Top 40 Risks in Outsourcing

By Jim Tompkins
CEO, Tompkins Associates
Adapted from Logistics and Manufacturing Outsourcing: Harness Your Core Competencies

If you’ve ever been ticketed at a parking meter, you might be surprised to learn that you were holding in your hand a symbol of an outsourcing failure.

In a case study cited recently in a national newspaper, one city’s outsourcing venture with parking meters was undertaken to save money, but the attempt actually cost $9 million over six years.

Can you imagine getting a report revealing that your customer complaints have increased thousands of percentage points? Complaints about parking meters by the city’s residents skyrocketed 2400 percent due to broken meters between 1997 and 2005. Perhaps your parking ticket could not have been avoided, but this outsourcing outcome could have been avoided. Although the city has a new contract that is performance-based so only a few meters can be inoperable at one time, it was a costly outsourcing lesson.

It is always disappointing to read stories of outsourcing gone bad. However, the majority of these circumstances are avoidable if the company and the provider work in unison to minimize the risks. Outsourcing is a science, but it doesn’t have to be rocket science. Not addressing the risks of outsourcing will certainly beget failure, and using the tips outlined here will help keep it manageable.

To help mitigate risk, learn the Top 40 Risks in Outsourcing. This is a list of possible risks for outsourcing any competency, and is not just limited to one area such as IT or HR. The list is arranged by the steps in the process of outsourcing: Strategy, Selection, Implementation, and Management.

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.

Future Trends in Outsourcing

The Supply Chain Consortium will examine more of the risks of outsourcing within specific levels of the supply chain in the future. Already, the consortium has administered surveys to its member companies on the outsourcing of transportation and distribution center (DC) operations. Among the findings:

• Customer satisfaction needs to be improved in the process of DC outsourcing. This can be done by making outsourcing a core competency.
• Making outsourcing a core competency will also foster a good relationship between companies and their outsourcing providers.
• When considering transportation outsourcing, customer service is important, with an emphasis on keeping the cost of services low.
• Complete a detailed evaluation before making the decision to outsource transportation; this includes evaluating internal expertise.

These are just a few of the conclusions the consortium has reported. New reports will be available to members of the Supply Chain Consortium. Visit the consortium Web site to learn how your organization can become a member.

Move Forward

Investing time and resources in the design and deployment of a proven outsourcing process will help you avoid the risks of outsourcing and move your organization forward to the next level of performance excellence. Whether your outsourcing venture occurs with parking meters, manufacturing, distribution, logistics, or in other areas, all risks should be taken into account before the process begins. Additional outsourcing resources are available here.

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Information for this article was taken from Logistics and Manufacturing Outsourcing: Harness Your Core Competencies by James A. Tompkins, Ph.D., Steven W. Simonson, Bruce W. Tompkins and Brian E. Upchurch.