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Eight Biggest Areas of Risk for Buyers of Outsourcing Services

New delivery models, new pricing models, service providers’ new marketing strategies, moving up the value chain to intellectual arbitrage, new technologies, real-time customer interaction, globalization, and new standards and regulations – these factors set the stage for risks for buyers of outsourcing services in the next two to five years. (Read Forces of Change Shaping Outsourcing Solutions and Upcoming Changes Point to Need for Buyers to Alter Their Way of Thinking for more information on these factors driving change.)

Outsourcing Center interviewed leading service providers about the risks they predict buyers will encounter from these developments. Their list of risks and advice for risk mitigation is a wealth of insights for buyers already in an outsourcing relationship as well as those considering future outsourcing initiatives.

Risk #1 – Service provider lock-in

“The risk of lock-in – being bound to one provider’s specialized products or services because the cost of change is too high – is a very real threat. This is especially important when it comes to data portability and long-term data preservation. It should be separable from any given software application or service. This will become particularly significant in a cloud-computing environment where the IT service provider stores a company’s data at a remote location. Other risks of lock-in include being weighed down by legacy systems and outdated applications that constrain the buyer from adapting to current business demands, as well as a rigid cost structure.” (Russ Daniels, Chief Technology Officer, HP Enterprise Services)

“Getting locked in with a service provider that is limited by geographic boundaries or that has limited capacity to invest or provide scalability would create business risk for large enterprises. Lock-in with a provider that is unable to comply with evolving regulations or one that lacks a demonstrated ability to work through disaster scenarios also puts the buyer at risk.” (Abid Ali Neemuchwala, Global Head, TCS BPO Services)

Risk #2 – Multisourcing

“Using multiple providers is perhaps a good buying decision but not always a good business decision. Each provider demands time and attention. In addition, this results in many small outsourcing relationships that are very narrow in scope and often represent transactional functions rather than higher-value processes that could be outsourced to create far more value and impact enterprise-wide.” (Robert Pryor, Executive Vice President of Sales, Business Development and Marketing, Genpact)

“A multisourcing approach opens the market to many smaller providers that previously lacked the capacity to compete and deliver on megadeals. However, many of these new entrants don’t understand the complexities and intricacies involved in satisfying enterprise requirements, which could lead to service disruptions and other continuity issues.” (Russ Daniels, Chief Technology Officer, HP Enterprise Services)

“The risk in taking the best-in-class route and selecting multiple providers is that some providers would end up with an incomplete view of and alignment to the buyer’s strategic objectives.” (Abid Ali Neemuchwala, Global Head, TCS BPO Services)

“While a multi-provider approach can potentially lower costs, it adds significant complexity in compatibility of technologies and handling of many contracts (which would be shorter term and renewed more often).” (Charlie Bess, HP Fellow, HP Enterprise Services)

Risk #3 – Building the business case

“Building a proper business case is a buyer’s most important step to capture the value it wants to drive and the scope and cost of the services. A half-baked business case will lead to value erosion and post-purchases price adjustments, which will then lead to dissatisfaction.” (Rajan Kohli, CMO, Wipro Technologies)

“A lot of challenging deals have resulted from a business case with an extreme emphasis on cost. The focus should be on evaluating how cost of services impacts quality, value, relationship viability, scalability, sustainability of business value, and innovation – not just how it impacts the bottom line. In the current business environment, it is imperative that buyers make sourcing decisions based on a solid business case that includes increasing agility over the long term.” (Deepak Patel,CEO, Aditya Birla Minacs)

Risk #4 – Underestimating the complexity of managing a “hybrid” environment

“Managing a “hybrid” IT environment (which includes a mixture of in-house, shared, outsourced, and cloud services) demands new models for service level agreements, end-to-end operational accountability, service management, enterprise architecture, and IT portfolio management. Buyers will have to establish a new IT governance structure and develop a multi-year transformation road map.” (James Miller, HP Fellow, HP Enterprise Services)

Risk #5 – Disruptive technologies

“The proliferation and enhanced capability of mobile devices will present security, asset management, application, and end-user support challenges. Buyers must address these challenges in their IT outsourcing decisions.” (Kevin Schatzle, President, Allied Digital Services)

“Disruptive technologies such as cloud and mobility offer opportunities for business model transformation. Buyers will have to choose providers they trust to be independent in their advice and work with them to achieve the objectives they set. Since these technologies carry an element of risk, buyers will prefer a model that enables business outcome.” (Rajan Kohli, CMO, Wipro Technologies)

“Security considerations are crucial in considering cloud-delivered solutions. Buyers need to ensure their providers follow the ITIL process and approach all outsourcing business with an eye towards security. In addition, buyers should keep in mind over the next few years that service providers can easily provision cloud-based delivery of services in a pilot as a proof of concept.” (Kevin Schatzle, President, Allied Digital Services) (Also see Assessing the Coming Impact of Cloud Computing on Outsourced Solutions.)

