This blog is the second and final part of a series on outsourcing in project management. The previous one shared the importance of outsourcing, as well as the benefits. This blog explores the risks associated with outsourcing, suggesting that outsourcers' failure is the greatest one. I also put forward some solutions that can help mitigate the probability and impacts of the risks
Despite all the benefits mentioned, there are some downsides and risks associated with outsourcing which may place the projects and programmes at a disadvantage.
Within the outsourcing process, all or part of the executive management of the outsourced activities is entrusted to outsourcers. In other words, executive or managerial power and control of managers over the implementation of projects or programmes are reduced. Moreover, some organisational information may be shared with outsourcers through the outsourcing process. So, the risk of disclosure of commercially sensitive business information associated with outsourcing is always considerable.
Responsibilities arising from the delivery of a project or programme can’t be transferred through outsourcing. The consequences of outsourcers’ failures to implement outsourced works properly, on time, safely and in compliance with the regulations concerned, can significantly affect projects and programmes. Project and programme managers, and stakeholders in charge will ultimately remain responsible for the outsourcers’ performances, and the resulting impacts on their projects and programmes. In addition, misestimating the costs associated with outsourcing can lead to cost surprises and, in severe cases, to a budget deficit when the project expenditures exceed the budget planned for the projects and programmes.
The following measures can mitigate the impacts and probability of outsourcing risks and issues:
- Allocating competent outsourcers by selecting them through efficient prequalification procedures.
- Drawing up robust contracts that consider the above concerns.
- Implementing proper non-disclosure agreements and data protection policies.
- Obtaining financial guarantees like performance bank guarantees, surety bonds and indemnity insurance policies.
- Proper implementation of health, safety and environmental regulations.
- Accurate cost estimations and effective budget management and control.
- Employing an outsourcing relationship management system.
Outsourcing and subcontracting
Despite many commonalities, outsourcing and subcontracting are fundamentally two different methods; outsourcing is for doing tasks that can be done by and within an organisation, while subcontracting is for tasks that cannot be performed by the organisation in-house.
I believe this distinction is unreasonable and inaccurate, particularly in the current complex and competitive business environment. For instance, in infrastructure projects, particularly in large-scale ones, main contractors often dedicate or subcontract all or a significant part of the executive works like engineering, construction/installation, QA/QC, pre-commissioning and commissioning, to qualified subcontractors. Of course, main contractors can perform these works in-house at will/ if deemed necessary or appropriate by allocating resources, machinery and man power needed. Project and programme managers mainly employ outsourcing based on their strategies, organisation types and business models.
Moreover, there is no material difference between outsourcing and subcontracting. Subcontracting is the term used when part or all of the works of the project undertaken by a main contractor (under a contract) is outsourced. An example of subcontracting and outsourcing is assigning a soil operating company (subcontractor) to prepare a soil trench for laying an underground pipe as part of a water supply project undertaken by the main contractor.
It’s important that risks associated with outsourcing are properly managed. Selecting and appointing competent outsourcers through efficient pre-qualification practices and obtaining reliable advance payment and performance guarantees or insurance policies are effective measures in mitigating the probability and impact of the said risk. What’s more, is that outsourcing and subcontracting are basically the same, and the benefit and risks in outsourcing can extend to subcontracting.
Despite its critical role in projects and programmes, outsourcing hasn’t been adequately addressed. Therefore, it’s recommended that more attention be paid to outsourcing, particularly concerning outsourcers’ and subcontractors’ qualifications, competency assessments, selection and management. In addition, more studies should be conducted on outsourcing, to further explore and analyse its benefits and associated risks in the realm of project and programme management.