Offshore Outsourcing: Risk Factors

Offshore outsourcing is attracting companies all over the world due to its numerous advantages. However, it is a commonplace to overestimate the pros of outsourcing a part of your activities and forget about the fact that there is no activity that does not involve risk. That is why it is important for managers identify these risks, assess them and develop methods for mitigating them.

Basically all risks may be divided into several groups:

• Geopolitical risks
• Project Risks
• Strategic Risks

Geopolitical risks are usually referred to host country. Factors of primary importance here are political stability and legal environment. Most main outsourcing host countries remain politically stable for the last decade, but nevertheless managers should carefully examine latest political trends in a host country before making their decision. That is why legal environment is the factor that comes first in pre-outsourcing analysis. Here the main factors that have to be evaluated are Intellectual Property rights enforcement, labor laws, customs regime, licensing and "business exit" conditions. Level of government regulation is not less actual then all mentioned before. On one hand it may directly affect project output, on the other the vendor shall demonstrate its ability to comply with these regulations. When examining outsourcing geopolitical risks, you may want to analyze the following points:

• What is the level of political stability in the probable host country?
• What is the legal environment (in particular, labor laws, customs regime, licensing and "business entry/exit" conditions)?
• What is the level of government regulation and support? Are there any specific requirements for vendors?
• Are Intellectual Property rights held in respect?
• What is the level of cultural proximity?

Geopolitical risks may be given lower priority, but project risks shall be considered with 200% priority. The success of the whole project depends on how thoroughly the company will examine and address given risks. Managing project risks require hard work and careful approach from both outsourcing company and offshore vendor. This is especially essential if the company has not used offshore outsourcing before. The following issues shall be reviewed:

• What is your experience in outsourcing projects? If this is the first time, are you well prepared for it? Do you need a special offsite/onsite consultant to manage it?
• Has the capabilities of vendor been assessed? What are his inner methodologies and technical skills? Are they sufficient to fulfill the project effectively?
• How easy is communication? Is communication infrastructure stable and secure?
• Are the requirements for project clearly defined and transferred to vendor without distortions?
• How well are the processes and procedures defined? Are the processes of vendor different from yours?
• Is there any project management process? Are right people assigned on both sides to manage it?
• How will the quality be controlled and assessed? Is there a QA division within the vendor responsible for it?
• Is handover process effective?
• What is the way the results are planned to be delivered? What is the acceptance process? Is it effective?

As far as strategic goals are touched upon, managers are concerned with the following issues:

• Is there a danger of transferring too much managerial power to the vendor? Have you considered the possibility to diversify risks by splitting the project between different offshore companies?
• Will you become dependent from offshore provider? How great is the risk in case of failure to deliver result for your company? How is delivery schedule insured, and what legal obligations are envisaged to lower delivery failure consequences?
• How high are protection and security of confidential information levels? What security policies and facilities are used by vendor? Have any information thefts occurred in the past?
• What knowledge transfer to outside parties and vendors' personnel training occurs during our project outsourcing? What confidential information is transferred? Is our NDA secure enough to protect it? How intensive is personnel turnover within the vendor?
• What hidden costs are implied for this project? How can they affect contract price?

Many companies view outsourcing as an attractive way to obtain considerable savings. But regardless of why you outsource, mistakes will happen, and to reduce their impact to the minimum you should carry out a careful examination. If you are not sure whether you will do it in the best possible manner, you may contact us, and our experienced experts will give all assistance you need.

Denis Syropushchinsky is a Marketing Manager in Qulix Systems - Offshore Outsourcing Software Development Company, located in Minsk, Belarus, Eastern Europe. Our client-oriented approach and effective offshore software development services are the things that will help you to achieve your business goals. If you have further questions on offshore outsourcing, please contact us.

Copyright Denis Syropushchinsky, 2005. All rights reserved. This article may be freely reprinted on your websites. We only require that the article and the resource box at the bottom of each article remain unchanged.