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Chapter Twelve Chapter Outline

Outsourcing: Managing Interorganizational Relations 12.1 Outsourcing Project Work
12.2 Request for Proposal (RFP)
12.3 Best Practices in Outsourcing Project Work
12.4 The Art of Negotiating
12.5 A Note on Managing Customer Relations

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Outsourcing Project Work Outsourcing Project Work

• Advantages • Disadvantages
– Cost reduction – Coordination breakdowns
– Faster project completion – Loss of control
– High level of expertise – Conflict
– Flexibility – Security issues

• Outsourcing – Political hot potato

– The process of transferring of business functions or processes
(e.g., customer support, IT, accounting) to other, often foreign
companies
– Being applied to contracting significant chunks of project work
– Being applied to the creation of new products and services

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Advantages- Cost Reduction Advantages - Faster project completion

• Competitive prices • more resources for the dollar.
• Overhead costs are cut Example: You can hire three Indian software engineers for the price
of one American software engineer.
• access to equipment that can accelerate completion of
project tasks.

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Advantages – High level of expertise Advantages - Flexibility

• focus on developing core competencies and hire firms • combining resources with talents of other companies.
• Small companies go global

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Disadvantages - Coordination breakdowns Disadvantages - Loss of control

• Coordination of professionals from different • Increased dependency
organizations – challenging
• Breakdowns may result by physical separation

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Disadvantages - Conflict Disadvantages - Security issues

• Projects are more prone to interpersonal conflict • trade and business secrets may be revealed.
• Trust, which is essential can be difficult to forge • Confidentiality.

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Disadvantages - Political hot potato Request for Proposal (RFP)

– Foreign outsourcing of work is perceived as a major • Be announced to external contractors/vendors with
cause of underemployment adequate experience to implement the project
• Development steps:
Companies (Apple) have been criticized for the oppressive labor
practices of some of their suppliers in China.

FIGURE 12.2
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RFP RFP
Summary of needs and request for action. Deliverable specifications/requirements, features, and tasks.
• The background • comprehensive so bid proposals from contractors can be validated
and later used for control.
• simple description of the final project deliverable Typical specifications cover physical features such as
• size,
Statement of work (SOW) • quantity,
• scope • materials,
• speed,
• major deliverables.
• and color.
For example, if the project involves a market research survey, the major
deliverables could be design, data collection, data analysis, and providing For example, an IT project might specify requirements for hardware,
recommendations by February 21, 2014, for a cost not to exceed $300,000. software, and training in great detail.
• Tasks required to complete deliverables can be included if they are
known.

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RFP RFP
Responsibilities—vendor and customer. Project schedule.
• What are the limits and exclusions for the contractor? The schedule should spell out what, who, and when.
(For example, who will supply test equipment?)
• What communication plan will be used by the contractor and Costs and payment schedule.
owner? • set out very clearly how, when,
• If escalation of an issue becomes necessary, what process will be • and the process for determining costs
used? • and conditions for progress payments.
• How will progress be evaluated?

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RFP RFP
Type of contract. Experience and staffing.
fixed-price • The ability of the contractor to implement the project may depend on
• agree on a price in advance, specific skills.
• remains as long as there are no changes to the scope provisions of
the agreement. Evaluation criteria.
• preferred in projects that are well defined with predictable costs and • The criteria for evaluating and awarding the project contract should
minimal risks. be specified.
cost-plus. For example, selection criteria frequently include methodology,
• the contractor is reimbursed for all or some of the expenses incurred price, schedule, and experience; in some cases these criteria are
during performance of the contract. weighted.
• This fee is negotiated in advance.
A well-prepared RFP will provide contractors with sufficient guidelines
Both types of contracts can include incentive clauses for to prepare a proposal that clearly meets the project and customer’s
superior performance in time and cost, or in some cases, penalties. needs.

