Minimising Risk in Outsourced Projects

By Mansi Aggarwal

Introduction

Outsourcing is the process of contracting a third party to do work on the behalf of the client that they have neither the skills or resources to perform in-house. It is usually more cost effective to contract out work than to hire someone in to complete the task in question.

The other benefits include being able to perform several parts of the project in parallel, thus reducing time to market. Taking advantage also of geographic differences in the cost of implementation in IT projects can also help to bring costs down; outsourcing development to countries such as India and those in Eastern Europe, for example, is a common practice.

The benefits do, however, come with some pitfalls. Chiefly among them us the lack of control that is experienced when outsourcing, and care must be taken to be ensure that the gains in cost and time are not lost in over-managing the outsourcing process.

Involving third parties as brokers in these situations can alleviate this risk. In essence, the project management is outsourced to a middle tier service provider capable of arshalling the best capabilities of the open market.

The Risk of Total Outsourcing

The riskiest path to take is that of total outsourcing; placing part of the project entirely in the hands of a third party. This may be because the task is so labour intensive or technical that the client is unable to service any part of the task themselves.

Thus, trust is placed in the experts to produce something which would not otherwise be possible. With that trust comes the additional burden of risk management. The danger is always there that the lack of control will lead to project overruns, and hence higher costs than anticipated.

Since the task is outside the expertise of the client, they can often neither control nor verify that the lack of control is a natural phenomenon. This is compounded by the fact that the contractor could effectively blind the client by the science of the service that they are offering.

In IT projects, this is one of the key risks involved in outsourcing.

Competence Outsourcing

To combat the risks associated with total outsourcing, outsourced projects should stay within the available competence; something which sounds obvious, but really is not. Given that the reason for outsourcing is that the task can not be achieved in-house, the logical conclusion is that it must lie outside available competence.

The paradox is easily solved : hire staff with equivalent, or related competences. This avoids all the issues associated with total outsourcing, but can prove to be as expensive as having the task performed in-house.

The alternative is find a project management team with both technical and non-technical skills. If the task to be outsourced is a single project within a portfolio of business activity, then it follows that hiring permanent staff to perform this function is probably going to be out of the budgetary scope of the company.

'CoSourcing'

This is where CoSourcing comes into play. In essence, it is two tier outsourcing, using a third party as a buffer between the highly technical project staff and the (usually) less technically competent client.

The key is in minimising the number of project firsts. The most risk is when the client is outsourcing for the first time, in a new project, with technology they have never approached before. CoSourcing reduces three project firsts to one.

CoSource provides a single interface to many competencies, enabling an approach that can fulfil the entire project lifecycle. Even if some aspects were not designed to be outsourced, clients can often find that the CoSource model allows them to find economies of scale within the projects as they unfold.

It is a win-win-win situation; the client enjoys superior service while making a significant cost saving, the contractor saves time in communicating with a technically minded project management team, and CoSource can continue to build on a solid base of experience.

Sally Lopez is a software developer specializing in software and web application development. To find out more about Offshore IT Outsourcing visit http://www.cosource.com.au. Article Source: http://EzineArticles.com/?expert=Mansi_Aggarwal

Core Competence Analysis

Get Ahead. Stay Ahead.

The idea of the “core competence” is one of the most important business ideas that has shaped our world. It is one of the key ideas that lies behind the current wave of outsourcing, as businesses concentrate their efforts on things they do well, and outsource as much as they can of everything else.

In this article we explain the idea and help you use it, on both corporate and personal levels. And by doing so, we show you how you can get ahead of your competition – and stay ahead.

By using the idea, you can make the very most of the opportunities open to you:

• You can focus your efforts so that you develop a unique level of expertise in areas that really matter to your customers. Because of this, you’ll command the rewards that come with this expertise; and
  
• You can learn to develop your own skills in a way that complements your company’s core competences. By building the skills and abilities that your company most values, you’ll win respect and be more likely to get the career advancement that you want.

