The role of outsourcing in project and programme management: the risks
This blog is the second and final part of a series on outsourcing in project management. The previous one shared the importance of outsourcing, as well as the benefits. This blog explores the risks associated with outsourcing, suggesting that outsourcers' failure is the greatest one. I also put forward some solutions that can help mitigate the probability and impacts of the risks
Despite all the benefits mentioned, there are some downsides and risks associated with outsourcing which may place the projects and programmes at a disadvantage.
Within the outsourcing process, all or part of the executive management of the outsourced activities is entrusted to outsourcers. In other words, executive or managerial power and control of managers over the implementation of projects or programmes are reduced. Moreover, some organisational information may be shared with outsourcers through the outsourcing process. So, the risk of disclosure of commercially sensitive business information associated with outsourcing is always considerable.
Responsibilities arising from the delivery of a project or programme can’t be transferred through outsourcing. The consequences of outsourcers’ failures to implement outsourced works properly, on time, safely and in compliance with the regulations concerned, can significantly affect projects and programmes. Project and programme managers, and stakeholders in charge will ultimately remain responsible for the outsourcers’ performances, and the resulting impacts on their projects and programmes. In addition, misestimating the costs associated with outsourcing can lead to cost surprises and, in severe cases, to a budget deficit when the project expenditures exceed the budget planned for the projects and programmes.
The following measures can mitigate the impacts and probability of outsourcing risks and issues:
- Allocating competent outsourcers by selecting them through efficient prequalification procedures.
- Drawing up robust contracts that consider the above concerns.
- Implementing proper non-disclosure agreements and data protection policies.
- Obtaining financial guarantees like performance bank guarantees, surety bonds and indemnity insurance policies.
- Proper implementation of health, safety and environmental regulations.
- Accurate cost estimations and effective budget management and control.
- Employing an outsourcing relationship management system.
Outsourcing and subcontracting
Despite many commonalities, outsourcing and subcontracting are fundamentally two different methods; outsourcing is for doing tasks that can be done by and within an organisation, while subcontracting is for tasks that cannot be performed by the organisation in-house.
I believe this distinction is unreasonable and inaccurate, particularly in the current complex and competitive business environment. For instance, in infrastructure projects, particularly in large-scale ones, main contractors often dedicate or subcontract all or a significant part of the executive works like engineering, construction/installation, QA/QC, pre-commissioning and commissioning, to qualified subcontractors. Of course, main contractors can perform these works in-house at will/ if deemed necessary or appropriate by allocating resources, machinery and man power needed. Project and programme managers mainly employ outsourcing based on their strategies, organisation types and business models.
Moreover, there is no material difference between outsourcing and subcontracting. Subcontracting is the term used when part or all of the works of the project undertaken by a main contractor (under a contract) is outsourced. An example of subcontracting and outsourcing is assigning a soil operating company (subcontractor) to prepare a soil trench for laying an underground pipe as part of a water supply project undertaken by the main contractor.
Conclusion
It’s important that risks associated with outsourcing are properly managed. Selecting and appointing competent outsourcers through efficient pre-qualification practices and obtaining reliable advance payment and performance guarantees or insurance policies are effective measures in mitigating the probability and impact of the said risk. What’s more, is that outsourcing and subcontracting are basically the same, and the benefit and risks in outsourcing can extend to subcontracting.
Recommendations
Despite its critical role in projects and programmes, outsourcing hasn’t been adequately addressed. Therefore, it’s recommended that more attention be paid to outsourcing, particularly concerning outsourcers’ and subcontractors’ qualifications, competency assessments, selection and management. In addition, more studies should be conducted on outsourcing, to further explore and analyse its benefits and associated risks in the realm of project and programme management.
Hossein is the Managing Director at Petro Power Construction and a council member of the British Exporters Association (BExA). He has over twenty years of experience in managing and implementing a wide range of projects in the Energy and Infrastructure sectors. Hossein specialises in economic evaluation and environmental impact assessments, risk management, investment and financing of projects in the above sectors.
Hossein is a Chartered Project Professional and a fellow member of the APM (ChPP, FAPM). In addition he holds various academic and professional qualifications in engineering, finance, leadership and management, renewable energy and land management.
1 comments
Log in to post a comment, or create an account if you don't have one already.
I disagree with your statement that outsourcing and subcontracting are basically the same. Rather, subcontracting is a sub-set of outsourcing. It makes sense to outsource something if another party can do it 'better' than me, whatever 'better' means in practice. A client does that to a main contractor on the basis that the contractor can manage all the specialist interfaces better than them: they 'contract' it out i.e. outsource it. Many main contractors have little or no capacity to do specialist work themselves so they outsource or 'subcontract' it out to these specialists. But in the example above, the client is not outsourcing to these specialists as the contract is with the main contractor. You also do not mention that a disadvantage of contracting out is that you lose an element - large or small depending on the arrangement - of control. What control you do have has to be done through the contract, not your internal hierarchy, and the contract may not allow it (or it costs you a lot more) !
