Factors to Consider when Outsourcing Project Requirements

Managing the Contractor-Customer Relationship

Today, organizations of all sizes and types are outsourcing many of their project requirements to third-party vendors that possess the requisite resources and expertise to provide high-quality goods and services pursuant to contractual requirements. While many if not most of these contractor-customer relationships are mutually beneficial and achieve their intended outcomes, there are some important issues that must be taken into account prior to and during any such contractual arrangement. To determine these issues and their implications for the contractor-customer relationship, this paper provides a review of the relevant literature concerning the ethical issues that can arise in contracting and an analyze and discussion concerning the benefits that can arise with contracting. In addition, a description of the importance of the communication process in the contractor–customer relationship and the risks and responsibilities in the contractor–customer relationship is followed by a summary of the findings that emerged from the research concerning these issues in the conclusion.

Discussion concerning the ethical issues that can arise in contracting

The increase in outsourcing in recent years has introduced a number of ethical concerns, most especially the need to ensure that the third-party provider is capable of providing the requested goods or services at the agreed-upon price in a timely fashion without violating national and international labor standards or otherwise engaging in illegal conduct in the performance of the contract (Tuft 2010). In this regard, DeVelliers (2022) emphasizes that, “Stories are common of exploitation of workers in developing countries and are a key reason there is still a stigma surrounding outsourcing. Companies must partner with firms that pay their employees fairly and ensure safe working conditions” (para. 4). Although these types of ethical issue are fairly obvious and even intuitive, the high-profile projects that are the focus of the outsourcing initiatives are sensitive and proprietary, and it is therefore essential that our company perform the required due diligence in this area in a thorough manner prior to entering into any outsourcing contracts.

Beyond the foregoing considerations, some of the other ethical issues that can arise in contracting include ensuring the security of the information that is shared with contracting partners. While the factor may not be especially relevant for some types of organizations and projects where the goods or services that are involved are not technologically intensive, this factor may present real concerns for organizations that are outsourcing critically sensitive information that could threaten corporate or even national security if they are compromised. As DeVelliers (2022) points out, “IP theft is rampant in China and other countries with low law enforcement and patent protection. Companies should work with outsourcing companies with similar regulations and laws as the US to minimize the risk” (para. 8).

Certainly, these are not the only ethical issues that might arise prior to and throughout the course of a contractor-customer relationship, but they are among the most common and business practitioners must remain vigilant to ensure that any novel ethical issues are resolved immediately to avoid suboptimal outcomes in the contracting relationship. While this level of oversight and due diligence is frequently time-consuming and complex, it is also vitally important in order to ensure that organizations realize the full range of benefits that can accrue to these types of relationships as discussed further below.

Analysis and discussion concerning the benefits that can arise with contracting

Perhaps the most obvious benefits that can arise with contracting needed goods and services from a third-party vendor are the potential cost savings that can be achieved through increased efficiency as well as access to expertise that is otherwise unavailable in-house (Letica 2016). In addition, many organizations are able to improve their innovative practices by outsourcing their technological needs to companies with the requisite expertise (Aamer 2018). In this regard, Aamer reports that, “The benefits organizations can gain from outsourcing include cost savings and higher levels of innovation” (6048).

Developing and implementing innovative practices frequently requires sophisticated information technology (IT) support that even major corporations may lack in-house, making these needs especially appropriate for outsourcing. For instance, Dhar and Balakrishnan report that, “Many large organizations are increasingly outsourcing their IT functions. Factors like lower costs, improved productivity, higher quality, higher customer satisfaction, and ability to focus on core areas are some of the benefits of outsourcing” (2006, 40). Given the significance of these multiple benefits, it is not surprising that increasing numbers of organizations are opting to outsource some or even all of their IT-related project needs, and it is clear that these trends will continue to accelerate well into the foreseeable future.

Irrespective of other considerations, though, the key to achieving the full range of benefits that can arise with contracting is the careful selection of which goods or services are best suited for this purpose (Letica). This step will require a collaborative in-house effort to ensure that the full range of requirements are identified early on in order to ensure that the opportunity exists to locate suitable third-party vendors and perform the above-mentioned due diligence including checking their track record with other organizations (Dhar and Balakrishnan). Companies that routinely fail to deliver on their contractual obligations will quickly become known in the business world, even if they are located in another country. Besides in-house collaboration, though, there is also a corresponding need for organizations to maintain ongoing communications with their third-party vendors during the pendency of the contract as discussed further below.

Description of the importance of the communication process in the contractor–customer relationship

There are countless ways that a poor communication process can adversely affect the contracting relationship. Indeed, even the most reliable and trustworthy vendors may experience unexpected delays, or they may not fully understand the requirements of a given assignment. In other words, it is in the best interests of both customers and contractors to maintain open lines of communication and to check in periodically in the event that additional collaboration is needed (Aamar). In fact, the importance of the communication process in the contractor–customer relationship is paramount to achieving the full range of benefits that this arrangement can provide. For instance, according to a study by Aamar, “Only companies that had collaborative relations with their supplier had successful outsourcing benefits” (6051).