Explaining Core Competences: The Value of Uniqueness

The starting point for understanding core competences is understanding that businesses must have something that customers uniquely value if they're to make good profits. 

"Me too" businesses (with nothing unique to distinguish them from their competition) are doomed to compete on price: The only thing they can do to make themselves the customer's top choice is drop price. And as other "me too" businesses do the same, profit margins become thinner and thinner.

This is why there's such an emphasis on building and selling USPs (Unique Selling Points) in business: If you're able to offer something uniquely good, customers will want to choose your products and will be willing to pay more for them.

The question, though, is where this uniqueness comes from, and how it can be sustained.

In their key 1990 paper "The Core Competence of the Corporation", C.K.Prahalad and Gary Hamel argue that "Core Competences" are some of the most important sources of uniqueness: These are the things that a company can do uniquely well, and that no-one else can copy quickly enough to affect competition.

Prahalad and Hamel used examples of slow-growing and now-forgotten corporations that failed to recognize and capitalize on their strengths. They compared them with star performers of the 1980s (such as NEC, Canon and Honda), which had a very clear idea of what they were good at, and which grew very fast.

Because these companies were focused on their core competences, and continually worked to build and reinforce them, their products were more advanced than those of their competitors, and customers were prepared to pay more for them. And as they switched effort away from areas where they were weak, and further focused on areas of strength, their products built up more and more of a market lead.

Now you'll probably find this an attractive idea, and it's often easy to think about a whole range of things that a company does that it can do well. However, Hamel and Prahalad give three tests to see whether they are true core competences:

1. Relevance: Firstly, the competence must give your customer something that strongly influences him or her to choose your product or service. If it does not, then it has no effect on your competitive position and is not a core competence;

2. Difficulty of Imitation: Secondly, the core competence should be difficult to imitate. This allows you to provide products that are better than those of your competition. And because you're continually working to improve this competence, ir means that you can sustain your competitive position; and 
   
   
3. Breadth of Application: Thirdly, it should be something that opens up a good number of potential markets. If it only opens up a few small, niche markets, then success in these markets will not be enough to sustain significant growth.

An example: You might consider strong industry knowledge and expertise to be a core competence in serving your industry. However, if your competitors have equivalent expertise, then this is not a core competence. All it does is make it more difficult for new competitors to enter the market. More than this, it's unlikely to help you much in moving into new markets, which will have established experts already. (Test 1: Yes. Test 2: No. Test 3: Probably not.)

Using This in Your Business and Career:

To identify your core competences, use the following steps:

1. Brainstorm the factors that are important to your clients.
   
   If you're doing this on behalf of your company, identify the factors that influence people's purchase decisions when they're buying products or services like yours (make sure that you move beyond just product or service features and include all decision-making points.)
   
   If you're doing this for yourself, brainstorm the factors (for example) that people use in assessing you for annual performance reviews or promotion, or for new roles you want.
   
   Then dig into these factors, and identify the competences that lie behind them. As a corporate example, if customers value small products (e.g. cell phones), then the competence they value may be "component integration and miniaturization". 
   

2. Brainstorm your existing competences and the things you do well.
   
   
3. For the list of your own competences, screen them against the tests of Relevance, Difficulty of Imitation and Breadth of Application, and see if any of the competences you've listed are core competences.
   
   
4. For the list of factors that are important to clients, screen them using these tests to see if you could develop these as core competences.
   
   
5. Review the two screened lists, and think about them:
   
   • If you've identified core competences that you already have, then great! Work on them and make sure that you build them as far as sensibly possible;
     
   • If you have no core competences, then look at ones that you could develop, and work to build those; or
     
   • If you have no core competences and it doesn't look as if you can build any that customers would value, then either you need another way of being unique in your market (see our USP Analysis article), or you need to consider finding another environment that better suits your competences.
     
     
6. Think of the most time-consuming and costly things that you do either as an individual or a company.
   
   If any of these things do not contribute to a core competence, ask yourself if you can outsource them effectively, clearing down time so that you can focus on core competences.
   
