Successful Managment Of Outsourcing Projects

Abstract

Outsourcing is nothing new in business world but it is increasingly becoming common practice in today’s competitive environment. Outsourcing in itself is not a recipe of success, if not done right it can do more harm than good for project. Organizations regularly face trouble when they move work offshore, but they persist since this process has become critical to remain competitive in current marketplace. In this paper we explore this ever growing trend of outsourcing and define formula for successfully managing the projects in outsourcing environment.

What is Outsourcing

Outsourcing can be defined as the strategic use of outside resources to perform activities traditionally handled by internal staff and resources. Outsourcing is a management strategy through which an organisation outsources key, non-core functions to specialised, efficient service providers. Companies have hired special contractors for specific types of work, and they have always partnered or formed long-term relationships with companies whose capabilities complement their own; organizations have always contracted for shared access to resources that were beyond their individual reach be it buildings, technology or people. But the difference with simply subcontracting and outsourcing is that outsourcing involves the company's wholesale restructuring around the core competences and external relations.

To further understand outsourcing, we need to understand both old and new models which will help differentiate the “mindset” required to achieve a successful outsourcing strategy. In old outsourcing model, contracts are generally put in haste. The outsourcer takes over a difficult situation where service levels could not be quickly decided. There are therefore very few meaningful service levels defined. The outsourcer does not provide enough information to the customer in terms of its cost for providing services, and any inquires made by the customer were answered slowly and ambiguous. The result is was a non-functional relationship in which both parties try to fault each other for increasing levels of non-performance. These relationships historically lead to adversarial sort of relationships where both parties try to win at the loss of the other, the customer tries to reduce the outsourcer’s profits, and the outsourcer tries to maximize its profit at the expense of customer.

In new outsourcing model, the customer treats outsourcer as a resource which is valuable to the company in long-run. As an asset, time and resources are devoted to maintaining the relationship and maximizing its value. The customer has resources appointed for maintaining relation and extracting value from the outsourcing relationship. Customers keep their focus on maintaining the relationship for as long as it brings value and understand that over time new teams and coalitions may need to be formed as technology and organizations change.

For that reason, customers strive for long-term partnerships and try to line up the outsourcers motivation by providing appealing incentives. They invest in tools which can objectively measure outsourcer performance and contribution and promote communication. The two organizations are interdependent, change in any organization affect the other. Therefore, both organizations should understand the cost drivers of the two infrastructures and coordinate changes so as not to drive additional costs into the process. Customer and outsourcer must behave as an integrated supply chain rather than win/lose adversaries.

Factors Driving Outsourcing

There are immense potential benefits of outsourcing for any organization. Outsourcing can help an organization to reduce its cost, free up capital investments for use in other areas, and usually can shift focus of management back to the bottom line.

Few of the main reasons for companies to outsource are as follows:

• Reduced overhead and operating costs
• Improve company focus
• Reduced directly employed workforce/free-up resources for other purposes
• Opportunity to sell finished products into the local (in-country) markets
• Reduced Material, rental and real estate costs
• Favorable currency exchange rates
• Foreign workers work considerably more hours in low - cost countries than their western counterparts
• Escaping from regulatory, safety, labor and environmental laws by shifting responsibility to outsourced company
• Due to low labor rates, capital investment in automation is not necessary
• Some Asian countries has developed huge swath of specialized resources not readily available in customer’s home country

Challenges when Outsourcing

Organizations frequently face numerous hurdles while doing outsourcing transition.

Few major ones are:

Outsourcing done right

While it is easy to hop on to outsourcing bandwagon, there is no guaranteed success in this process. Chances of success can be significantly increased by following below described practices:

Due Diligence

This first step in selecting destination and right partner to outsource work is also the most important one. Extensive research has to be done and right amount of efforts has to be put while researching which region would be best suited and which partner has the correct skillset to support your outsourced work. Organizations sometimes make mistake of running after lowest cost alternative presented while not considering hidden costs which an derail whole operation in later stages.

Manage the Risk

While selecting the outsourcing partner, ensure that they are evaluated on well defined selection criterion. Proper weightage should be given to more important criterion and partner should not be selected just based on lowest bid. They should be evaluated for other things like skills, capacity, quality, investment, development time etc. These criterions can be weighted based on organization’s current outsourcing need.