Thank you for your comment. There is no material difference between outsourcing and subcontracting. Subcontracting is a term used when part or all of the works of a project undertaken by a contractor/ main contractor is outsourced. Therefore, subcontracting and outsourcing are practically the same operations regardless of the reason, and what work(s) are outsourced. While access to the required expertise is one reason for outsourcing/ subcontracting, the said strategy is not essentially implemented because outsourcers/ sub-contractors can do a better job. It is important to note that organisations and businesses, including clients and projects sponsors, and contractors, employ outsourcing/ subcontracting predominantly to benefit from the various advantages this method offers (as discussed in the first series of this article - published on February 10, 2023). Complying with regulations and business laws- for example, local content requirements, the ESG standards and meeting the requirements for incentives/ benefits and tax mitigation, etc., are other reasons that drive the above organisations and businesses towards outsourcing/ sub-contracting. Projects clients and sponsors awards projects contracts to qualified contractors who are able to implement projects properly and have the capability and capacity to accept the responsibility concerned. Contractors’ commercial and technical proposals are also considered to this end. They do not award the contract of / outsource their projects on the basis that the contractor can manage all the specialist interfaces better than them. iI general contractors can implement projects (conventional and specialised works) in-house or through outsourcing/ sub-contracting at their discretion. Contractors/main contractors often have the capability and resources to allocate/ mobilise machinery and man-powers and other requirements needed for in-sourcing their projects’ works if they see fit. Such a decision mainly lies on their strategies, business module, regulations and other parameters concerning their projects. As mentioned in the blog, within the outsourcing process, all or part of the executive management of the outsourced activities is entrusted to outsourcers. Accordingly, projects and programme managers’ managerial control and powers over their projects and programmes are less than what they would have in insourcing. Having mentioned that, they would still be able to inspect and control the progress and quality of the outsourcers’ performances and even intervene if necessary as per the outsourcing contract and regulations. As suggested in the blog, drawing up robust outsourcing contracts and obtaining financial guarantees would help mitigate the probability and impact of the risks associated with the above issue. It is pertinent to note that the projects’ organisational structure does not necessarily correspond to the contracting company’s organisational chart and may vary from one project to another.
I think we are going to have to disagree on this ! My view is that if, as a Client, I decide to 'outsource' a service or the manufacture / construction of a product, I am not deciding to subcontract it. That is the decision of the party I have contracted with. So to repeat my view, subcontracting is a sub-set of outsourcing (by the contractor), but not the same thing. Further, while outsourcing might be due to capacity limits, I re-iterate, the main reason you do it is because the party you are subcontracting the part of the project to it is because the subcontractor can do it better ... that is why they are often called 'specialist subcontractors'. And in the UK construction and heavy engineering sectors, most main contractors subcontract out the majority of the physical work. This applies to whether it is a house (bricklayers, plumbers, roofers etc) to large civil and building projects. Regards, Dr Jon Broome, past chair of the C&P SIG
Regarding the example you cited, the term ‘sub-contracting’ is used for outsourcing the works of the project that the contractor undertook under a contract with the client. Of course, the term sub-contracting is not applicable to the contractual arrangement between the client and the contractor whereby the client assigns the contractor implementation of its project, even if it was for an outsourcing purpose- albeit provided the project in question has not been entrusted to the client under a contract. In another example; assuming that the same contractor decides to outsource some of its back office activities, the term sub-contracting is not used for the said outsourcing, even if it is also in relation to the project undertaken by the contractor. In the scenarios mentioned above, all the works/tasks, including those delegated to subcontractors, are practically outsourced. Therefore, in practice, there is no material difference between outsourcing and subcontracting operations. It is important to note that subcontracting is the term that identifies the arrangement under which a contractor engages an outsourcer / a subcontractor on the works of the project that it is contractually responsible for. The term sub-contracting is important from a legal perspective, mainly in respect of contractual matters, the relation between the client and the subcontractors engaged upon the project works- for example, payment to subcontractors in case of contractor insolvency and incidences and tax etc. With all due respect, I disagree with your view that “…the main reason you do it [outsourcing]is because the party you are subcontracting the part of the project to it is because the subcontractor can do it better”. It is to be noted that you have not provided any basis for the above assertion. I have already detailed various reasons organisations and businesses use outsourcing/ sub-contracting method. As mentioned in the blog and my reply to your previous comment, the decision on outsourcing/ sub-contracting mainly lies on organisations’ and businesses’ strategies, business models, regulations and other parameters concerning their projects. For example, a study I conducted on outsourcing in the engineering and construction businesses (EPC contractors) a few years ago suggests that Risk Transferring is the primary reason for the above companies for outsourcing/ sub-contracting. It can, of course, vary from one business/organisation and sector to another. Anyway, thank you for your time. I hope the audiences find my blogs and the above discussions useful. Best regards Hossein