This article is a brief introduction on understanding supplier risk for outsourced projects. There are a lot of issues only just touched on here, but we’ll cover risks in more detail in future discussions.
You may have heard of the corruption scandal that has rocked the Indian IT scene over the past few weeks- the near collapse of Satyam (I think they’re negotiating a lifeline at this point). They’re a multi-billion dollar company who provide software and outsource solutions to the worlds biggest companies. You can read about the scandal here. Basically it seems that the founder and managing director fingered the books to the tune of $1.5 billion USD. Now there’s a lot of jobs at risk, some very upset shareholders and clients, and a big bruise on India’s international image. Many commentators have likened it to the Enron scandal that rocked the USA, a shining example of corporate greed and irresponsibility. If you’re not familiar with the Enron collapse you’ll find all you need here.
But what impact does it have for small business outsourcing?
Whilst it is a huge scandal, it is of very little significance if you’re considering outsourcing. If you mention outsourcing overseas to your friends they may now respond with ‘No way man! Didn’t you hear about Satyam?’.
It has again stirred up the perception that overseas companies are somehow worse than the similarly dodgy businesses you can find at home. But those perceptions come and go… 10 years ago it was ‘India is going to steal the world’s IT jobs’ (which obviously didn’t happen :)), now it’s ‘Can we trust them with our customers and our money?’. The same news outlets discussing corruption in foreign businesses this week, were discussing corruption in US financial institutions last week… so it should all be taken with a big grain of salt. Then there’s also the shady practice of ‘Pheonixing’ that is a problem in Australia and the UK (explanation here).
If anything, I’m more concerned about what this whole sad mess says about the accounting firm auditing the Satyam accounts. If you can’t trust the auditors to get it right… who can you trust?
Anyway, getting back to outsourcing..
No safety net means you need to manage risk carefully…
For the purposes of Internet based outsourcing, it is a timely reminder that suppliers of all kinds can do the wrong thing, whether they are across the street or across the globe. Anyone who’s been caught out before… like me… can tell you that having a water tight contract or government regulations on your side doesn’t fix the problem, and doesn’t make spilt milk any less spilt. If you naively believe that these things do offer protection from a supplier failure (like I did), one day you may be unpleasantly surprised. My advice, don’t ever sit on your thumbs thinking that the contract terms will ultimately be your safety net or that government regulations will protect you from a failed supplier.
When you outsource overseas, you will be without even these simple protections… Want to go to Croatia to dispute a $1000 contract? (yeah right) Are you familiar with consumer protection laws in Pakistan? I’m not 
I believe this is a good thing for the small business owner however. The realisation that you are playing without even the illusion of a safety net helps you stay focused on getting an effective outcome, and being careful about how you manage the project risk. One thing I recommend you always do is never, ever, ever, ever, pay in advance!
Good project management is the answer to problem suppliers. It will protect you, by minimising your chance of failure. And one aspect of that is planning what you will do if things do go wrong; so that if your project does go haywire, you can act quickly and decisively.
Always have a Plan B.
In your planning, consider the risk of total failure of the project or outsourcing company. If you’re using an individual, consider the ‘hit by a bus scenario’. What will you do if they stop responding to phone calls or email? What if a dispute arises that is simply not resolvable? You need your Plan B. Consider:
- what is the likely impact on your business/customers?
- what is the likely impact on other projects you may have running?
- who can pick it up and complete it? What needs to happen for that to occur?
- if it’s a work in progress, can you get access to what’s already completed?
- if you can get access to it, is it even useful to you? (it may not be!)
- is partial completion likely to mean total failure? If so, is there any way to structure the project into useful ‘chunks’ so that total failure is less likely or less significant? (more detail on this in future posts)
- can you afford to cut your losses, dump it, and walk away if need be?
Special note for software projects: If you’re paying someone to do a web or software project, insist on access to source code before payment. This means you can have it checked and verified (which is particularly important if you are not a coder monkey yourself!). They will not be happy to do this unless it is planned for and negotiated upfront, but it is the best protection on larger projects.
By taking these things into consideration, you can structure the project to limit your risk. For example, you may insist on daily or bi-weekly status reports. Or, you may decide that you’ll give half the work to company A, and half to Company B. Or you might appoint a manager from a different organisation to independently monitor performance and report to you. And remember, all of these controls are only minor cost increases, labour is quite inexpensive depending on where you are hiring from. But they do need to be considered during the planning.. not on the fly.
If the project is so important that there is no viable ‘plan B’ (it’s a ‘make or break’ piece of work) use project milestones to limit your exposure, and stick to them doggedly. Don’t release payment until your carefully considered milestones are met or exceeded (and independently verified if you can’t do this yourself). At least then you may get out with your shirt if the worst case scenario does occur.
Set a Stop-Loss…
This strategy is a similar concept to using a Stop-Loss when investing. It is the predetermined point in time at which you declare the project failure or are at an increased risk of failure should you no longer contribute money/time. Before the project is underway, you should (unemotionally) determine the success/failure criteria. Usually, you’d do this using project milestones. If the project can’t achieve a milestone within a particular cost/timeframe then the project is cancelled. Limiting your losses.
Doing this while the project is in play is difficult, as you’ll often have a very optimistic freelancer telling everything will be fine“just wait until next week…”. Combine this with the undesirable feeling that you’re going to lose money, and it becomes very easy to let the project run and run. So make these decisions during your planning, and if it eventuates stick to it.
The idea is to save you from your own blind optimism… if things have gone very badly and are getting worse, probability is NOT favoring a turnaround. It is unlikely that tomorrow is the day that everything will ‘come good’; that the quality issues will go away, or that the freelancer will miraculously start following instructions. It is therefore foolish or wasteful to continue burning time and money. If you have planned for this unlikely and unfortunate occurrence, then you’ll have a well considered point at which you will shut the project down. This will save you time and money, and should mean that you should still have the resources to finish it with someone else, scrap it and start again, or move on to something else entirely.
Despite the gloomy discussion, it’s been my experience that most projects work out just fine or are recoverable if you practice good project management. And this blog will give you the tools you need (eventually )