Identify the Skill Sets

Oftentimes when an organization is thinking of outsourcing work, it will be of specialized nature. Organizations have to ensure that partner they want to select has the specialized skills necessary to carry out the work till the end. There may be lot of proprietary tools or processes involved, outsourcer need to make sure that partner either already have those skills or is ready to ramp up their teams with personnel with right skill-set. Understanding the skills requirements is fundamental not just to select an outsourcing partner, but also to conveying expectations to the partner, both at the start of a project and, as the project evolves, requirements change and the outsourcing partner has to bring on new capabilities.

Focus on the Relationship

Of course it is important to consider the technical requirements, capabilities and skills sets while selecting a firm to outsource, but these are traits that either your own organization or your outsourcing partner can acquire. While these attributes are important, in selecting firm to outsource, what’s even more important is synergy between your own and company you select to outsource.

Build A True Partnership

Outsourcing a project, service or a product oftentimes comes with a huge number of requirements, templates and reporting mechanisms. It may be challenging to capture everything in the contract. To overcome this, you should find a organization which will become your partner. It have to be an organization that synergize with your organization’s ethics, management attitude and vision. The supplier must understand and honor the spirit of the contract rather than just legal contract. Organizations will have significantly less number of commercial disputes during the daily operation of the program when they partner such companies.

Communicate, Communicate, Communicate

As any good relationship goes, key factor for a healthy OEM-outsourcing partnership is communication. It's imperative to develop proper communication channels and put clear communication strategy in place when starting the partnership, this will help reducing any confusion in conveying requirements and what is expected from outsourcing partner. It is also important to have open and honest dialogue as often time allows. Both Outsourcer and outsourcing partner have strength and weaknesses, it is important that both sides try to leverage the strengths and work around the weaknesses.

Put the Tools In Place Early

With communication being such a crucial success factor, it is important to put in place the tools that would enable the necessary level of interaction between the outsourcer and the outsourcing partner. Different organizations use tools that suit their needs, but when outsourcing, it becomes important that partners can assimilate to the tools used on client side, earlier the tools are put in place, more time partner will have to get familiar and use the tools and communication channels properly.

Take time to transition

Allow yourself and partner sufficient time for transition. This transition period can be lengthy based of organization maturity, geographic region and industry. During transition allow partner to get acclimated to your organization culture, finalize its own organization structure and refine the execution plan. Also, allow time and ensure that all systems at partner end are working, procedures are documented, templates are created and resources have been trained and brought up to speed.

Meaningful Measurements

You can't manage what you're not measuring. While negotiating the contract, you should define performance indicators of the program. The metrics of success or risk should be well defined. Also, a risk mitigation plan can be defined at this time so that partners are aware of client expectations. The right choice of indicators will open the door to professional discussion, while the people of both organisations are on the same agenda and in the same programme vision.

Local Managing Director

It is generally beneficial to hire a local Project Manager to run the daily operations. Team personnel usually find it easier to follow a local manager, it helps with keeping the workforce focused and motivation levels are higher when a local person is in charge. Spend appropriate time and hire the right person and this is a vital role. Hiring someone with government affiliations can be very beneficial as they can help navigate the government procedures which can be very different than client home country.

Protecting Your Intellectual Property (IP)

An important fact that customer should be prepared for is that some parts of your IP will be pirated while outsourcing your work to lower cost countries. You should come up with a strategy to protect important parts of your IP before you embark on outsourcing journey. One such strategy is to move only selected low technology parts of your work to low cost region and keeping core components within your own team. Another strategy is to separate different components and outsource them to different regions, like software development to India and hardware development to China. Once you have observed that your product is being pirated, do not try to complete with those low cost knock-offs, instead focus on marketing and highlighting quality features of your product. Also, make continuous improvements to your product and stay ahead in game from pirates because it take time to copy any piece of technology. Relying on legal system may not be a good strategy as it is difficult to win IP infringement cases in low cost countries, even if you win legal battle, it is almost impossible to enforce the decision.