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Strategy :: Top 40 risks in outsourcing

An interesting article on the major risks related to outsourcing a service.


Outsourcing Strategy Risks

Outsourcing strategy is the process of determining whether or not to outsource and, if so, what to outsource.
  1. Outsourcing undesirable functions versus the ones that provide the greatest competitive advantage;
  2. Not clearly defining goals and objectives before starting the outsourcing process;
  3. Not establishing an effective internal baseline against which providers are measured — 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 ignoring areas of risk such as environmental and regulatory factors;
  8. Failure to understand human relations and employment law requirements for an outsourcing initiative;
  9. Announcing outsourcing before sufficient details have been finalized, creating morale issues; and
  10. Lack of risk analysis and risk assessment planning.


Outsourcing Selection Risks

Outsourcing selection is the process of finding and evaluating potential outsourcing partners.
  1. Not including enough resources to effectively manage the vendor selection process;
  2. Lack of a proper internal skill set to effectively manage the selection process;
  3. Not understanding or leveraging the benefits that 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. Using poorly developed and documented service or product specifications;
  7. Inaccurate costing of assets that will be transferred to the service provider;
  8. Not doing business and financial due diligence on potential providers;
  9. Insufficient knowledge of service provider capacity limitations; and
  10. Making the selection process a personal, rather than a commercial, decision.


Outsourcing Implementation Risks

Outsourcing implementation is where the relationship between outsourcing partners is defined and established.
  1. Not establishing an outsourcing 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; and
  10. Not training the provider on critical elements of the company product line or on service expectations.


Outsourcing Management Risks

Outsourcing management is the monitoring and evolution of the ongoing relationship.
  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 of 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 relationship as outsourcing requirements evolve; and
  10. Lack of a formal “lessons learned” roundtable on outsourcing in general, and specifically, in established relationships.




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