How to succeed on it outsourcing projects through contract risk management

HOW TO SUCCEED ON IT OUTSOURCING PROJECTS

THROUGH CONTRACT RISK MANAGEMENT

Alfredo Saad

IT Outsourcing Consultant

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alfredo.saad@terra.com.br

AGENDA

A Brief History of Risk

Risk: Definitions

Risk Management in IT Outsourcing Contracts

Stages of an IT Outsourcing Project

Where do the risks come from ?

Typical risks on each stage

The bad news ...

... and a strong recommendation

Success x Failure on IT outsourcing projects

Conclusion

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A BRIEF HISTORY OF RISK

How did risk concept evolved through

history? How risks were seen on Ancient

Age and Middle Age? Which facts

stimulated the progress of the risk

management science ?

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A BRIEF HISTORY OF RISK

Risk Concepts during Ancient and Middle Ages

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Neither Greeks, who created Geometry, Nor Arabs, who created Algebra, made any significant progress on the risk area

A BRIEF HISTORY OF RISK

Risk Concepts during Ancient and Middle Ages

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Neither Greeks, who created Geometry, Nor Arabs, who created Algebra, made any significant progress on the risk area

A BRIEF HISTORY OF RISK

Risk Concepts during Ancient and Middle Ages

Why ?

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- Passiveness in front of God(s)’ decision - Risk = good or bad fortune - Oracles = monopolize the anticipation of future events - Fatalism = future predetermined by fate and therefore unalterable - This cultural and religious vision explains why:

Neither Greeks, who created Geometry, Nor Arabs, who created Algebra, made any significant progress on the risk area

A BRIEF HISTORY OF RISK

Risk Concepts during Ancient and Middle Ages

Why ?

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- Philosophers challenge fear about the future - Mathematicians create risk analysis quantitative methods - Reaction to Risk: an option, not a fate imposition - Capacity to anticipate different future scenarios - Application areas during 17th and 18th centuries

- Maritime insurance - Life expectancy - Gambling

A BRIEF HISTORY OF RISK

Risk Concepts during Early Modern Age (Renaissance)

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- Quantitative techniques increasingly sophisticated - The science of alternative selection appears - Decision making: influence over the future - Application areas on 19th and 20th centuries ... and today

- Financial investments - Corporate finance - Mergers / acquisitions Source: Bernstein, Peter L. – Against the Gods: The Remarkable Story of Risk, John Wiley & Sons Inc, 1996

A BRIEF HISTORY OF RISK

Risk Concepts during Contemporary Age

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The Royal Swedish Academy of Sciences has decided to award the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, 1997, to Professor Robert C. Merton, Harvard University, Cambridge, USA and Professor Myron S. Scholes, Stanford University, Stanford, USA for a new method to determine the value of derivatives. Robert C. Merton and Myron S. Scholes have, in collaboration with the late Fischer Black, developed a pioneering formula for the valuation of stock options. Their methodology has paved the way for economic valuations in many areas. It has also generated new types of financial instruments and facilitated more efficient risk management in society. Source: http://nobelprize.org/nobel_prizes/economics/laureates/1997/press.html

Press Release - 14 October 1997

A BRIEF HISTORY OF RISK

Risk Concepts during Contemporary Age

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RISK: DEFINITIONS

Why definitions of risk are normally associated

only to the chance of loss, vulnerabilities

and exposure to bad results? Could risks

also be associated to opportunities?

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RISK: DEFINITIONS

Statistics Probability of an undesirable outcome

Banking Uncertainty that an asset will earn an expected rate of return, or that a loss may occur

Law Potential danger that threatens to harm or destroy an object, event, or person

Military Probability and severity of loss linked to hazards

Finance Allowance for the hazard in an investment or loan

Insurance Danger or probability of loss to an insurer ; amount that an insurance company stands to lose.

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RISK : DEFINITIONS

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Risk =

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Danger

RISK : DEFINITIONS

Risk =

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Danger

Opportunity

+ Risk =

RISK : DEFINITIONS

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In a crisis, be aware of the danger - but recognize the opportunity (John Kennedy )

An uncertain event or condition that, if it occurs, has a positive or negative effect on a project's objectives (PMI – Project Management Institute)

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Danger

Opportunity

+ Risk =

RISK : DEFINITIONS

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RISK MANAGEMENT IN

IT OUTSOURCING CONTRACTS

What are its objectives ? What are its

anticipated benefits ? What are the

consequences if not implemented ?

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RISK MANAGEMENT IN IT OUTSOURCING CONTRACTS

Which risks must be monitored and treated ?