   For example, as an individual, are you still doing your own cleaning, ironing and decorating? As a small business, are you doing you own HR and payroll? As a bigger business, are you manufacturing non-core product components, or performing non-core activities?

Tip 1: As with all brainstorming, you'll get better results if you involve other (carefully-chosen) people. Tip 2: On a personal basis and in the short term, it might be difficult to come up with truly unique core competences. However, keep this idea in mind and work to develop unique core competences. Tip 3: You may find it quite difficult to find any true core competences in your business. If you've got a successful business that's sustainably outperforming rivals, then maybe something else is fuelling your success (our article on USP Analysis may help you spot this). However, if you're working very hard, and you're still finding it difficult to make a profit, then you need to think carefully about crafting a unique competitive position. This may involve developing core competences that are relevant, real and sustainable. Tip 4: As ever, if your going to put more effort into some areas, you're going to have to put less effort into others. You only have a finite amount of time, and if you try to do too much, you'll do little really well.

http://www.mindtools.com/pages/article/newTMC_94.htm

Outsourcing and competence

February 28th, 2006

Posted by Paul Murphy @ 3:21 am

Last week’s blog on not out-sourcing mission critical functions led to a particularly interesting talkback discussion.

At the top, Roger commented that Zdnet should out-source its servers and several others mentioned being unable to use talkbacks. I believe there’s enormous frustration within the executive ranks at Zdnet over these failures - and that, sooner or later, they’ll take the necessary steps to address them.

(As an aside, when Sun first offered a free server to people willing to implement and blog about it. It’s quite true that very few CEOs or CFOs credit any part of their organization’s competitive advantage to IT…I told the editor I work with that I’d be happy to convert blogs.zdnet.com to an all open source environment on a T2000 and then write about it as a reliability and performance demonstration, but, so far, his bosses haven’t wanted to play.)

Next, Erik Engbrecht added a commentary that really set the tone for the rest of the on-line discussion by breaking out the situations in which out-sourcing is generally considered reasonable and then showing that these should not arise in a well run business.

The contrary position was clearly and articulately put forward by a "Paul C" who argued that out-source services suppliers can sometimes do a better job than the internal IT people.

I thought they were both right, because the question isn’t whether out-sourcers are better where out-sourcers are better, but under what circumstances an organization is better off using an outsourced IT service.

And the answer to that, I think is implicit in the things Erik said in the first of his contributions to the discussion: fundamentally, out-sourcing is preferable only if management fails to deliver adequate IT services internally.

As part of that, here’s his theory on why out-sourcing exists:

 

My theory is two-fold:

1. From the business perspective, Internal IT has conistently failed to make good on promises, so if someone is going to fail, it’s better that they are cheaper and/or can be sued for failing.

2. From the IT perspective, those darn business people never give IT the respect it deserves, so doing IT in a non-IT company is a dead-end career. It’s better to work in a company where my skill is core to the business.

In other words, IT people don’t want to be outsourced, but they typically want to be the outsourcer. The reason being they don’t get any respect from the business-side, because they fail to deliver on their promises.

In person he’s probably a nice guy; I’m not, so let me put it rather more bluntly: outsourcing is a solution to internal incompetence at either, or both, the business and IT levels. Thus it’s quite true that very few CEOs or CFOs credit any part of their organization’s competitive advantage to IT, but that says a lot about them and nothing at all about whether IT should be handled internally or externally.

Indeed it’s important to remember that IT is only one part of a larger organizational picture and that it’s quite possible for an organization to grow and prosper despite providing itself with inferior IT support and services. In other words saying "this business out-sourced IT and prospered" isn’t an argument either for or against out-sourcing, because there’s no necessary causal link between the out-sourcing and the prosperity amd no evidence that they could not have done better yet had senior management paid adequate attention to IT.

