Minimizing Risks of Outsourcing Failure

As the challenge on CFOs and other business leaders to do more with less continue to increase, we have witnessed an increase in the number of outsourcing arrangements across all industries.

Most organizations, led by their CFOs have outsourced selected projects, functions and delegated the day-to-day management of these activities to third-party organizations.

Many at times, the reasons for outsourcing include but are not limited to – outsource to achieve significant cost savings, focus management on core activities, improve quality, achieve higher activity levels, improve customer service(s) and improve financial control.

Whether CFOs and their organizations achieve these intended outcomes is a debate for another day as some research findings have proved otherwise.

When outsourcing certain business activities, it is imperative that CFOs do not succumb to “herd mentality”. Just because everyone is doing something doesn’t necessarily mean you have to follow suit.

When the decision has been made to outsource, it is critical for CFOs and the other business leaders to thoroughly understand the risks inherent therein and devise intelligent means of managing and monitoring these.

Unfortunately, outsourcing risk is poorly managed in a considerable number of outsourcing arrangements.

What business leaders need to be clearly understand is that, if improperly managed, outsourcing risk can be fatal to their organizations.

Simply outsourcing a selected part of your business does not mean all your problems are over. You can never outsource responsibility, nor can you outsource reputation risk.

By handing over critical parts of your organization to a third party and delegating their day-to-day management to a third-party organization, you are to a certain degree, losing degree of control over operations and quality.

However, you still maintain ultimate responsibility of the partnership performance and results. It is therefore important to remember that when something goes wrong, your customers, employees, vendors and other key stakeholders will come knocking at your door for answers.

They do not care much who the outsourcing company is.

Thus, having an effective enterprise risk management (ERM) framework can help CFOs monitor and manage a wide array of risks in outsourcing arrangements.

Lack of preparation and improper decision making are what causes a large percentage of outsourcing arrangements to fail. CFOs and business leaders need to know and understand the critical units that are absolutely essential to the functionality of the core business processes.

In other words, the decision to outsource should be made on good business grounds, looking at the overall value outsourcing can bring, and not solely on grounds of cutting costs or improving ROI.

Having clearly defined goals and objectives from the outset is key to identifying risks to the project and minimizing failure. If clear objectives are not defined, it makes it difficult to assess all the risks with potential of derailing the outsourcing arrangement.

What CFOs need to understand is that outsourcing risks go beyond the planning stage. They are found at each stage of the outsourcing arrangement.

Once the agreement has been entered into, risks will continue to creep in along the way.

How are you going to respond if service delivery fails to meet your expectations, confidentiality and security are breached, there are management changes at the outsourcing company, the contract is too rigid to accommodate change or the outsourcing company goes out of business?

These are some of the risks CFOs must keep an eye on and ensure there are adequate plans and controls in place to monitor and manage these.

As mentioned earlier on that poor planning and decision making are what causes a large number of outsourcing arrangements to fail, selecting the wrong partner is one of the worst risks.

Selecting the provider to deal with should not be based on whoever provides the cheapest deal but also on other factors such as capability and competence, supplier pricing transparency, data and information security, third-party dependency risk, compatibility with your organization’s culture and vision and the supplier’s governance structure and internal management practices.

By having various perspectives of the supplier CFOs will be able to manage the process effectively.

Another area of risk concern lies within the SLA, the contract which governs the buyer-supplier relationship. Although SLAs are partly standard for any type of outsourced arrangement, they must be properly designed to your specific business.

Bad SLAs can hide unacceptable problems in the business and this has a high potential of backfiring in the long run. Thus, when negotiating the SLA, it is critical to take a risk-based view of the contract development.

In addition to containing details of what needs to be done, division of responsibilities, activities that will impact the arrangement and critical deadlines that must be met, performance review process, reporting of performance, issue escalation process, confidentiality expectations, change control protocols and the exit strategy, the SLA should also act as a fundamental risk control.

Risk profiles should be developed for each outsourced function, service or activity to allow for appropriate oversight. These risk profiles must be aligned to the desired process outcomes and the risk metrics developed accordingly so that they can be monitored logically.

Designing risk profiles helps CFOs and other business leaders evaluate the performance of the outsourcing partner and determine whether the desired outcomes are being achieved or not.

The risks metrics designed to monitor the arrangement should tie into the SLAs that have been established for the service provider. Furthermore, they must be properly focused and the means of producing and reporting them must be real time and near time.

