect a list of all indicators that affect the final cost of the decision. The calculations must include the total cost of indirect costs and possible risks.
Possible management mechanisms: Structuring and financial analysis. Definition of the list of indicators affecting the transfer of the process to outsourcing; Construction of a financial model. Analytical tools for calculating all mathematical parameters (Total Cost of Ownership Estimator).
4. Hidden costs
When switching to outsourcing, there are two types of hidden costs. The first is managerial costs (finding a supplier, negotiating, etc.). The second type of cost is the management of interaction with an outsourcing company.
Do not forget about the importance of the principle of a high degree of customer involvement, which will require the allocation of responsibility for the operational management of interaction with the outsourcer on an ongoing basis.
Possible management mechanisms: cost analysis and forecasting.
5. The pursuit of short-term financial gain
The focus on short-term capitalization growth often overshadows the strategic goal of the business in long-term development, which ultimately results in high costs. There is a certain correlation between the volume of production and the price of outsourcing.
Therefore, the customer company needs to accurately calculate the planned production volumes in the long term and evaluate them for the appropriateness of outsourcing.
Possible management mechanisms: building a financial model taking into account all associated costs, forecasting the growth of work volumes for outsourcing.
6. Costly contract adjustments
The undesirable results caused by such risk factors as a high degree of uncertainty of actions and unforeseen changes. The consequences of contract adjustments are cost increases and service degradation.
Possible management mechanisms: detailed elaboration of the responsibility of the parties in the outsourcing agreement, risk insurance, operational and strategic management of the outsourcing life cycle.
7. Risk of breach of confidentiality
The problem of maintaining classified information by companies is currently one of the most difficult to solve, and it is almost impossible to avoid it. This risk is assessed qualitatively, based on the degree of importance of the business process and possible losses associated with the disclosure of information.
It should be noted that this risk is one of the most significant for the management of the customer company. We recommend analyzing information flows and entering into confidentiality agreements as management mechanisms. In addition, the reliability and reputation of an outsourcing company is also one of the factors that reduce the risk of confidentiality.
8. The weakening of control over the work of the supplier.
Outsourcing of operations whose efficiency is low should be carried out carefully. If inefficiency is associated with insufficient economies of scale or lack of experience, outsourcing makes sense.
If inefficiency is due to poor leadership, then outsourcing is not always the right decision. It is extremely important for the client in the outsourcing project not to weaken control over the operations received by the supplier. Of crucial importance is the retention of outsourcing in line with a single corporate strategy. Although the supplier’s management skills are very important, they must be supported by technical skills.
Possible management mechanisms: systematic monitoring and interaction with an outsourcer. Compliance with SLA and other reporting forms. Fixing the results of intermediate control and the results of the outsourcer according to the developed acceptance criteria and other requirements.
9. The risk of the inability of the outsourcer to provide the required qualitative and
quantitative characteristics of the process transferred to him for execution
In this case, as a rule, we are talking about an insufficient level of technological and other competencies of the outsourcer who wants to conscientiously fulfill the duties assigned to him under the contract, but cannot (temporarily – until the acquisition of the necessary competencies, or permanently if the development of these competencies is impossible) to do this for objective reasons.
This risk also leads to financial losses for the customer due to insufficient quality of execution of the outsourced business process.
Possible management mechanisms: Verification of outsourcing candidates according to the developed selection criteria, second-party audit, ordering a control sample, mystery shopper, receiving feedback and ratings from other outsourcing clients.
10. The risk of low competence of the customer
Outsourcing has all the features of a project, for the effective implementation of which competencies and management skills are needed in such areas as: integration management, timing, quality, communications, risks, cost, etc.
Possible management mechanisms: Appointment of responsible, with project management skills. Conducting experiments – practical testing of individual events and stages of interaction with an outsourcer.
11. The outsourcer’s bad faith risk (outsourcer’s refusal to cooperate on agreed terms)
This risk includes the requirement to revise the price upward, the refusal to fulfill its obligations due to receiving a better order from another company, etc. The onset of this risk entails the need for the company to make a decision either on breaking off relations with the outsourcer or on satisfying its requirements.
Both of these options are associated with losses for the company: in the first case, due to the fact that for the period of searching for a new operator, it does not receive services to perform the functions, it needs, in the second – due to the fact that agreeing with the requirements of the supplier means an increase in its cost services. In addition, it is not uncommon for an alternative service provider to be absent
12. Outsourcer monopoly risk
There is a possibility that only one outsourcing organization meets the criteria and requirements of the customer organization. It is also possible that, in principle, the required type of service or product is issued by a monopolist company in the market.
There is a risk that the outsourcer will begin to abuse his exclusive position as a service provider to perform a certain function for the sake of obtaining additional benefits, while the refusal of the services of this outsourcer can result in significant losses to the client organization.
The level of this risk can be estimated based on the number of executing organizations in the market, the acceptable risk level can be considered as the presence on the market of 3 or more outsourcers capable of providing you with the necessary services.
13. Inability to terminate a relationship
Early termination of outsourcing agreements occurs quite often, therefore, all issues related to the termination of relations (change of supplier, reintegration of outsourced operations) should be spelled out in the agreement. Often, companies also face “fear” or “inconvenience” of changing outsourcers because of already existing relationships, to the detriment of the quality of services received.
To minimize this risk, it is necessary to follow the principles of outsourcing regarding the construction of open systematic dialogue and a high degree of involvement of the customer’s leadership in interacting with the outsourcer.
The above list of risks is not final, but represents the most common risks that management should consider when planning to outsource. The provisions of ISO 31000: 2009 [6 “Risk management. It can be a good help, as a guide to risk management. Principles and guidelines. ” The standard is global in nature since it takes into account all types of risks, is based on the best practices of their management and can be used in addition to existing risk management documents, being compatible with them.
It also provides guidance for a risk management organization in a systematic manner and can be applied to all organizations regardless of type, size, type of activity or location. Today, outsourcing has become an integral part of the competition, almost every organization uses its elements in its activities.
Outsourcing should increase the effectiveness of the company, both in the field of business operations and in the field of finance. If used improperly, it can lead to costly consequences for the business and even destroy the reputation of the enterprise.
A sharp, in recent years, an increase in various types of information published in the field of outsourcing has shown that the criteria and systematization mechanism for this information have not yet been developed, which leaves the scope of outsourcing unstandardized.
The absence of internationally accepted principles, methods and approaches to management inhibits the development of outsourcing, and the inaccuracy of the translation of regulatory documents from the original language (including terminology) leads to the ambiguity of their application and interpretation.
Outsourcing process management is based mainly on an intuitive approach and general management principles, which does not allow using this tool as efficiently as possible for business. The authors hope that the material proposed in the article will be useful, both in theoretical and practical senses, and its study will receive further discussion.