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
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

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 ?

Risk Concepts during Ancient and Middle Ages

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

Why ?

- 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:
Why ?

- 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
Risk Concepts during Early Modern Age (Renaissance)

- 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
Risk Concepts during Contemporary Age

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
Risk Concepts during Contemporary Age

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?

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.

RISK : DEFINITIONS
Risk =

alfredo.saad@terra.com.bralfredo.saad@terra.com.br
Danger
RISK : DEFINITIONS
Risk =

Danger
Opportunity
+Risk =
RISK : DEFINITIONS

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)
Danger
Opportunity
+Risk =
RISK : DEFINITIONS

RISK MANAGEMENT IN
IT OUTSOURCING CONTRACTS
What are its objectives ? What are its
anticipated benefits ? What are the
consequences if not implemented ?

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 ?

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
Accept the risk and
take no further
action or include
contingency.

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
Accept the risk and
take no further
action or include
contingency.
Transform
Transform risk
into a deal
opportunity
5

ENGAGEMENT SOLUTION DELIVERY
<= 1 year <= 10 years
IT OUTSOURCING CONTRACT: STAGES

ENGAGEMENT SOLUTION DELIVERY
<= 1 year <= 10 years
IT OUTSOURCING CONTRACT: STAGES
Which risks may arise during each stage ?

WHERE DO THE RISKS COME FROM ?

ENGAGEMENT

SOLUTION

Cross-Brand
Competitors
Transition
SOW
SOLUTION

DELIVERY

Timing
Training
Team Motivation
DELIVERY

Cross-Brand
Competitors
Transition
SOW
Schedule
Training
Team Motivation

 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

 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

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

How to succeed on it outsourcing projects through contract risk management

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