Risk, normally is defined as undesired result, and may bring positive or negative result. IT projects are having a nature of complexity, and software project as one of the IT projects, Armour states in his article that “every software project involves some degree of risk” (Armour, 2005).
Generally speaking, there are two major purposes of IT project outsourcing, 1) for cost and 2) for expertise. Microsoft as one of the biggest software companies is using outsourcing in many projects and products development. And I used to directly work with vendor teams together in several projects for years. There were many successful deliveries made by our vendor teams during past several years and overall we are satisfied with their work. But I have to admit there are always many risks in these outsourced projects and sometime the negative impacts of these risks do cause economic loss.
Within my own experience, we started our outsourcing journey from mixed vendors with staff based model. Then we realized some problems of this model, like the cost is still relatively high, very high management cost, no consolidated training since staff work for different companies, no career path for these vendor staff, etc. So we moved to single vendor model for single project or product and gradually, we moved from staff based model to project based model in our outsourcing projects. And along with this shift, some new risks raised then.
Currently we are still facing many risks and two major ones are: 1) underperformance and poor quality delivery, 2) legal affairs.
Risk from Delivery
The underperformance and less quality delivery risk is one of the major risks of IT project outsourcing. There are several reasons of underperformance delivery,
- Incapable development team;
This is a major reason of underperformance delivery. When an outsourcing vendor is selected, it may provide very strong and capable people at very beginning and then replace with lower cost and incapable people to pursue the maximum financial output.
- Communication problem;
Software development relies on communication like the understanding of requirements, schedule and status update, etc. But as normally vendor is in different location with the client (normally offshore), and the communication is normally based on email or phone, the miscommunication is very likely to happen. For example, even there is no intention to misunderstand the requirement, since the communication approach, the delivery may not fully meet the requirement. Although the contract can define the penalty, that’s normally not what the client expects.
- Management issue;
The vendor development team is normally managed by outsourcing provider, except the staff based model. As the management style may be very different with client, there is a conflict in management, especially the project management. Furthermore, the management of outsourced project in client side is also very challenging, as the information may be hidden intentionally by the vendor. Try to make sure the delivery requires a transparent communication and management in both sides.
- No incentives to vendors.
Herath and Kishore (2009) state that underperformance delivery occurs because the vendor’s incentives for hard work are different. Even you can propose incentives to the vendor providers, but as the individuals are managed by the provider, there normally is very limited incentive for them.
Legal affairs
Firstly, software is an intangible asset and normally is protected by intellectual property laws or legislations. There are several legal risks in outsourcing projects,
- Contractual problems;
Outsourcing needs contract in place and to be signed before the actual development happens. As you may not know what will happen in future no matter the project size, you may miss something in the contract. The professionalism of vendor may be helpful to you, but you likely finally get the legal affairs. Besides, although there could be penalty defined in contact, this is not really the client wants. Underperformance delivery hurts to both client and vendor.
- Local legal regulations;
As the vendor is very likely locating in different country or region with the client, and they need to follow the local legislation and regulation, there is a risk of conflicts in different laws with the country or region the client sits.
- Open source code or library;
The open source projects are an important part of software world. But since these projects have different licenses and are not all suitable to be applied in the outsourcing project, the client may face to legal problems by not aware of this. Also because the management and actual development is not fully transparent to the client, the vendors may want to use open source library to accelerate the development and lower the cost.
- Other IP issues;
Using open source codes is not the only IP problem. The content, functionality, or even UI may violate other companies patent or IP.
Potential Solutions
Outsourcing strategy
Whether outsourcing the project or not is always a challenge to the companies. There are always advantages and disadvantages in both sides. And the project is not always suitable to be outsourced. So it is very necessary to have a clearly defined outsourcing strategy in place to help decide whether the project is suitable to outsource.
Better Vendor selection
Vendor is indeed very important to the project success, since they are the actual people who will deliver the project. Selecting a good and capable vendor will be a very good start of an outsourcing project. Following dimensions may help in selection (Herath and Kishore, 2009),
- Performance, especially historical performance;
- Technical expertise;
- Quality;
- Management;
- Cost;
- People.
Better Vendor management
Vendor management is always challenging in outsourcing projects. To have a very good engagement with vendor in management is very helpful. Besides, applying agile development process in project management will likely be helpful as well, which increase the transparence of project status and delivery.
Technology
Choosing the suitable technology to deliver the project is always a key to success. And it will be essential that the chosen technology is known by both client and vendor to mitigate the delivery risk. If the vendor is not capable in specific technology, the delivery risk is very high.
Conclusion
Just like Forest’s mother told Forest Gump when she was dying. Sometime life is just like a box of chocolate, you never know what’s in it until you open it. Outsourcing is very similar, since the lack of transparency to client; the client may only know the output at the end. There are many risks in out sourcing projects. The client needs to be aware and identify these risks at the start of the project and it’s also essential that the client and vendor need to work together closely in the risk management to ensure the success.
Thanks,
Binzy @ 21 July 2011
References:
Armour, P. G. (2005), ‘Project Portfolios: Organizational Management of Risk’ Communications of the ACM, Volume 48 Issue 3, March 2005, DOI: 10.1145/1047671.1047690.
Herath, T. and Kishore, R (2009), ‘Offshore Outsourcing: Risks, Challenges, and Potential Solutions’. Information Systems Management, volume 26, pp312–32, DOI: 10.1080/10580530903245549