5 tips to reduce outsourcing risk
Service providers present a special challenge to organizations involved with complex IT projects. Although consultants are integral to many projects, dysfunctional service provider relationships can increase the customer's risk of failure.
To explore this issue, I spoke at length with Alec Miloslavsky, CEO of Exigen Services, an outsourcing supplier that specializes in Agile development. I asked him why traditional relationships with system integrators sometimes cause a gap between customer goals and consultant interests:
Traditional consulting companies base their relationship model on labor arbitrage, where the services provider gains financial benefit primarily from differences in labor costs. As a result, the consulting firm neglects key issues in IT project delivery, increasing the customer's risk.
Alec added that projects generally face three types of risk:
- Financial risk, where project cost rises above expectations
- Time to market risk, where the project is late
- Delivery risk, where the project doesn't achieve planned objectives
Pure labor arbitrage contributes to all these problems, especially in environments where there is insufficient governance to control results.
I asked Alec for five tips to help services customers get the most from their relationship with external consultants. Here is his list:
1. Outsourcing should generate a favorable return. The goal of an outsourcing investment should be achieving a specific business result -- not simply buying cheaper labor. Project risks and execution should be shared responsibilities between you and your outsourcing partner. If you structure the outsourcing partnership correctly, risk reduction happens automatically - therefore reducing your costs.
2. Methodology matters. Demand that the specific methodology of outsourcing and project execution is an explicit part of your vendor's business proposition. Project governance should be the responsibility of the vendor. Make sure that methodology and governance address the risks of project execution, as well as unique risks of distributed development.
3. Success is a joint responsibility. Success is a function of the time and effort invested into the project by the stakeholders (engineering, IT, and business users) . The absolute key to success is frequent and timely feedback by the all the stakeholders, particularly on the business side. Whenever possible, clearly identify the decision-making criteria in advance so that the team can work most effectively to meet your business goals.
4. Things will change. Within any project, change is inevitable. Make sure the business model and the methodology are nimble enough to absorb business change, and that the sign-off approving project change is held in the relevant hands. To ensure maximum project return, reassess and reconfirm priorities periodically during the project, as part of the project execution methodology.
5. Align end to end. Because outsourced projects rely on resources who are working for a different company, there is the potential for staff changes to affect your intellectual property and project control. The best way to minimize this risk is to make sure your outsourcing business model aligns you and your outsourcing vendor all the way from overall business goals down to the staff level. Specifically, verify that the HR and compensation strategy of the vendor aligns with your project goals.
My take. The relationship between services provider and customer is critical to achieving successful projects. As Alec noted, this relationship should be a two-way street with shared goals, responsibilities, and incentives on both sides.
I strongly disagree with those who push responsibility onto one side or the other of this relationship; such imbalances perpetuate negative cycles of failure.
While not a silver bullet, Alec's excellent advice can certainly help align the interests of customers and consultants to improve project success rates.
[Photo of Alec Miloslavsky from Exigen Services.]