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Golden rules of outsourcing

A.Yong | Feb. 28, 2011
Moving up the outsourcing learning curve.

The naysayers have got it all wrong. Instead of its gradual demise, outsourcing is here to stay – but managing these contracts carries with it a learning curve that users need to understand, said Prof. Leslie Willcocks.

“IT outsourcing is not a fad, but signifies a fundamental change in the way IT is delivered,” said Willcocks in a presentation titled “Effective IT Outsourcing: Eight Questions a Client Needs to Ask… and How to Answer Them.”

Considered an authority in the field of outsourcing, the Director of Outsourcing Unit and Head of the IS and Innovation Group, London School of Economics and Political Science, was speaking to a room of more than 30 senior level corporate executives, at an Enterprise Wide Outsourcing CxO Breakfast Forum held in January 2010 in Singapore, organised by SingTel.

Willcocks cited analyst data, which calculated that the IT outsourcing market in the Asia Pacific excluding Japan is predicted to have five to 10 per cent growth rates from 2009 to 2012.

Given the strong growth trends, companies who choose to outsource need to manage these projects well in order to achieve business advantage. A key approach is to ask the right questions and one such question is: What are the risks and how should they be managed?

He noted that the biggest risks in outsourcing are hidden costs of contracts, credibility of vendor claims, irreversibility of contracts, and the lack of expertise in managing contracts.  

Winner's curse

Beware of risks associated with the “winner’s curse”, which are deals that favour the client at the expense of the supplier. This “winner’s curse” affects as many as 20 per cent of all contracts, and do not work to the client’s advantage in the long run, said Willcocks.

There are also different situations where suppliers may decide to go with very thin margins to win a deal, and try to upsell additional services subsequently. However, this may not work for both parties.

Willcocks recommended striving for a win-win approach, and warned companies not to choose suppliers based on cost alone, but to allow service providers “a reasonable level of profit.” He explained that any benefits the client may gain through lower rates may be eventually eroded by the cost of time and resources needs to fix problems later.

Learning Curve

Willcocks noted that clients and providers typically move through four phases of a learning curve. Phase 1 - Hype and Fear; Phase 2 - Early Adopters; Phase 3 - Market Matures; and Phase 4 - Institutionalised.

 

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