In effect the analogy I used last week: that "passing information control to a third party is a lot like putting somebody else in charge of regulating your heart beat: useful in the short term if your heart is failing, but not a recipe for Olympic success"; is the right one because the question isn’t whether the patient walks or jogs now, it’s how fast that patient could go with a properly functioning heart of his own.

And I think that’s the real bottom line: IT out-sourcing may look, to senior management, like an effective way of firing the IT department without acknowledging responsibility for their behavior, but it is ultimately always an acknowledgment of their own failures in either refusing, or being unable, to manage IT.

http://blogs.zdnet.com/Murphy/?p=540

The competence of IT outsourcing

March 1st, 2006

Posted by John Carroll @ 12:20 pm

Paul Murphy argued in a blog post today that outsourcing mission-critical IT functions is a sign of management-level incompetence.  Quoting from that post:

…outsourcing is a solution to internal incompetence at either, or both, the business and IT levels. Thus it’s quite true that very few CEOs or CFOs credit any part of their organization’s competitive advantage to IT, but that says a lot about them and nothing at all about whether IT should be handled internally or externally.

…

"passing information control to a third party is a lot like putting somebody else in charge of regulating your heart beat: useful in the short term if your heart is failing, but not a recipe for Olympic success"; is the right one because the question isn’t whether the patient walks or jogs now, it’s how fast that patient could go with a properly functioning heart of his own.

Let’s follow that line of reasoning to it’s logical conclusion. GM is dependent on a steady supply of steel plate. That is a "mission critical" resource, as without it, GM can’t make cars. Therefore, they should buy a steel mill and "in-source" production of steel. Same goes for parts, such as rubber for wheels, glass for windows, and plastic for the inside of a car.  These are just as essential to GM’s operations as steel. Therefore, GM should get into glass manufacturing, rubber production and buy up a few oil wells as inputs to a growing plastic-making operation within an ever expanding GM. Soon, GM will become maker of all things and master of nothing.

I exaggerated the situation to demonstrate a point. Division of labor often dictates that you outsource operations to external experts. Small to medium sized companies may not have the resources to throw at maintenance of their own server farm, backup coordination, or even keeping up with updates that are critical in today’s networked world. Heck, I might even argue that large companies with the resources to do that for themselves may benefit from outsourcing parts of their operations, as specialist companies tend to hire lots of domain experts in quantities that large enterprises operating in markets unrelated to to IT may have zero interest in matching. They may end up with MORE expertise applied to the problem if they had to make do with whatever team they could afford to hire in-house.

IT outsourcing isn’t a sign of incompetence. It’s a sign of competence, and deciding where to concentrate limited resources. CEOs can spend their time doing the things CEOs do, or they can type up their own meeting reports, perform data entry tasks, and do other things which are better OUTSOURCED (or just offloaded) to someone else. In fact, "offloading" may be a better word than "outsourcing" given the hackles it raises among IT professionals convinced that Indian programmers will eat their lunch (they won’t, but that’s a subject for another blog).

That isn’t to say that in-sourcing doesn’t make sense in certain situations. It would be fairly ridiculous for Microsoft not to maintain most of their own sites, as doing so gives them lots of flexibility not to mention real-world experience with their own products. On the other hand, Microsoft didn’t build its own fabrication plants for the creation of the XBox. They outsourced that work to fabrication companies that act as hired guns for the creation of custom hardware.

If that approach works for hardware, then it surely works for IT infrastructure.

http://blogs.zdnet.com/carroll/index.php?p=1545

The supply-side IT outsourcing competencies and relationship exchange in Malaysia