Risk #6 – Governance mistakes

“Change management is a crucial element of outsourcing relationship governance. The key issue to tackle in change management is to set detailed guidelines on when a change has a financial impact on the deal, allowing the provider to charge additional fees or the customer to pay fewer fees. Failing to have effective change management methods often leads to protracted discussions (and most likely differences of opinion) as to whether any given change impacts the financials. These discussions will delay or possibly inhibit an implementation.” (Rajan Kohli, CMO, Wipro Technologies)

“The biggest mistake buyers currently make – and will continue to make – in their outsourcing arrangements is not prioritizing or investing in a formalized, end-to-end governance model and maintaining senior leadership involvement. Lack of investment in their own resources to partner with a provider is the number-one reason outsourcing relationships fail. Buyer investment from senior leadership and setting the tone for the organization to drive full partnership through governance drives consistent communication and a ‘one-team’ mentality.” (Gene Byrne, General Manager, F&A and SCM, North America, IBM)

Risk #7 – Service provider selection

“In reality, business changes so quickly these days that few organizations can accurately predict the full scope of their needs. Instead of selecting a partner that appears to have what the buyer needs today, a buyer should select a partner to match the flexibility it will need. Also important to the decision is cultural fit and relationship management. These capabilities will allow the outsourcing partnership to evolve and shift to meet the ever-changing needs of the buyer’s business.” (Angela Hills, Executive Vice President, Pinstripe)

“Enterprise buyers are increasingly looking for expert partners to add value to their overall business process and operations. Companies need to ensure that their service providers bring value to the table not only with their deep process, domain, and technology expertise but also with a ‘partnership’-based approach.” (Deepak Patel, CEO, Aditya Birla Minacs)

“Buyers should ensure that their service provider partners are able to view their processes on a truly end-to-end basis, at a granular level, including any portion of these that the buyer retains. This integrated approach is critical to truly understanding the client’s business and being able to effectively collaborate with them to optimize and commit to their business outcomes. An end-to-end approach not only accelerates transformation and provides transparency, but ensures seamless operation with few surprises. The provider also should be able to demonstrate functionality in support of the full F&A footprint to drive consistent, repeatable, scalable business outcomes.” (Don Schulman, General Manager, Global F&A and SCM, IBM)

“Exercising greater due diligence in selecting service providers is especially important when identifying appropriate candidates for early adoption of ‘as-a-service’ delivery. Decision-makers should focus on service portfolio management as the key capability to assure long-term success and should not hesitate to insist on pilots and proofs of concept.” (Russ Daniels, Chief Technology Officer, HP Enterprise Services)

“Some buyers rush into an outsourcing contract without carefully evaluating the provider’s culture and comparing it with their own. If the cultural mismatch is too strong, it will lead to miscommunication and misalignment of objectives.” (Abid Ali Neemuchwala, Global Head, TCS BPO Services)

“Buyers that outsource to IT service providers that primarily offer reduced labor costs will make a big mistake. They should look for providers that employ the latest technology for more efficient and pervasive management of the applications and infrastructure as well as reduced labor costs.” (Kevin Schatzle, President, Allied Digital Services)

“It is a mistake for buyers to be too narrow in their views about what functions and processes they could outsource. They need to base the decision on how to create significant competitive advantages in terms of cost, quality, productivity and impact on the overall business.” (Robert Pryor, Executive Vice President of Sales, Business Development and Marketing, Genpact)

Risk #8 – Future orientation

“IT organizations need to shift their perspective. They need to start outsourcing and supporting their suite of applications as assets that enable them to meet their business objectives – not just expense items with costs that need to be cut or as someone else’s problem now that it is outsourced. Companies must re-value IT as an investment, not an expense. In addition, if they undertake an initiative that is not ‘integrate-able’ and is limited to the resources they have available today, it will limit their flexibility in the future. If an organization undertakes an initiative that is very fixed in structure and unable to change to meet the business needs of the future, it needs to closely scrutinize the return on investment.” (Charlie Bess, HP Fellow, HP Enterprise Services)

“Companies in existing outsourcing relationships today are at risk if they do not ensure that their current provider has a road map to migrate their outsourcing model from labor arbitrage to tools and services delivered from the cloud. Buyers need to hold their current providers accountable that they are re-tooling their offerings to recent advances in cloud-based software and services. Buyers should have a clear five-year road map to leverage the changing IT landscape.” (Kevin Schatzle, President, Allied Digital Services)

“Outsourcing buyers will increasingly need to address their ongoing leadership pipeline. In two generations, where will their leadership come from? Some of the most consistently outsourced roles today are those in transactional processing – the same roles that historically served as foundational positions for growth within many large organizations. Will talent in 15 years come through the outsourcing service providers? There’s an interesting conversation, particularly as outsourcing providers continue to invest heavily in ensuring their delivery teams are integrated into the businesses of the clients they serve, potentially setting the stage for a reverse transition of roles in the future.” (Gene Byrne, General Manager, F&A and SCM, North America, IBM)


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