How to Do Effective Risk Assessment in IT Outsourcing?

Introduction

Companies are progressively using services like IT outsourcing as a part of the general capacity management plan. This has created questions about the risks related to outsourcing and the challenges and benefits it provides.

IT outsourcing often increases the probability of project failure; however, statistics indicate that it is not the case. As per the PMI’s Pulse report, the main reasons for project failure are:

Changes in the organization’s priorities: 41%

Wrong requirements collecting: 39%

Changes in project purposes: 36%

However, certain risks are associated with outsourcing your work to third-party vendors. The key here is to mitigate these with effective risk management.

What Is Risk Management?

If you work on a project at the management level, you’ll understand the concepts of operational risks.

Per the Basel II guidelines, operational risk means losses that might create from suboptimal inner procedures, failures of supporting systems, and the human factor. You need to include external events also (with regulatory risks).

Operational risk management is a constant cyclic procedure that includes risk assessments, risk decision-making, and risk control implementation. In the end, the objectives of all these actions include acceptance, justification, or risk avoidance.

Operational risks take place for many reasons, including internal reasons like lacking stakeholder engagement and external reasons like a vendor’s vulnerable delivery culture.

If you don’t manage well from the beginning, operational risks may result in underperformance, poor engagement, or poor communication.

The Most Common Operational Risks in IT Outsourcing

Operational risks come before any outsourcing project starts and throughout its lifecycle. All these risks could be divided into two kinds:

1. Engagement Risks

Engagement risks are general risks related to third-party partnerships. They include:

• Relational Risks: The probability is there that your vendor would fail to maintain a proper level of engagement, communication, or management with the project.
• Strategic Risks: The risk that the products or services offered by your vendor won’t align with the strategic expectations and requirements as the project progresses.
• Vendor Risks: The risk where a vendor doesn’t work as expected or offers a service that doesn’t comply with the local regulations or laws.

2. Delivery Risks

Delivery risks include the risks in which your vendor might fail to complete their side of the agreement. For instance, by delivering partial work or low-quality services. The stakes could be grouped further as follows:

• Coordination Risks: The risks are essential in managing a complicated system of contracts, processes, relationships, technologies, and people.
• Financial Risks: The probability of a project exceeding the due budget or risks related to inappropriate initial estimates.
• Service Risks: The risks in which a vendor’s products or services will fail to meet contractually outlined expectations and quality standards.

Understanding where the general operational risks might come from is insufficient to lessen them.

Understanding the standard risk management principles is vital to avoid IT outsourcing disasters.

How to Do Outsourcing Risk Management Effectively?

The main objective of risk management is to identify, measure, and monitor the possible risks which may come at various stages of any outsourcing project lifecycle. You can do four crucial activities to ensure a smoother outsourcing engagement.

1. Risk Assessment

All risk types outlined in the last section initiate from either procedure, systems, external events, or people.

Procedures: All the methods related to outsourcing engagement include business procedures, support procedures, administrative procedures, and requirement management procedures.

• Systems: All information, communication, and technology systems including software and hardware.
• External Events: Market or monitoring changes and parallel events that your organization can’t control may affect outsourcing engagement. For project duration, the vendor counts as a possible source of interior (i.e., controllable) risks and not external risks.
• People: All people associated with the engagement lifecycle, like software engineers, product owners, managers, and designers.Address the group of all these risk types in your risk management framework.

How to Choose the Outsourcing Partner Type?

The selection of an outsourcing partner is essential when choosing to outsource. Every partner type will have pros and cons, and you have to make choices as per the service type you want, your budget, and the relationship type you want to get with the outsourcing partner.

The partner types are given below:

If you want an outsourcing partner proficient in only mobile app development ,you may choose a professional mobile app development outsourcing company. Such companies will usually be more minor and deal with many clients simultaneously.

More prominent app development companies provide mobile app development as part of a collection of services. If you want a long-term association, this type will suit you the best.

You may opt for app development freelancers if you have a tight budget, development. Consequently, they might be an individual or a team that provides services according to the project.

2. Outsourcing Willingness Assessment

As quickly mentioned, only some of the possible causes of project failure are because of the vendor. Your business might also need more operational willingness for IT outsourcing.

For example, it may need appropriate procedure capabilities to support the external team. Therefore, evaluating your organization’s willingness to outsource is vital while managing outsourcing risks. For that, you have to:

• Confirm how outsourcing would fit your projects or the company’s overall business strategies.
• Create SMART ideas, and set expectations and goals.
• Fix the areas where you assume outsourcing to provide your company with the maximum value.
• Outline reasons to use outsourcing and ensure they are entirely justified.
• Validate your capacity requirements.

These confirm that your company’s procedures can accommodate the expected outsourcing model.

3. Service Level Agreement Assessment

Your SLA or service level agreement is essential in creating good client-vendor relationships. This agreement defines:

• Actions for not achieving any agreed-on levels of services
• Anticipated service levels from the vendor.
• Applicable metrics for performance measurement.
• The expectations and responsibilities on every side.

Your SLA metrics selection should rely on the possibility of given services. At least they should include service availability, technical quality, and budget estimates. For any business, more accessible metrics are better. Select IT metrics that could be easily collected. Doing that will make reporting and monitoring easier.

The SLA prevents the company and vendor from misunderstanding any deliverables or relationships. The agreement needs to make sure that you both get an equal understanding of project requirements.

Contract terms have a similar role in formalizing obligations and deadlines, indemnification, confidential information handling, liability limits, non-disclosure duration, and end clauses. Both your SLA and contract should be associated with the business objectives of your outsourcing engagement.

4. Strong Monitoring Delivery Practices

Risk management for outsourcing usually concentrates heavily on contract stages and planning. However, proper assessment requires to continue through project lifecycle outsourcing. You can accomplish this by describing relevant KPIs and performance metrics.

There are four main KPI types:

• Basic: Use them as comprehensive resources of risks to evaluate if all service requirements are fulfilled and objectives accomplished.
• Reactive: Provide you the ability to evaluate the effectiveness of business decisions and control whether they enabled the anticipated outcomes.
• Reflective: Utilize them for monitoring higher priority risk, and comprise regular post-performance reporting and monitoring.
• Proactive: They are positioned on higher priority risks and comprise active service quality valuations.

The given factors also add to effective delivery monitoring:

• A robust software development lifecycle is vital to any successful tactical product management.
• Regular and transparent communication between vendor and in-house teams.
• Strong reporting standards, outlined in the contract or scope of work.
• Well-defined change management procedure.

The grouping of all measures can ensure consistent mitigation and management of risks throughout the outsourcing lifecycle.

Conclusion

Risk management in IT outsourcing is a constant process. Therefore, knowing where the risks remain is the key to preventing unwanted outcomes. Support this knowledge with risk mitigation and risk assessments based on collected results. It will assist in making sure the sustainability of the outsourcing project lifecycle.

At GTCSYS, we help all our clients with the right size and optimal service models, depending on their operational maturity, project types, and general tactical vision. Contact GTCSYS to know more about our method to reduce operational risks in IT outsourcing.