40 outsourcing risks you need to know now

Oct. 5, 2008
Outsourcing strategy risks Outsourcing undesirable functions versus the ones that provide greatest competitive advantage. Not clearly defining goals and

Outsourcing strategy risks

  1. Outsourcing undesirable functions versus the ones that provide greatest competitive advantage.
  2. Not clearly defining goals and objectives before starting the outsource process.
  3. Not establishing an effective internal baseline to measure providers against, including costs, service and value adds.
  4. Outsourcing in the international market without international operations experience.
  5. Inadequate business case development for the outsourcing decision.
  6. Making the decision to outsource without complete information on internal costs and processes.
  7. Not considering the impact of outsourcing on other functions and areas of risk, such as environmental and regulatory factors.
  8. Lack of understanding the human relations and employment law requirements for an outsourcing initiative.
  9. Announcing outsourcing before sufficient details have been finalized, creating morale issues.
  10. Lack of risk analysis and risk assessment planning.

View outsourcing implementation risks

Outsourcing implementation risks

  1. Not establishing an outsource relationship that has sufficient flexibility to deal with business fluctuations.
  2. Initiating an agreement with a service provider that limits flexibility in the future.
  3. Having an unrealistic timeline for any of the steps of the outsource process including start up.
  4. Poor implementation planning with respect to timing of transition to service provider and demands on the organization.
  5. Underestimating the time required to negotiate a service agreement.
  6. Not fully defining an employee transition plan.
  7. Not getting the operational issues resolved in the service agreement before moving into the legal aspects of the agreement.
  8. Inadequate planning concerning information systems and interfacing with the service provider.
  9. Insufficient technology development before implementation.
  10. Not training the provider on critical elements of the company product line or service expectations.

View outsourcing selection risks

Outsourcing selection risks

  1. Not including enough resources to effectively manage the vendor selection process.
  2. Not having the proper internal skill set to effectively manage the selection process.
  3. Not understanding or leveraging the benefits a Request for Information (RFI) can have in narrowing the potential provider field before entering the Request for Proposal (RFP) process.
  4. Not casting one's net widely enough for potential providers of the service, and thus missing good candidates.
  5. Not involving a variety of perspectives in the selection process.
  6. Poorly developed and documented service or product specifications.
  7. Inaccurate costing of assets that will be transferred to the service or product provider.
  8. Not doing business and financial due diligence on potential providers.
  9. Insufficient knowledge of service provider capacity limitations.
  10. Making the selection process a personal rather than a commercial decision.

View outsourcing management risks

Outsourcing management risks

  1. Not considering the full impact of an outsourcing agreement on a company's financial condition.
  2. Lack of internal communication.
  3. Lack of incentives for provider continuous improvement.
  4. Not establishing multiple touch points between the company and the provider.
  5. Lack of a contingency plan for major disruptions at the service provider.
  6. Not putting a full communication plan into effect including escalation processes, regularly scheduled meetings, review periods and employee communication.
  7. Doing a poor job managing expectations around the go-live.
  8. Expecting too much from a provider in the early months after go-live.
  9. Neglecting to "flex" the outsource relationship as outsource requirements evolve.
  10. Lack of a formal "lessons learned" roundtable on outsourcing in general and, specifically, established outsource relationship.

Excerpted from The Supply Chain Handbook (Tompkins Press, 2004), edited by James A. Tompkins, Ph.D., and Dale Marmelink. www.tompkinsinc.com