Outsourcing Risk Management Case Study

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THE BUSINESS PROCESS OUTSOURCING RISK MANAGEMENT PUZZLE
Recent years have seen a rapid rise in the number of IT outsourcing deals going beyond infrastructure and functional applications. The vendors in those deals take primary responsibility for their client’s IT-enabled business processes. Despite this business process outsourcing(BPO) big bang, clients and vendors alike are struggling to grasp the im pact of their broadened and deepened relationship, and of the extended transfer of organizational assets between them. The business literature has not stressed the risks of IT outsourcing beyond the operation of a typical outsourcing project and outsourcing’s short-term performance impact on the client firm.Nor has it reflected on outsourcing
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The most cited one is project cost overrun—or worse, an outsourcing project that results in an increase in overall operations costs for the client. It is the most visible outsourcing risk because cost cutting remains one of the most common reasons for IT out sourcing. Other common signs of an outsourcing disaster include: clients’ poor service delivery, increasing customer complaints, and, in extreme circumstances, business shutdown (due to an information security breach or to the vendors’ system or organizational failure). Any of these is directly harmful to an outsourcing client’s short-term market performance as measured by sales, costs, strength of customer relationships, or market reputation. These short-term market performance risks signal the imminent failure of an outsourcing project. The popular business literature, therefore, has focused mostly on identifying the causes of outsourcing project failure, calling them “outsourcing risks.”2 One major cause of outsourcing cost overruns is the client’s naïve expectations on cost reduction, which is called a cost savings mirage. Many executives assume that labor arbitrage will yield savings comparable to a worker-to-worker substitution, without regard to he hidden costs and the differences in operating models. Outsourced workers absorbed elsewhere inside the client firm dissipate the expected savings. Extra project management resources earmarked for overseeing the outsourced work add to the total cost. Since vendors usually require a standardized and repeatable model, the client’s lack of process model maturity3 creates a potential gap that additional resources are required to bridge, which further undermines the expected cost savings. Outsourcing vendors may also be responsible for project failure and there sulting short-term market performance shortfalls for the clients. A vendor’s competence in technology, business function, business process,

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