Many organizations engage in outsourcing deals that last for three, five or even more than seven years. While outsourcing has many advantages and signing long-term contracts may bring additional benefits, there are some key elements that are often not adequately addressed in the excitement of signing a deal. One such area is the loss of institutional knowledge in long-term outsourcing deals.
Loss of institutional knowledge results in an enterprise losing its know-how to carry out the outsourced tasks internally in the future or re-source out to the market if the selected provider fails to perform. In its most severe form, this means losing the capacity to retain an understanding of underlying business processes, data and technology. This results in an inability to govern and effectively manage the outsourcing relationship with the service provider. In other words, the tail starts wagging the dog. The higher the number of outsourced activities, processes or systems, and the higher the number of displaced internal resources, the greater the amount of institutional knowledge at risk. At the same time, the longer the contract duration is, the greater the at-risk knowledge is lost over time. Intellectual property and knowledge management considerations in contracts often do not go far enough in scope or scale to ensure that sufficient institutional knowledge can be retained.
Long-term contracts increase an enterprise’s dependence on the market and add to the supplier’s influence and power over the enterprise. In the language of Michael Porter’s five forces, supplier power becomes greater than customer power. Use of proprietary systems by a provider further tilt the balance of power in its favor. Over time, the enterprise starts to erode its ability to terminate the relationship with the service provider since it holds all the cards and all the knowledge. The countervailing force of collective knowledge of employees has probably walked out with the employees whose jobs have been outsourced. Lack of documentation or proper on-going knowledge transfer by the supplier further exacerbates the situation.
If you have an outsourcing contract, answers to the following questions can determine the extent of loss of institutional knowledge:
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Have you retained internal resources, which thoroughly understand the business processes? |
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What knowledge management provisions have been made in the contract? |
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How is knowledge management being managed as part of the relationship with the service provider(s)? |
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Do you have good operational insight into what your providers do on a day-to-day basis? |
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Do you have sufficient understanding of your supplier’s processes, particularly their inputs and outputs? |
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Do you have employees who have been keeping up with the latest developments in your industry and applicable technologies? |
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Do you pass the lottery test? If all the employees of the provider were to win the lottery and not show up to work the next day, do you have adequate documentation to carry on? |
If you answered some or all of the questions in the negative, you need to review how you can retain an adequate level of institutional knowledge. So how should you proceed?
There are proven ways to minimize the threat of institutional knowledge but it does require preparation before signing a contract and carrying out specific proactive service-management activities while the contract is in effect.
