Risk Management in IT outsourcing: How much commercial risk is reasonable to shoulder

Risk management is defined as identifying, assessing the impact and prioritizing the risks associated with the execution of a project or program. There is a relationship between how risk is managed and the relationship that a service provider shares with the client. Sometimes risks can arise from the internal application of resources and sometimes they can come from external factors. From a service provider perspective, focusing on risks that arise due to external factors poses the question, “how do you decide on how much of the external risk should you shoulder?” For example, in cases where a client fails to meet its commitment on providing certain resources results in a schedule risk towards the delivery of the project. To me the answers seems to lie in the responses to the following two questions

1. Where do you stand in the current relationship with the client?

2. Where do you think the portfolio fits with your strategic goals?Where do you want to stand in the relationship in the future?

Relationship is an absolute must as a contract is neither self-enforcing nor self-adjusting. If engagements are driven through contracts, there is no trust and no relation. Although a transaction-based relationship can lead to future opportunities, the risks associated are very high compared to a relationship-based engagement. There is a higher sense of trust in arelationship-based engagement compared to transaction-based engagements.

Relationships can either be transactional, a partnership or a strategic partnership. As trust amongst the parties involved increases, the relationship moves from transaction oriented to strategic partnership. The catch is how we create the sense of trust with the customer.In my opinion, the answer is for the service provider to start thinking from a customer perspective and identifying the risks as the first step. Once risks are identified propose a structure where the service provider is sharing the risk with the client. Once risk is shared there will be enough focus on identifying ways to reduce the negative effect of the risk. The one most important thing that the service provider should not do is to transfer the risk if the intention is to take the relationship in the right direction.

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