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Contractor Evaluation Template Best Practices in Outsourcing Project Work

• Well-defined requirements and procedures

• Extensive training and team-building activities
• Well-established conflict management processes
in place
• Frequent review and status updates
• Co-location when needed
• Fair and incentive-laden contracts
• Long-term outsourcing relationships

FIGURE 12.3 FIGURE 12.2

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Best practices Best practices

Well-Defined Requirements and Procedures Extensive Training and Team-Building Activities
Often managers assume that people issues will work themselves out over
time.
Successful firms
Smart firms
• are very careful in selecting the work to be outsourced.
• recognize that people issues are as important
• choose to contract only work with clearly defined deliverables with • train their personnel to work effectively with people from other organizations
measurable outcomes and countries.
• different firms’ project management systems need to be integrated. • team-building sessions designed to forge healthy relationships before the
project begins.
• Team-building workshops involve the key players from the different firms,
for example, engineers, architects, lawyers

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… …
For example, one project, in which the owner and the contractors • What actions do the other groups engage in that create problems for
were relatively inexperienced at working together, utilized a two-day us?
workshop. • What actions do we engage in that we think create problems for
• The first day was devoted to ice-breaking activities and establishing them?
the rationale behind partnering. The conceptual foundation was • What recommendations would we make to improve the situation?
supported by exercises on teamwork, synergy, win/win, and
constructive feedback.
The team-building sessions often culminate with the creation of a
• The second day began by examining the problems and barriers that partnering charter signed by all of the participants.
prevented collaboration in the past. Representatives from the
different organizations were separated and each asked the This charter states
following: • their common goals for the project
• the procedures that will be used to achieve these goals .

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Project Partnering Charter Best practices

• Conflict is inevitable on a project
• Escalation is the primary control mechanism for dealing with and
resolving problems.
• The basic principle is that problems should be resolved at the
lowest level within a set time limit (say, 24 hours), or they are
“escalated” to the next level of management.
If so, the principals have the same time limit to resolve the problem, or
it gets passed on to the next higher level.
No action is not an option.

FIGURE 12.2

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Best practices Preproject Activities—Setting the Stage

for Successful Partnering

• Selecting a Partner(s)
Frequent Review and Status Updates
– Voluntary, experienced, willing, with committed top
• using online surveys to collect data from all project participants
management
about the quality of working relations
• Team Building: The Project Managers
– Build a collaborative relationship among the project
managers
• Team Building: The Stakeholders
– Expand the partnership commitment to include other
key managers and specialists

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Project Implementation—Sustaining Project Completion—Celebrating Success

Collaborative Relationships
• Conduct a joint review of accomplishments
• Establish a “we” as opposed to “us and them” and disappointments
attitude toward the project • Hold a celebration for all project participants
– Co-location: employees from different organizations • Recognize special contributions
work together at the same location
• Establish mechanisms that will ensure the
relationship withstands problems and setbacks
– Problem resolution
– Continuous improvement
– Joint evaluation
– Persistent leadership
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Advantages of Long-term Partnerships The Art of Negotiating

• Project management is NOT a contest.
• Reduced administrative costs – Everyone is on the same side—OURS.
• More efficient utilization of resources – Everyone is bound by the success of the project.
– Everyone has to continue to work together.
• Improved communication
• Principled Negotiations
• Improved innovation
• Improved performance

TABLE 12.2

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The Art of Negotiating (cont’d) Managing Customer Relations

• Dealing with Unreasonable People • Customer Satisfaction

– If pushed, don’t push back. – The negative effect of dissatisfied customers on a
firm’s reputation is far greater than the positive effect
– Ask questions instead of making statements of satisfied customers.
– Use silence as a response to unreasonable demands – Every customer has a unique set of performance
– Ask for advice and encourage others to criticize your expectations and met-performance perceptions.
ideas and positions – Satisfaction is a perceptual relationship:
– Use Fisher and Ury’s best alternative to a negotiated Perceived performance
agreement (BATNA) concept to work toward a Expected performance
win/win scenario – Project managers must be skilled at managing both
customer expectations and perceptions.

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The Met-Expectations Model Managing Customer Relations (cont’d)

of Customer Satisfaction
• Managing Customer Expectations
– Don’t oversell the project; better to undersell.
0.90 Perceived performance 1.10
= = – Develop a well-defined project scope statement
Dissatisfied Expected performance Very satisfied
– Keep everyone informed about the project’s progress
– Involve customers early in decisions about project
- If performance falls short of expectations (ratio < 1), the customer is
dissatisfied.
development changes
- If the performance matches expectations (ratio = 1), the customer is – Handle customer relationships and problems in an
satisfied. expeditious, competent, and professional manner
- If the performance exceeds expectations (ratio > 1), the customer is
very satisfied or even delighted.

FIGURE 12.7

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Key Terms

Best alternative to a negotiated agreement (BATNA)

Co-location
Escalation
Met-expectations model
Outsourcing
Partnering charter
Principled negotiation

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