How to succeed on it outsourcing projects through contract risk management

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The implementation of a risk management process in an IT outsourcing contract may assure the achievement of the benefits intended both by the buyer and the provider of the services.

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How to succeed on it outsourcing projects through contract risk management

  1. 1. HOW TO SUCCEED ON IT OUTSOURCING PROJECTS THROUGH CONTRACT RISK MANAGEMENT Alfredo Saad IT Outsourcing Consultant alfredo.saad@terra.com.br
  2. 2. 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
  3. 3. alfredo.saad@terra.com.br 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 ?
  4. 4. alfredo.saad@terra.com.br A BRIEF HISTORY OF RISK Risk Concepts during Ancient and Middle Ages
  5. 5. alfredo.saad@terra.com.br 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
  6. 6. alfredo.saad@terra.com.br 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 ?
  7. 7. alfredo.saad@terra.com.br - 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 ?
  8. 8. alfredo.saad@terra.com.br - 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)
  9. 9. alfredo.saad@terra.com.br - 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
  10. 10. alfredo.saad@terra.com.br 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
  11. 11. alfredo.saad@terra.com.br 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?
  12. 12. alfredo.saad@terra.com.br 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.
  13. 13. alfredo.saad@terra.com.br RISK : DEFINITIONS alfredo.saad@terra.com.br Risk =
  14. 14. alfredo.saad@terra.com.bralfredo.saad@terra.com.br Danger RISK : DEFINITIONS Risk =
  15. 15. alfredo.saad@terra.com.bralfredo.saad@terra.com.br Danger Opportunity +Risk = RISK : DEFINITIONS
  16. 16. alfredo.saad@terra.com.br 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) alfredo.saad@terra.com.br Danger Opportunity +Risk = RISK : DEFINITIONS
  17. 17. alfredo.saad@terra.com.br RISK MANAGEMENT IN IT OUTSOURCING CONTRACTS What are its objectives ? What are its anticipated benefits ? What are the consequences if not implemented ?
  18. 18. alfredo.saad@terra.com.br 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 ?
  19. 19. alfredo.saad@terra.com.br 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.
  20. 20. alfredo.saad@terra.com.br 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
  21. 21. alfredo.saad@terra.com.bralfredo.saad@terra.com.br ENGAGEMENT SOLUTION DELIVERY <= 1 year <= 10 years IT OUTSOURCING CONTRACT: STAGES
  22. 22. alfredo.saad@terra.com.bralfredo.saad@terra.com.br ENGAGEMENT SOLUTION DELIVERY <= 1 year <= 10 years IT OUTSOURCING CONTRACT: STAGES Which risks may arise during each stage ?
  23. 23. alfredo.saad@terra.com.bralfredo.saad@terra.com.br WHERE DO THE RISKS COME FROM ?
  24. 24. alfredo.saad@terra.com.bralfredo.saad@terra.com.br ENGAGEMENT WHERE DO THE RISKS COME FROM ?
  25. 25. alfredo.saad@terra.com.bralfredo.saad@terra.com.br ENGAGEMENT WHERE DO THE RISKS COME FROM ?
  26. 26. alfredo.saad@terra.com.bralfredo.saad@terra.com.br SOLUTION WHERE DO THE RISKS COME FROM ?
  27. 27. alfredo.saad@terra.com.bralfredo.saad@terra.com.br Cross-Brand Competitors Transition SOW SOLUTION WHERE DO THE RISKS COME FROM ?
  28. 28. alfredo.saad@terra.com.bralfredo.saad@terra.com.br DELIVERY WHERE DO THE RISKS COME FROM ?
  29. 29. alfredo.saad@terra.com.bralfredo.saad@terra.com.br Timing Training Team Motivation DELIVERY WHERE DO THE RISKS COME FROM ?
  30. 30. alfredo.saad@terra.com.bralfredo.saad@terra.com.br Cross-Brand Competitors Transition SOW Schedule Training Team Motivation WHERE DO THE RISKS COME FROM ?
  31. 31. alfredo.saad@terra.com.bralfredo.saad@terra.com.br Cross-Brand Competitors Transition SOW Schedule Training Team Motivation WHERE DO THE RISKS COME FROM ?
  32. 32. alfredo.saad@terra.com.br  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
  33. 33. alfredo.saad@terra.com.br  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
  34. 34. 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
  35. 35. 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
  36. 36. 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

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