Abstract: - IT outsourcing (ITO) has experienced a considerable growth in recent years, so much so that some authors suggest we find ourselves in the outsourcing era. ITO growth seems to be guaranteed at least in the near future. Many past researches on IT outsourcing were done in North America, Europe and Australasia contexts with little evidence from developing countries perspectives. Participant competencies are under-researched in Malaysia IT outsourcing context. In addition, IT outsourcing relationship researches revealed its importance in improving the success of IT outsourcing arrangements. Many researches on relationship, however, were investigated from demand-side perspectives. Hence, it is the aim of this study to complement these one-dimensional findings by investigating the IT outsourcing relationship exchange from service providers’ perspectives in Malaysian context. This report presents the first phase qualitative findings of an on-going research on IT outsourcing competencies and relationship. The study comprises three major phases: 1) literature reviews, a focus group and in-depth interviews; 2) mass survey; and 3) final group discussion. To answer the research question, we reviewed scholarly journals, proceedings and dissertations, and websites. In order to understand the issues from practitioners, we have arranged an expert focus group deliberating on the topic and a few key variables were identified. We subsequently interviewed five senior executive managements in the service provider firms to explore further on the key variables. The unstructured interviews were recorded and transcribed and analysed based on Miles and Huberman (1994) recommendations. The study found that all the variables are, in practice, important determinants of successful outsourcing projects as claimed by many other researches in the western context. The ranking of the determinants or factors, however, were of varying disputes depending on the types of ITO configurations the parties entered into.

Introduction
IT outsourcing (ITO) has experienced a considerable growth in recent years, so much so that some authors suggest we find ourselves in the outsourcing era. ITO growth seems to be guaranteed at least in the near future. [49] projected significant growth for the managed services market which will grow at a compound annual growth rate (CAGR) of 8% from 2005 to 2008, exceeding USD25 billion by 2008. According to estimates in [6] study, the global outsourcing markets growth was USD758.1 billion in 2005. And this will continue to grow at a steady compound annual growth rate (CAGR) of 12 per cent.

According to the 2002 [7] report, global ITO market is claimed to grow from USD180.5 billion in revenue in 2003 to USD253.1 billion in 2008 at an annual growth rate of 7.2 percent. In 2003 report, Gartner predicted that the global outsourcing market continues to grow at a steady pace, with a forecast growth rate of 8.1 (higher than 2002 forecast) percent in 2008. “In 2008, we expect to see some early adopters of multi-sourcing to consolidate around fewer providers to reduce their service integration costs and harvest the benefits of better relationship management with fewer strategic suppliers,” said Mr. Potter (Gartner, 2008)i.

The global worldwide Shared Services and Outsourcing (SSO) market is expected to grow at a CAGR of 15 per cent over the next few years, reaching USD1.43 trillion by 2009 as compared to USD930 billion in 2006. “The outsourcing need is growing and we intend to fully leverage on our achievements to meet this need,” said Badlisham of Multimedia Development Corporation’s (MDec) Chief Executive Officer. He added that ICT services like SSO contributed MYR2.8 billion to the nation’s Gross Domestic Product of MYR495.6 billion. David Wong, Outsourcing Malaysia and PIKOM chairman, cited that the local SSO industry is currently worth USD300 million growing at a CAGR of 30% year on year, compared with the current global IT outsourcing size of USD24 billion. In 2012, the Malaysian SSO industry is targeted to be worth USD2 billion providing 300,000 jobs.ii

Extant ITO researches indicate the growing complexities of IT outsourcing arrangement. As a result, many studies or news reported project failures. Literature reviews reflect the near maturity of ITO practices in Europe and United States. Despite this, meta-analyses by [3], [10] and [25] alerted us on various research gaps for future undertakings. Among those are researches on ITO competencies and relationship exchange from both service receiver’ and providers’ perspectives in less-developed countries context which is lacking. Studies on ITO relationship are mostly done in North America, Europe and Australia context with little emphasis on developing countries.

This study is a response to fill the gaps from service providers’ perspectives and developing countries especially Malaysia environment compared to previous researches done in developed countries and from the service receivers’ perspectives [see 5, 8, 14, 20, 22, 21, 31, 32, 40 and 43]. We attempt to explore and investigate the impact of service receiver-service provider competencies, relationship exchange factors and strength on ITO project success from supply-side perspectives in Malaysia.