Saturday, November 20, 2010

Outsourcing, how to make it work


I have been studying project management in the last few months; the course is very interesting but works on the assumption that you are a project manager working on projects for your organisation. In my case, that is not true. I work for a consultant (outsourcing) company, meaning that the “projects” I work on is really for the benefit of my client’s organisation and this small distinction makes a big difference in how the project manager handles the project.


Firstly, let’s look at the purpose of a project. For an organisation to finally decide to invest into a project the organisation must see that the success in the project will lead to the success of the organisation; the project also needs to fit strategically within the organisation, the following considerations needs to take place:
  • Does the project fit with the organisation’s technology architecture?
  • Does the project follow corporate standards, policies and methods?
  • Can the project last with the organisation’s business and IT strategic plan?
  • Can the project co-exist with existing systems?
All of these questions are answered in a document, usually called the business case document, and is compiled by the Project Owner, who is most probably a permanent staff of the organisation. After approval is received and a project sponsor is defined, it may be decided to outsource this project to a consultant company that specialise in the type of delivery the project requires, nothing wrong with that, in fact there are many advantages to this approach, some of the key advantages are:
  • Reducing costs - labour is usually cheaper via outsourcing, also its cheaper, quicker and easier to find the right consultant company that to hire (and then manage) a resource with the correct skills
  • Improved business focus – with a portion of the work outsourced, the organisation’s permanent staff can focus on the organisations core competencies
  • Access to unique skills – The shortage of IT skills makes it difficult for the organisation to find the required skills directly. Outsourcing makes these skills more easily accessible
  • Experience - By outsourcing, the organisation is not only gaining a skillset, but experience, this helps identify risk that the organisation may not be aware of and can greatly contribute to the success of the project

    Unlike the popular series called “Outsourced”, you may also require the outsourced company to provide a project manager. Again, nothing wrong with that approach, in fact, a project manager from the consultancy company …
    • Has great experience on similar type projects
    • Has a tried and tested approach for your project
    • Knows the common high risk areas and has a strategy in mitigating it
    • Knows the type of stakeholder involvement required for project success
    • Is familiar with the outsourced team and knows how to manage them
    • Can provide more accurate estimates (cost and time)
    But the project manager works for the outsourced company, and while there is an expectation for the Project Manager to make decisions that for the benefit of the organisation as a whole, this type of expectation is not expected from an outsourced project manager (since there can be a conflict of interest when the Project Manager can make decisions that will benefit the consultancy company). For example, Project Managers will NOT …
    • Identify kill points (points in the early part of a project, where it needs to be decided if the project should continue)
    • Focus on the return of investment. The outsourced project manager will define the requirements of the project and produce a solution that matches the requirements. The return in investment will be the responsibility of the Project Owner, not the project manager
    Also, since the project manager is not part of the organisation, the project managers will not know the …
    • Organisation’s “Big Picture” strategy
    • Organisational structure, and thus will not know who are the key stakeholders needed for project success
    • Organisation’s standards and procedures
    • Existing systems and technology infrastructure
    So how do we create an environment where the organisation can gain the advantages of having an outsourced set of resources, included with that, the advantage of having the outsourced Project Manager, but without the disadvantages? 


    There are really 2 approaches. 

    Organisation provides a project manager that works closely with the outsourced project manager. This approach is great for short term projects. This resource needs to understand the organisations “big picture” strategy, standards, procedures, etc. He also requires sufficient authority in making quick decisions, and by working closely with the outsourced project manager, he will ensure that decisions are made for the benefit the organisation. 

    This is great if an organisation can place a dedicated resource to this project, but may not work for long term projects. For long term projects, it would be better to establish a strong relationship between the organisation and the outsourced company. 

    If an organisation forms a 5 year contract (involving many resources) with an outsourced company, that’s a 5 year commitment, the project is no longer seen as a short term project that will benefit the client’s organisation. It is now a long term project that will require significant investing from the outsource company and ultimately benefits the outsourced company as a whole. 

    With this level of commitment, the outsourced company will understand the organisational structure, organisation objectives, standards and procedures, etc. a lot better, that will assist in delivering successful projects. 

    Also, as part of the 5 year commitment, organisation should place the more senior outsourced resources in decision making position within the organisation. The outsourced company now has responsibility and authority for a particular organisational business requirement. With this power, comes responsibility, so ROI and kill points are now considered more carefully and impartially. 

    This type of commitment helps the outsourced company grow, with the steady income flow provided by this contract, the outsourced company can focus on training resources, improving processes and providing a better service. This really is a win-win situation that is rarely practiced because of …
    • Loss of control – outsourcing to this level is seen as giving the management and control of a business functional to another company
    • Hidden Costs – requirements not defined in the original agreement are subject to change control with can lead to additional costs
    • Quality problems – contracts with fixed prices, places a large amount of risk of the outsource company which may force them to reduce their expenses to maintain a profit
    • Dependant on stability of outsourced company – if the outsource company goes under, the organisation is left with a huge problem
    This is where the strong relationship between organisation and outsourced company is essential, Also look at the costing structure. A fixed price places all the risk on the outsourced company, while the time and material approach places the risk on the organisation. A well balanced costing contract is the CPIF (Cost-plus-incentive fee) contract, where the price paid changes in relation to costs (http://en.wikipedia.org/wiki/Cost-plus-incentive_fee). This type of contract with the strong relationship will resolve most of the concerns mentioned above and truly enforce that win-win situation.

    2 comments:

    Tony said...

    Great post! I found it very relevant and close to the reality of most organisations. Good job Nadir. Keep it up.

    mentalist said...

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