Any event that, if it happens, will bring a relevant impact over relevant aspects

of the project:

Services Quality

Customer Satisfaction

Schedule

Costs

When it occurs, its effect will result in a change in the anticipated or planned

project behavior, frustrating the expectations of both the buyer and the

provider organizations

And what are the possible ways to react to an identified risk ?

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2 Avoid

Remove the

possibility of

the risk

occurring

1 Accept Transfer

Transfer the risk

to another party 3

4 Mitigate

Reduce the

probability

and/or impact

RISK MANAGEMENT IN IT OUTSOURCING CONTRACTS

Accept the risk and

take no further

action or include

contingency.

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2 Avoid

Remove the

possibility of

the risk

occurring

1 Accept Transfer

Transfer the risk

to another party 3

4 Mitigate

Reduce the

probability

and/or impact

RISK MANAGEMENT IN IT OUTSOURCING CONTRACTS

Accept the risk and

take no further

action or include

contingency. Transform

Transform risk

into a deal

opportunity 5

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ENGAGEMENT SOLUTION DELIVERY

<= 1 year <= 10 years

IT OUTSOURCING CONTRACT: STAGES

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ENGAGEMENT SOLUTION DELIVERY

<= 1 year <= 10 years

IT OUTSOURCING CONTRACT: STAGES

Which risks may arise during each stage ?

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WHERE DO THE RISKS COME FROM ?

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ENGAGEMENT

WHERE DO THE RISKS COME FROM ?

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ENGAGEMENT

WHERE DO THE RISKS COME FROM ?

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SOLUTION

WHERE DO THE RISKS COME FROM ?

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Cross-Brand

Competitors

Transition

SOW

SOLUTION

WHERE DO THE RISKS COME FROM ?

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DELIVERY

WHERE DO THE RISKS COME FROM ?

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Timing

Training

Team Motivation

DELIVERY

WHERE DO THE RISKS COME FROM ?

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Cross-Brand

Competitors

Transition

SOW

Schedule

Training

Team Motivation

WHERE DO THE RISKS COME FROM ?

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Cross-Brand

Competitors

Transition

SOW

Schedule

Training

Team Motivation

WHERE DO THE RISKS COME FROM ?

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Not manage adequately will result in:

Payment of contract penalties

Unmanageable delivery crises

Deeply unsatisfied customer

Costs out-of-control

Growing probability of contract erosion

SUCCESS X FAILURE IN IT OUTSOURCING CONTRACTS

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Not manage adequately will result in:

Payment of contract penalties

Unmanageable delivery crises

Deeply unsatisfied customer

Costs out-of-control

Growing probability of contract erosion

SUCCESS X FAILURE IN IT OUTSOURCING CONTRACTS

alfredo.saad@terra.com.br

Manage adequately will result in:

Better delivery operations stability

Lower costs

Better customer satisfaction

Bigger probability to close new deals

Not manage adequately will result in:

Payment of contract penalties

Unmanageable delivery crises

Deeply unsatisfied customer

Costs out-of-control

Growing probability of contract erosion

SUCCESS X FAILURE IN IT OUTSOURCING CONTRACTS

alfredo.saad@terra.com.br

Manage adequately will result in:

Better delivery operations stability

Lower costs

Better customer satisfaction

Bigger probability to close new deals

Not manage adequately will result in:

Payment of contract penalties

Unmanageable delivery crises

Deeply unsatisfied customer

Costs out-of-control

Growing probability of contract erosion

SUCCESS X FAILURE IN IT OUTSOURCING CONTRACTS

alfredo.saad@terra.com.br

CONCLUSION

Besides being a critical factor to the project success, contract risk management results in a

permanent alignment between the expectations of both buyer and provider organizations

Such alignment enables a growing mutual partnership and trust mindset which creates

justifiedly a customer’s perception that the provider acts proactively on the identification and

treatment of the vulnerabilities which may impact his business scenario.

This perception brings the feeling that the contract operation add a strategic value to the

customer’s business, increasing the propensity for the implementation of new projects which

will expand the scope and/or the contractual term initially agreed

This attitude will enable, on the provider side, a better support to both the dynamic requisites

imposed by the business activities of the customer and by the continuously changing scenario

of the IT market. And, on the customer side, the possibility of extracting the best possible

benefits from the IT outsourcing project.

Reference

Saad, A. – Transforming Risks Into Deal Opportunities– IBM Brazil Technology Leadership Council

Mini-Paper Series Year 8 – # 195 – October 2013