Lack of appropriate outcome-focused metrics and the right measurement criteria is a key failure point in outsourcing arrangements. The problem with many arrangements is that too often unrealistic expectations are placed on the provider by the client.

CFOs and their executive management team should be reasonable and realistic and try to ensure there are no surprises. Good communication ensures that management’s expectations are managed and also acts as a prudent risk control mechanism.

The exit strategy must be laid bare from the outset. Although there are various reasons why the contract should come to an end, failure by the provider to deliver on expectations or poor quality are some of the reasons. When negotiating SLAs, CFOs must think about their exit strategy.

There should be clarity about the circumstances under which the agreement may be terminated, how the service or function can be brought back in-house or passed on to a third-party, who owns what assets and when compensation is due.

Failure to do so can result in the organization becoming dependent on the provider or losing its negotiating power making it difficult to transition elsewhere.

It is important for CFOs to understand that an outsourcing arrangement is a partnership that must be nurtured and managed effectively on a collaboration basis to achieve the desired outcomes.

Getting it right from the start is key to minimizing failure and maximizing performance.

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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

  • Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
    • Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
  • When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
    • Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
  • The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
    • Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
  • It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
  • Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
    • Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
  • Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
    • Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
  • Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
    • Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

  • It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
  • Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
  • Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
  • Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
  • Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
  • New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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Preparing for Geopolitical Shocks

Geopolitical instability has steadily increased over the past years, and uncertainty in the global economy is at an all-time high. Thanks to globalization and advances in technologies, we now live and work in a tightly interconnected world, one in which the boundaries that previously separated domestic from global issues have disappeared.

Threats are no longer confined to traditional political borders, social structures, and geographic boundaries. Geopolitical shifts have dramatically altered the global economic landscape and brought politics and business together.

The rise of China as an economic and politically influential power has threatened the dominance of the United States as the world’s largest economy. Although the opening of China and a market of 1.4 billion people have benefited both countries, it has also intensified competition and sparked U.S. economic and technological espionage accusations against China, leading to strained relations between the two giants.

U.S. companies operating from China have felt the impact of this tense relationship. The opposite is true for Chinese companies in the U.S.

Across Europe, national populism is on the rise and now a serious force. In 2016, the United Kingdom shocked the world when it voted to leave the European Union, generating reverberating effects across markets.

Banks and financial services companies that once benefited from the EU passporting system have had their cross-border banking and investment services to customers and counterparties in the many EU Member States impacted, causing them to reimagine their value proposition models.

The recent invasion of Ukraine by Russia is another example of a geopolitical event that has had devastating effects on human livelihood and businesses. Although the conflict between the two countries has risen over the years, I think it’s fair to say that few political analysts, governments, and businesses predicted a war to happen.

The war has created a humanitarian crisis, rattled global commodity and energy markets, caused prices to soar, and forced many international companies to temporarily suspend their Russian activities or completely cut ties with the country.

Global supply chains which are already fragile and sensitive due to the COVID-19 pandemic are now facing new challenges in the aftermath of the Russia-Ukraine crisis. Multilateral economic sanctions have been imposed on Russia. A state of affairs that was unthinkable months ago and is now threatening to derail the nascent global economic recovery from the COVID-19 pandemic.

Given the global domino effect of geopolitical events and the shrinking of the distance between markets and politics, the need to better understand and more effectively mitigate geopolitical risk has become more urgent. The business impacts, whether direct or indirect, vary by company type and industry sector.

Your company may not be able to prevent wars between nations, but you can anticipate and better prepare for geopolitical shocks:

  • Integrate strategy, risk, and performance decision-making. Consideration of risks to business success is an important part of the strategy selection and execution process, not an afterthought.
  • Develop a better understanding of geopolitical trends and how they are changing. For example, what are the megatrends in business, politics, and technology that are making geopolitical risks more diverse, prevalent, and consequential?
  • Assess the links between these geopolitical events and business performance. What are the events that matter most to your business? For example, how might current global political trends pose physical, business, and reputational risks to your parent organization?
  • Anticipate how these trends are likely to play out in the short, medium, and long terms, and develop mitigation strategies for each geopolitical scenario. Proactively anticipate and plan for radically different worlds, instead of reacting to problems as they arise
  • Review your mitigation strategies as the world changes. Are they effective enough in case of a major shock?
  • Develop capabilities for continuous learning to anticipate, address, and recover from geopolitical crises.

What do you think?

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