Information Technology Reference
In-Depth Information
Table 1. List of outsourcing risks
Risks (and references)
Description
Existence of deficiencies on the contract.
(Aubert et al., 2005; Bahli & Rivard, 2003a; Bahli &
Rivard, 2003b; Dhar & Balakrishnan, 2006; Gonzalez
et al., 2005a; IDC, 2005; Kakumanu & Portanova,
2006).
To draw up a contract with deficiencies may lead to amendments' costs. This
deficiencies may be caused for instance by the complexity of the contract itself,
by technological discontinuity, by the fast market evolution or by environmental
volatility of the organization.
Unexpected costs and other hidden costs.
(Aubert et al., 2005; Bahli & Rivard, 2003a; Bahli &
Rivard, 2003b; Deloitte, 2005; Dhar & Balakrishnan,
2006; Kakumanu & Portanova, 2006; Varajão, 2002).
The organization inexperience about Outsourcing contracts or its weak knowl-
edge about the activity to outsource may lead to extra costs.
Frequently organizations do not define properly its IS/IT needs and may not
realize the repercussions of the interdependency of the outsourced activities and
the internal activities. The failure on return on investment is an example of this
risk.
Organizations perform a poor cost-benefit analy-
sis.
(Gonzalez et al., 2005a;Varajão, 2002).
On an Outsourcing decision process there are some costs organizations don't
consider on a cost-benefit analysis.
Examples of this are costs of: suppliers selection, contract negotiation, imple-
mentation, suppliers management and, at the end of Outsourcing contracts,
switching suppliers or insource.
Organization gets in the hands of the service pro-
vider organization (lock-in).
(Aubert et al., 2005; Bahli & Rivard, 2003a; Bahli &
Rivard, 2003b; Deloitte, 2005; Dhar & Balakrishnan,
2006; IDC, 2005; Kakumanu & Portanova, 2006;
Varajão, 2002; Wright, 2004).
Some organizations face a decrease on its internal competencies, and in case of a
small number of suppliers, they may not be able to switch Providers or to bring
the services in-house without incurring in great expenses.
Also, long term contracts, very frequent on Outsourcing deals, may became dif-
ficult for organizations to respond to market changes.
Organization has a lack of its needs fulfilled.
(Aubert et al., 2005; Dhar & Balakrishnan, 2006;
Gonzalez et al., 2005a; Kakumanu & Portanova,
2006; Varajão, 2002).
Although the contract fulfilment, the organization may have not specified
adequately the outsourced activities or its service levels and the service could be
delivered bellow expectations.
Other factors may lead to this risk such as the constant changes of requirements
by the organization, the lack of internal competencies to evaluate the Service
Provider performance or the inexistence of mechanisms to control delivered
service.
Providers don't comply with the contract.
(Aubert et al., 2005; Deloitte, 2005; Dhar & Bal-
akrishnan, 2006; Gonzalez et al., 2005a; Kakumanu
& Portanova, 2006; Varajão, 2002; Wright, 2004).
The lack of compliance with the contract may occur due to:
- The Provider does not know the business activity of the Client.
- High rotation of human resources or skilled resources deviation to other
Clients, due to an economical powerful Provider, like a monopoly position and/
or with a large Clients portfolio.
- As the opposite, due to an economical weak Provider, like a takeover by anoth-
er company or an insolvency declaration, the organization may have to support
the costs to switch Providers, since it does not have internal competencies.
Dispute and/or litigation.
(Aubert et al., 2005; Bahli & Rivard, 2003b; Dhar &
Balakrishnan, 2006; Varajão, 2002; Wright, 2004).
On a contractual relation the existence of a conflict is a probable event. Conflicts
may have origin on defective measurement of service levels, low performance
of the Provider, cultural differences or weak expertise on legal environment/
aspects.
Irreversible outsourcing decision.
(IDC, 2005; Gonzalez et al., 2005a; Gonzalez et al.,
2006a).
An organization that adopts Outsourcing may face a too high cost to rebuilt
internally the IS department in comparison with the costs of keeping the IS
functions out.
IS/IT logical security failure.
(Aubert et al., 2005; Dhar & Balakrishnan, 2006;
Gonzalez et al., 2005a; IDC, 2004; IDC, 2005; Ka-
kumanu & Portanova, 2006; Varajão, 2002; Wright,
2004).
On an Outsourcing contract some logical security characteristics of the IS/IT
can be defined by the Provider such as rules and politics of intellectual property,
privacy and confidentiality control.
Threat from opportunism by the Service Provider.
(Aubert et al., 2005; Dhar & Balakrishnan, 2006;
Varajão, 2002).
The Provider may take advantage of contractual gaps and charges extra fees over
weak or unclear specified/unspecified services on contract.
Continued on following page
Search WWH ::
Custom Search