Page 279 - Global Project Management Handbook

14-4 MANAGEMENT OF GLOBAL PROGRAMS AND PROJECTS

based on classic project management principles, modifications and extensions are inevitable
to support the wide scope of the globalization movement. This chapter starts by explaining
how these outsourcing projects change the entire direction of the company. The next sec-
tions analyze the project life cycle of outsourcing decisions by reviewing recent projects
from various industries. A modification of general project life-cycle phases is proposed, and
the phase procedures are detailed, including critical activities, managerial challenges, and
milestones, as well as cost, schedule, and technical performance factors. Methodologies
specifically related to outsourcing projects such as risk management, stakeholder manage-
ment, and contract management are also highlighted, along with their practical applications.
As a conclusion, the multiple outcomes of these projects are discussed. Failure and success
indicators of outsourcing projects and their implications are justified.
Outsourcing is a rising trend that has been subject to many controversial discussions.
For some people, it is a globalization effort that creates opportunities for future innova-
tions, contributing to the world economy. For others, outsourcing has a destructive effect
on the U.S. economy, increasing unemployment rates and weakening the industrial power
of the country. Above all, outsourcing is a consequence of several reasons. Globalization
is a result of the unification of world cultures lead by the media and through the rise of
communication technologies. Political and economic developments around the world,
such as privatization of public-sector organizations and formation of European Union,
also increased the speed of globalization. On the other hand, the U.S. consumption mar-
ket continued expanding. The development of manufacturing processes and technological
enhancements and rising demand caused a reduction in product life cycles. More compa-
nies started to provide several versions of consumption goods, leaving fewer features for
differentiation between products. The power shift from manufacturers to the big retailers
such as Wal-Mart and Home Depot gave the incentive to the retailers for tougher price
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negotiations, forcing the manufacturers toward lower-cost alternatives. As a result,
lower-price offers became the main factor for a larger percentage of market share.
Globalization and cost pressures forced U.S. companies to the outside world that already
had the basis to accept such a shift.
Today, outsourcing stands out as an attractive option for a growing number of compa-
nies to reduce costs of their operational activities by either engaging in direct investment
in or having strategic alliances with low-labor-rate countries. From a financial point of
view, by such moves, companies also anticipate a remarkable reduction in their capital
requirements, which gives top management the opportunity to get a higher return on equity
(ROE). Therefore, outsourcing is a credible alternative way for managers to make share-
holders happy.
The existence of highly educated youth, government subsidies, tax reductions, and
infrastructural improvements in developing countries also motivates senior managers
toward offshoring their high-cost activities. However, the outsourcing initiative can give
a competitive acceleration to a company only if careful analyses are performed and sound
projections are constructed. A systematic project management approach during the
process of outsourcing decisions is the key driver behind the success.
Outsourcing decisions are based in large part on organizational strategies. A small
shift from the optimal decision will have disastrous effects on the competitiveness of the
company. Therefore, outsourcing decision processes should be considered in a structured
discipline. Many companies have support from outside consultants for their outsourcing
decision process. There are also ways to outsource safely using internal staff and exper-
tise. In both cases, the decision process goes through several phases that have defined
beginning and end time points. By its intrinsic properties, an outsourcing decision process
fits into the definition of a project: a combination of organizational resources pulled
together to create something that did not exist previously and that will provide a perfor-
mance capability in the design and execution of organizational strategies. 2