BMGT485 Exam 2 Review Chapter 12: Outsourcing

Outsourcing

Transferring of business functions or processes to other, often foreign companies

Advantages of Outsourcing

1. Cost Reduction: Overhead costs are lowered

2. Faster Project Completion: Can buy more labor for the same dollar. (3 Indian engineers = 1 American engineer, can get more work done with the same dollar)

3. High level of expertise: Company can focus on its core competencies and don’t need to keep with technologically since it can be outsourced

4. Flexibility

Disadvantages of Outsourcing

1. Coordination of breakdowns: hard to coordinate workers from different organizations and countries

2. Loss of control: Core team depends on other organization that they have no authority over

3. Conflict: Interpersonal conflicts due to differences in values, culture, and priorities

4. Security Issues: Business secrets may be revealed

5. Political hot potato (Cultural, Political perception): Foreign outsourcing is perceived a major cause of underemployment in the US and have pressured companies to keep jobs local

Steps of an Request for Proposal (RFP)

1. Summary of needs and request for action: The background and a simple descrip- tion of the final project deliverable are given first

2. SOW detailing the scope and major deliverables

3. Deliverable specifications/requirements, features, and tasks

4. Responsibilities - vendor and customer

5. Project Schedule

6. Costs and Payment Schedule

7. Type of Contract

8. Experience and Staffing

9. Evaluation Criteria

Types of Contracts

1. Fixed Price: contracts agree on a price or lump sum in advance, and it remains as long as there are no changes to the scope provisions of the agreement. This type is preferred in projects that are well defined with predictable costs and minimal risks.

   • The risk is fixed and the person who owns the risk would be the seller

2. Cost Plus (time and materials): the contractor is reimbursed for all or some of the expenses incurred during performance of the contract. This fee is negotiated in advance and usually involves a percent of total costs. The scope is not well defined and if there is no delivery then you still have to pay. The contract is open ended and the buyer bears the risk

3. Performance contracts/Cost reimbursement: Seller is being paid by their performance, so it incentivizes them to perform well since they bear risk alongside with the buyer

Best Practices in Outsourcing project work (Source selection criteria)

1. Well defined requirements and procedures

2. Extensive training and team building activities

3. Well established conflict management processes in place

4. Frequent review and status updates

5. Co-location when needed

6. Fair and inventive laden contracts

7. Long term outsourcing relationship

Advantages of long term outsourcing

1. Reduced admin cost

2. more efficient utilization of resources

3. improved communication

4. improved innovation

5. improved performance

Principled Negotiation

1. Separate the people from the problem: Avoid personalizing the negotiation and focus on the problem to solve

2. Focus on interests, not positions: Focus on the interests behind your positions and separate these goals from your ego

3. invent options for mutual gain

4. When possible, use objective criteria: Whenever possible, you should insist on using external, objective criteria to settle disagreements

The first part of negotiation deals with reaching an agreement

Second part deals with implementation of that agreement

Met expectations model of customer satisfaction

Perceived Performance / expected performance

Contract Process (From lecture notes)

1. Planning:

   • Buyer (customer/client): Requirements from buyer is money and have to make a make or buy decision

   • Seller (Contractor): Requirement for them is to deliver their promise (planning phase, bid or no bid decision)

2. Solicitation (Request Process)

   • Buyer: Provides SOW and RFP

   • Seller capture Team 4 parts: Technical, delivery, contractual, pricing

3. Source Selection process:

   • Buyer: Reviewing and evaluating proposals

   • Seller: Evaluation

4. Contract Administration

   • Negotiation takes place

   • Buyer: Agree to contract terms and conditions and payment

   • Seller: Delivery and invoicing

5. Close out

   • Notice of completion —>Final payment —> Release of claims

Negotiation strategy standpoint

• Collaborative: Win win situation (mutual gain): Both sides walk away feeling they gained something

• Competitive: Win lose situation, one side ends up losing

  • For PM, collaborative is the best option to go for

What are hidden costs?

Costs that are not upfront that costs the most. EX. would be a printer. The printer is cheap but the ink for it to work is expensive

Ways of contract termination

1. Mutual agreement (most desired)

2. For convenience (things like lease of equipment): Either side can walk awauy from the contract and the contract defines what walking away from the contract means

3. For Cause (most undesired): Seller didn’t delivery properly or defaulted on contract, and is usually settled with lawsuits