The degree of collaboration that is needed to achieve successful outsourcing benefits varies, of course, depending in large part on the complexity of the project that is involved (Santos and Cabral 2022). Other considerations, however, also require extensive collaboration such as the timing for delivery and the precise specifications of the requested goods or services. This point is emphasized by the Project Management Institute (PMI) which notes, “Communications is a core competency that, when properly executed, connects every member of a project to a common set of strategies, goals and actions” (2019, 2). To the extent that timely and effective communications between customer and contractor are achieved is likely the extent to which the contractual relationship will be successful (PMI).

The importance of the communication process in the contractor-customer relationship assumes even greater relevance and criticality when third-party vendors from other countries where a different language is spoken are involved. In some cases, business practitioners seeking a strategic partnership with a third-party vendor for technological assistance may be required to find suitable candidates in developing nations such as India or China. While English has become the de facto lingua franca of the business world, it is incumbent upon organizations to ensure that their due diligence in selecting a third-party vendor includes their ability to communicate effectively.

Regardless of any other linguistic constraints that may be involved, it is essential for contracting organizations to be crystal-clear in their specifications concerning what is required from their vendors, meaning that all technical terms must be precisely defined and agreed upon prior to the formalization of the contract. In some cases, this may even include ensuring that customers and contractors are using the same system of measure in those countries where the metric system is used as opposed to the imperial measures used in some Western countries such as the United States. In addition, even regional language differences in the United States may interfere with seamless communications between contractor and customer, a reality that underscores the need for preparatory collaboration and ongoing communications throughout the contracting process. Likewise, both customer and contractor should avoid the use of jargon, idioms and slang in their communications in order to avoid any potential misinterpretations concerning their meaning (PMI).

These considerations represent just part of the challenges that are involved in selecting an appropriate third-party vendor, but they do underscore the pitfalls that can derail an otherwise viable contracting relationship. In fact, in only takes one misunderstanding to doom a contractual relationship to failure, and the expenses that may be incurred make it clear that the communication process in the contractor-customer relationship is central to success. Moreover, there are also a number of other risks and responsibilities in the contractor-customer relationship that must be taken into account and these issues are discussed further below.

Description of the risks and responsibilities in the contractor–customer relationship

One of the first harsh lessons in life learned by many people early in life is that relying on others to do what they say they will do when they say they will do it is a risky enterprise. These same types of disappointments are also prevalent in the business world, but their risks are typically far greater than a broken youthful promise. While the performance of the above-described due diligence will help minimize these risks by identifying the best suited third-party vendors for the organization’s purposes, a constellation of risks may arise that will threaten the success of the outsourced project. Unfortunately, even the most rigorous due diligence may fail to identify all of the issues that might arise in the fulfillment of a third-party vendor’s responsibilities, but a growing body of scholarship indicates that these potential constraints are especially pronounced in developing nations. For example, according to a study by Aamar:

Some large organizations are pursuing the practice of outsourcing, more specifically, targeting global outsourcing from developing and low-wage countries. However, the perception of expected cost saving benefits when outsourcing to low-wage countries does not always reflect reality. A number of companies have failed to achieve the expected cost savings in sourcing from low-wage countries due to operational-level capability. (2018, 6048)

In this context, “operational-level capability” might refer to constraints in administration, production, shipping or even supply chain delays that are experienced by third-party vendors. Although the circumstances and specific of every contracting situation are unique in some ways, some of the more common risks that have been identified in the contractor-customer relationship include the following:

· Fiscal and labor risks;

· Delays in project execution and surpassing the project budget;

· Risk of receiving a product of low quality/durability; and,

· Risk of not receiving a warranty from the contractors (Choma 2008, 2).

The above-described list, of course, not exhaustive but it does make it clear that the contractor-customer relationship is fraught with unforeseeable risks that can delay or even cause an outright failure, an outcome that involves concomitant expenses and time lost. Moreover, it is essential assured that the contracting organization will incur all or at least the lion’s share of these costs, especially when third-party vendors are located in other countries. In this regard, Choma cautions that, “When contracting another company to execute part or all of a project, it’s not possible to transfer 100% of the risk. It’s rarely possible to transfer fines to the contractors, or transfer costs for extensive repairs and/or delays which might occur” (4).

Therefore, both contractors and customers have some fundamental responsibilities to each other, including the obvious need for transparency and honesty in their contract negotiations and administration of the contract. In addition, and as noted above, contractors and customers also have the responsibility to maintain open lines of communications so that any potential delays or other problems in performing the contract are made known as soon as possible so that alternatives or other arrangements can be made. Taken together, the foregoing risks and responsibilities make it apparent that a solid contractor-customer relationship that is characterized by open communications as well as honesty and transparency in the performance of the contract is essential for successful outcomes.