Page 295 - Global Project Management Handbook

14-20 MANAGEMENT OF GLOBAL PROGRAMS AND PROJECTS

Risks exist as long as outsourcing relations continue. The challenge of controlling and
managing risks is much bigger than the challenges faced in implementation. In the 2004
issue of the Marsh & McLennan Companies journal (Viewpoint), risk factors were classi-
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fied by giving examples from company cases :
Loss of strategic control. JPMorgan Chase announced that it would bring back a major
set of IT activities it had outsourced to IBM in a seven-year contract. After some expe-
rience period, the managers realized that it was critical to manage and control IT directly
to gain competitive advantage.
Hidden costs. An AMR research study showed that 80 percent of outsourcing deals did
not meet targeted return on investment. Another study of by Gartner found that one-
sixth of companies outsourcing IT activities did not save any money.
Service quality problems. Lehman Brothers, Conseco, Capital One, and Dell all have
experienced customer service disappointment from Indian call centers.
Lack of scalability. A major airline found that its outsourced maintenance provider
could not meet its needs for innovation and expansion.
Brand damage. Nike was blamed for its outsourcing relationships with China and
Central America.
Weak governance. At a leading high-tech company, a major function had been out-
sourced to the same provider independently by three different divisions via eight con-
tracts worth $100 million annually. Management realized the situation only when one
of the divisions expressed its dissatisfaction.
An ability to notice the risks and react timely can be ensured by constant monitoring
and documentation. As a general rule, a person or a team, depending on the size of the
outsourced application, can be formed to monitor and evaluate the changes throughout
the relationship. The three critical factors that require measurement and monitoring are
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reduced costs, rapid cycle times, and responsiveness (three R’s). Companies can expect
cost savings starting in the first three months of an outsourcing relationship. Costs
adjusted for productivity need to be measured. New project initiatives normally should
take shorter time periods as the relationship gets stronger. An alarming indicator is
delayed operations and inability to meet deadlines. Reduced costs and rapid cycle times
cannot be realized without a rapid response time. In addition to the three R’s, evaluation

of performance specifications and customer surveys should be included in periodic feed-
back reports to ensure continuous control over the outsourcing relationship.

CONCLUSION

Siff competition, short product life cycles, and increasing complexity of business
structures drive the rise of outsourcing trend that started with manufacturing more
than a decade ago. Recently, outsourcing began to receive attention for core compe-
tences such as design and research and development (R&D). Improvements in techno-
logical infrastructure and educational enhancements in developing countries usually
drive globalization efforts. While “cost reduction” is a worthy outcome, often being
the initial reason that organizations are attracted towards outsourcing, the procedures
and results differ depending on the objective, operational structure. and the market.
The steps toward an outsourcing initiative are not the same and should not be the same
for every company. For this reason, a carefully planned project management approach
is an effective tool in identifying, analyzing, and assessing the actions needed to be
taken throughout the decision-making and implementation stages.