While some states, such as Tennessee, have been quick to ban or limit international outsourcing of

government activities, other state governments have sought to take advantage of low-cost opportunities that

international outsourcing can offer.

The state of New Mexicos Labor Department hired Tata Consultancy Services, an Indian outsourcing firm,

to redo New Mexicos unemployment compensation computer system. While Tata had completed work for

other states, including Pennsylvania and New York, it had never worked on an unemployment

compensation system. Also, New Mexico agreed to allow Tata to do all computer software work in India,

apparently with insufficient monitoring of progress by New Mexico officials responsible for the outsourcing

project.

The new system should have been completed in 6 months, which put the due date in December 2001.

Unfortunately, things did not work out well. The initial system was delivered 1 year later. But in late 2004,

it was still not working. Also, the outsourcing project went way over the budget of $3.6 million, up to $13

million. The warranty for the system ended in 2003, leaving New Mexico with a situation of either suing

Tata to complete the project (it was estimated at 80% complete) or hiring someone to fix it. Tatas position

was that it had complied with the outsourcing agreement and was willing to continue fixing the system if it

could receive additional compensation to justify additional work.

TABLE 1The Outsourcing Process and Related Risks

Outsourcing Process Examples of Possible Risks

Identify non-core competencies Can be incorrectly identified as a non-core competency.

Identify non-core activities that

should be outsourced

Just because the activity is not a core competency for your firm

does not mean an outsource provider is more competent and

efficient.

Identify impact on existing

facilities, capacity, and logistics

Failing to understand the change in resources and talents needed

internally.

Establish goals and draft

outsourcing agreement

specifications

Setting goals so high that failure is certain.

Identify and select outsource

provider Selecting the wrong outsource provider.

Negotiate goals and measures of

outsourcing performance

Misinterpreting measures and goals, how they are measured, and

what they mean.

Monitor and control current

outsourcing program

Being unable to control product development, schedules, and

quality.

Evaluate and give feedback to

outsource provider

Having a non-responsive provider (i.e., one that ignores

feedback).

Evaluate international political

and currency risks

Countrys currency may be unstable, a country may be politically

unstable, or cultural and language differences may inhibit

successful operations.

Evaluate coordination needed

for shipping and distribution

Understanding of the timing necessary to manage flows to

different facilities and markets.

Discussion Questions

1. Use the process in the above table to analyze what New Mexico could have done to achieve a more

successful outcome.

2. Is this a case of cultural misunderstanding, or could the same result have occurred if a U.S. firm,

such as IBM, had been selected? Make a statement and support your argument

3. Conduct your own research to assess the risks of outsourcing any information technology project.

(Computerworld is one good source.)

Some questions that you have to answer in your risk assessment process: what other risks can be

involved in the process of outsourcing projects in the information technology domain? How will

you evaluate each of those risks, as far as probability of occurrence and severity (you can develop

a risk assessment matrix to conduct your analysis)? What will be your recommended contingency

and mitigating strategies to address those identified risks? What is your plan to implement those

strategies and monito the result of the implementation?