Knowledge Articles / White Papers

Offshore outsourcing - risk mitigation planning guidelines

Akshay Upadhye, 8th January 2007

Andre Gide, the famous Nobel laureate wrote “Man cannot discover new oceans unless he has the courage to lose sight of the shore”. Some of the early adoptors of Offshore Outsourcing, who had the courage to lose sight of the shore and explore offshore opportunities, have opened the gates for many other organisations to reap the benefits of offshore outsourcing.

Offshore outsourcing, like any other strategic initiative, will have its own set of associated risks and rewards. Any organisation involved in offshore outsourcing or planning to embark on an offshore outsourcing strategy needs to evaluate the risks and develop a mitigation strategy. Planning for risks will help the organisation increase its chances of success, despite the fact that something is moving away and will now have to be managed from afar.

The first and most important step in risk mitigation is to identify the source of risks and their overall impact on the offshore programme. The process is illustrated in the diagram below and will help an organisation identify risk sources, related scenarios and their potential impact. Once this is done, risk mitigation can be achieved by:

1. Eliminating the risk source
2. Reducing the dependency between risk source and risk scenario
3. Reducing the dependency between risk scenario and risk impact

Using the above process and based on his experience of working with offshore outsourcing engagements for Fortune 200 organisations, the author has highlighted the key risk sources and their interdependencies in the figure below:

All the risk sources highlighted above are manageable, and the risk impact can be minimised or eliminated with appropriate planning.

• Vendor Risks - The highest impact risk in an offshore outsourcing implementation is the wrong choice of vendor. As offshore outsourcing is considered a long term strategic initiative, the wrong choice of vendor could lead to a collapse of the whole initiative, incurring financial losses and reducing the confidence level of your key stake holders in the overall strategy. The best way to mitigate this risk is to ensure that sufficient time is spent in choosing the right vendor. This can be achieved by using a detailed RFI/RFP process followed by a thorough due diligence of the vendor’s capabilities. It is recommended that companies have a multi-vendor policy to safeguard their interest and also maintain healthy competition between vendors to get best value for money.
• Risk to Assets – Today Intellectual Property (IP) is the most important asset for an organisation. This IP is usually in the form of data, designs / drawings, formulae, etc. Protection of this IP is essential to maintain competitive advantage. This can be achieved by deploying the right technology and processes to secure such data. An organisation’s best interests are safeguarded by implementing a comprehensive background check policy for all vendor resources having access to critical information and IP. Clients should enforce guidelines on the vendor for data access by implementing the right technological solution. For example disabling network ports such as FTP access, scanning all emails, etc to ensure that no part of the code or IP is going out of the secured network. It is also recommended that there are severe penalty clauses in the agreement with the service provider for breach of contract terms and that the provider is made responsible & accountable to secure all data and IP.
• Environmental Risks – These risks usually cannot be controlled, but if planned well in advance at the beginning of the engagement, the impact of such risks can be greatly minimized. The most common environmental threats are:
  • Risks due to political or regional factors. e.g. political disturbance between India and Pakistan, etc. The best way to mitigate this risk is by documenting a comprehensive disaster recovery / business continuity plan that is calibrated at regular intervals.
  • Change in Government regulations and policies. E.g. Tax imposed by your Government Authorities for sending work offshore. One of the suggested risk mitigation for this type of problem is being part of a strong business lobby and having a strong PR / Communication Plan.
• Project Risks- Selection of the right project plays a vital role in any offshore outsourcing program. By demonstrating success in the projects you execute offshore, there is an increase in confidence from different business units and increased support of the initiative. Hence it is critical to identify the best fit projects. This can be done by conducting a scientific assessment of all the software projects and business processes to have a clearly defined roadmap for sending work offshore. Taking help from an experienced offshore advisory company in the selection process would be to an organisation’s advantage. Another important aspect in ensuring project success is clearly defining deliverables and the Service Level Agreement (SLA) with the service providers. Also, conducting regular project reviews with the service provider is equally crucial. These reviews are to ensure that the project deliverables and quality is as planned, and will be used as a platform to raise early alarms and plan for corrective / preventive actions.

• Organisational Risks – These are somewhat easier to mitigate. Typical organisational risks are :
  • Internal Resistance. This is one of the most common problems that organisations face when they decide to offshore. The primary reason for the resistance is that people fear loss of jobs and loss of control. This can be managed with an effective communication plan from the senior management team with well defined goals that would address most of the concerns of your team. By showing the value of offshore outsourcing to each of the business owners, they will propagate this message to their sub-ordinates and ensure support from all levels within the organisation.
  • Overdependence on vendors. Organisations have to prepare themselves to execute and sustain an offshore outsourcing program. The management of an offshore sourcing program starts with learning the new culture of the sourcing destination and learning to manage vendors remotely. Usually vendors will try their best to give confidence to their clients that they can depend 100% on them. However, it is in the interest of the organisation concerned to keep tight checks and controls on the vendor to ensure satisfactory performance. A multi-vendor approach can provide healthy competition and keep pressure on all vendors. It is advisable to document a transition process with each vendor and put the transition onus on the vendor as a part of the contract with them. This will ensure that in case you need to discontinue your relationship with any of the vendors, they must still ensure a smooth transition back to either your team or the team of a different vendor.

While still somewhat controversial, offshore outsourcing is an important part of the modern business environment and it is not likely to go away any time soon. As such, it is essential that organisations obtain a firm understanding of the risks that may be associated with offshore outsourcing and the most effective strategies for managing those risks. As outlined herein, there are risk identification and mitigation strategies that can help you increase the likelihood of an outsourcing relationship success.

About the Author

Akshay Upadhye is a Senior Consultant with Alsbridge plc, the award winning advisors on outsourcing, shared services and offshoring. The article represents his personal views. Akshay can be contacted at akshay.upadhye@alsbridge.eu or on +44(0) 20 7242 0666.

 

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