Chapter Twelve Outsourcing: Managing Interorganizational Relations

Outline of Project Management Topics
- Introduction to Outsourcing
- Project Management Elements and Terms
- Learning Objectives Overview

12-01: Understand the advantages and disadvantages of outsourcing project work.
12-02: Describe the basic elements of a Request for Proposal (RFP).
12-03: Identify best practices for outsourcing project work.
12-04: Practice principled negotiation.
12-05: Describe the met-expectations model of customer satisfaction and its implications for working with customers on projects.

Definition of Outsourcing:
- Traditionally involves transferring business functions or processes (e.g., customer support, IT, accounting) to foreign companies.
- Currently applied to contracting significant portions of project work, enhancing efficiency and expert engagement.
- Examples of Outsourcing:
- Apple and Motorola collaborate with manufacturers in China for smartphone development.
- Toyota and DaimlerChrysler work with suppliers for new automobile platforms.

Advantages:
1. Cost reduction.
2. Faster project completion.
3. Access to high levels of expertise.
4. Increased flexibility.
Disadvantages:
1. Coordination breakdown.
2. Loss of control over project elements.
3. Potential for conflicts.
4. Security risks.
5. Involvement in political/legal issues.

Steps for Developing a Detailed RFP:
1. Summary of needs and request for action.
2. Statement of Work (SOW) detailing scope and major deliverables.
3. Specifications/requirements for deliverables, features, and tasks.
4. Definition of responsibilities for vendor and customer.
5. Project schedule outlining timelines and milestones.
6. Costs and payment schedule.
7. Type of contract proposed.
8. Experience and staffing details.
9. Evaluation criteria for proposals.

Criteria for Evaluation:
- Maximum Weight for each category (Total = 100)
- Contractor qualifications (Weight = 10)
- Technical skills available (Weight = 20)
- Understanding of contract (Weight = 5)
- Financial strength to implement project (Weight = 15)
- Understanding of proposal specifications (Weight = 10)
- Innovativeness and originality of proposal (Weight = 5)
- Reputation for delivering on time and budget (Weight = 15)
- Price (Weight = 20)

Key Best Practices:
- Establish well-defined requirements and procedures.
- Engage in extensive training and team-building activities.
- Implement established conflict management processes.
- Conduct frequent review and status updates.
- Ensure co-location of teams when necessary.
- Offer fair and incentive-laden contracts.
- Build long-term outsourcing relationships.

Partnering Approach Characteristics:
- Builds mutual trust within relationships.
- Establishes shared goals and objectives.
- Forms joint project teams with high interaction levels.
- Encourages open communication.
- Includes long-term commitments for continuous improvement.
- Allows objective critiques and resource access.
- Requires total company involvement from CEO to team members.
Traditional Approach Characteristics:
- Characterized by suspicion and distrust.
- Operates on independent project teams with limited interactions.
- Communicates in a structured, guarded manner.
- Risks are transferred to the other party.

Four Key Strategies:
1. Recognize cultural differences.
2. Use the right wording in communications.
3. Confirm requirements clearly.
4. Define deadlines to promote accountability.

Principled Negotiation:
- Proposed by Fisher and Ury from the Harvard Negotiation Project.
- Focuses on creating win/win solutions while protecting oneself.
- Based on four key points:
1. Separate the people from the problem.
2. Focus on interests rather than positions.
3. Invent options for mutual gain.
4. Apply objective criteria when possible.

Key Points:
- Bad news tends to circulate more rapidly than good news.
- Cultivating positive relationships with clients mitigates reputational damage.
- Customer satisfaction hinges on perceived performance relative to expectations.

Performance vs. Expectations:
- When performance is below expectations (ratio < 1), customer dissatisfaction ensues.
- Performance matching expectations (ratio = 1) yields customer satisfaction.
- Performance exceeding expectations (ratio > 1) results in customer delight.

Best Practices:
- Resist the urge to oversell project benefits to secure approval.
- Set realistic expectations by underplaying aspects of the project.
- Collaborate with clients to establish a clear project scope statement.
- Transparently communicate risks/potential issues affecting project execution.
- Keep clients informed about project status and progress.
- Handle interactions and issues professionally, ensuring coherent communication.

Roles of Project Manager include being an entrepreneur, politician, friend, marketer, and coach.
Challenges faced:
- Navigating diverse organizational cultures.
- Identifying vital relationships outside the team.
- Motivating team members without formal authority.
Strategies employed:
- Persuasive techniques to influence stakeholders.
- Aligning proposals with client strategic objectives.
- Encouraging team development through challenging tasks.

Best Alternative to a Negotiated Agreement (BATNA): The most advantageous alternative course of action a party can take if negotiations fail.
Escalation: A situation where the cost of a project increases beyond initial estimates.
Outsourcing: The practice of contracting out business functions to external providers.
Partnering Charter: A document that formalizes partnerships between parties in a project.
Principled Negotiation: A negotiation strategy that seeks collaborative, mutually beneficial outcomes.
Request for Proposal (RFP): A document soliciting proposals from potential contractors to complete a project.