On the Risks of Outsourcing

A recent piece from CIO.com discussed the possible lessons learned from outsourcing deals gone bad, citing cases involving the governments of Texas, Virginia and Indiana. Rather than attributing these issues to a unique relationship between BPOs and public entities, they argue that the increased exposure and disclosure inherent to government functions are shedding light on the types of disputes that go unreported in the case of private businesses:

Such public disputes could be seen as signs that the public sector and private outsourcing simply don't mix. After all, the mega-deals signed by Texas and Virginia in 2006 were hailed as a bellwether for future public outsourcing growth.

But, industry watchers say, these tussles between outsourcers and their state customers are less an indicator that public sector outsourcing is doomed to fail than they are a peek at the current state of IT services.

"The rate of issues in public sector deals is no different than the rate of issues in private sector deals," says Robert M. Finkel, head of the U.S. technology, communications, and outsourcing practice for law firm Milbank, Tweed, Hadley & McCloy, who has worked on outsourcing deals for AT&T, Tyco (TYC), and Unilever. "When deals do go sideways in the private sector, you never hear about them. In the public sector, everyone's dirty laundry is out there for everyone else to see."

Unlike corporate IT contracts, with their attendant non-disclosure agreements and confidentiality clauses, state outsourcing customers are required by law to air their grievances. As a result, these troubled or failed state IT services deals offer a rare glimpse at what really happens when an outsourcing relationship goes south and suggest some lessons for all IT services providers and their customers.

When I read about problems associated with outsourcing, problems that can lead to the firing of highly accomplished people and multimillion- (or even billion-) dollar lawsuits, it makes me think of the incredible leap of faith a business is taking when it hands the keys to its most critical departments to an outside firm. Your customers may be speaking to far-away operators willing to work for a fraction of the wage, but those customers will view those operators as the face of your business. Distant specialists may be willing to carry the burden of processing your payables and receivables, but will they also carry the liability when the IRS, SEC or other governmental auditors come around?

These are serious matters that require diligent considerations, as unwise decisions in this area could impede or even imperil long-term operations. Is it wise to relinquish direct operational control and visibility in exchange for disavowing cumbersome, labor-intensive processes? For most businesses or business functions, one could argue that the ideal solution--the missing link, if you will--is some type of application--a tool--that would allow the business to realize gains in efficiency and effectiveness without exporting control to an independent party.

President Harry Truman famously said, "The buck stops here," though this concept could apply to any company's executive board. If work is being done in your name, the results will reflect upon your reputation, both legally and amongst your client base.

This should leave you asking the same question the Who once asked: "Can you see the real me?" Can your customers see the real you? Can you?