Fraud in Outsourcing: Games Vendors Play

Outsourcing Fraud: Mozok Works

Table of Contents

Phil Hatch, CEO, Mozok Works May 12th, 2022

Fraud in Outsourcing

Years ago, I lived in a large cabin slope-side at a ski resort for a summer. Our neighbors had kids that were quite entertaining.

One day, I heard these boys laughing hard at a scheme they ran to make money off one of the dads. Their father routinely hit neon-orange golf balls from their back porch out into the ski run. The boys would then comb the ski run for these golf balls, returning them to the dad for a small fee.

By the end of June, the boys figured out how to game the system. The boys started stealing golf balls from the garage each day to later sell them back to the father.

I remember sitting with the parents, laughing about this scheme. The boys started small in their master criminal enterprise, slowly scaling it up throughout the summer. As much as the boys thought they were executing a flawless plan, the parents caught them early on. The father joked that if the scheme continued to grow, he would hit ten balls and would be asked by the boys to buy one hundred at the end of the day.

This story of the golf ball thieves applies to fraud in outsourcing well in many ways. Many outsourcing firms (and firms’ employees) are constantly looking for an opportunity to take advantage of a client.

Fraud in outsourcing is far more common than most think.

What Is Outsourcing Fraud?

Outsourcing Fraud: Mozok Works

Merriam-Webster defines fraud as: “DECEIT, TRICKERY. Specifically: intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right.”

Within the outsourcing industry, this definition of fraud fits perfectly. The key to this conversation is that there are varying degrees of fraud when considering the scheme’s architect, intent, scale, and impact on the customer.

Simple Outsourcing Fraud

Simple fraud is defined as some machination by the outsourcing firm or their employees that does not materially affect deliverables, quality, delivery times, or project costs. Further, simple fraud does not involve planning from the vendor’s senior management team or their awareness.

A common example of a simple fraud can be the games outsourcing firms play during the hiring phase of an outsourcing project. Outsourcing firms regularly inflate a candidate’s experience, switch people in interviews, etc.

Important to note: Simple fraud often happens without material ill-intent. I have spoken with outsourcing firms about games played during the interview process. Many openly admit to manipulating interviews. However, many also note they do so to speed up the interview process and promise they are not attempting to reduce the quality of the end team.

Moderate Outsourcing Fraud

I define moderate fraud as any scheme that materially affects deliverables, timelines, or financials. Further, any level of involvement from the outsourcing vendor’s management team will push what would be considered a simple fraud into the moderate category.

An example of moderate fraud can be when outsourcing vendor team members (not leadership) manipulate monthly KPIs, allowing the vendor to avoid a performance penalty. 

Severe Outsourcing Fraud

I categorize fraud as severe when:

  1. The vendor’s senior management team plans and orchestrates the fraud.
  2. Damages are significant enough to warrant some form of involvement of law enforcement.
  3. There is collusion between the vendor and a customer’s employee.

 

Examples of severe fraud can include:

  1. The vendor’s senior executive team instructs their internal recruiting team to play games intentionally when the customer interviews a potential team member. While inflating a resume may not be a severe fraud, orchestration by the top executive team is highly problematic.
  2. The outsourcing firm’s management team instructs and oversees an ongoing effort to manipulate KPIs, allowing the firm to avoid performance penalties that would be considered material.
  3. Theft of the client’s IP.

How Common is Fraud in Outsourcing?

Outsourcing Fraud: Mozok Works

Determining how common fraud in outsourcing occurs is a difficult task. Simple fraud is so common that many clients do not consider it fraud. Customers are also leery of discussing any moderate or severe fraud.

Regardless, fraud rates in outsourcing are significantly higher (across the table) than most understand.

Simple Outsourcing Fraud

100% of customers I have worked with over the years note they have dealt with fraud such as the bait-and-switch game while interviewing potential team members. As high as 90% of all current outsourcing engagements have some form of simple fraud.

What is frustrating is that simple fraud is so common that the greater industry (including both customers and vendors) no longer considers many of these games a “fraud.” Often, these games are considered the cost of doing business and are laughed about later on.

Moderate Outsourcing Fraud

I completed a study of SLA-tied process outsourcing engagements. One in ten ongoing outsourcing engagements had at least one instance of the vendor’s team manipulating KPIs to avoid a penalty.

In polling outsourcing customers in a different study, I found that over 90% of customers have previously dealt with moderate fraud.

Severe Outsourcing Fraud

Severe fraud happens more frequently than most thinks. I polled Fortune 500 companies, asking them if they have ever involved law enforcement in any outsourcing engagement. One in fifty noted they had.

While that statistic is alarming, most cases of severe fraud are perpetrated by employees of the vendor and not by the vendor themselves.

Why Does Fraud in Outsourcing Occur?

Outsourcing Fraud: Mozok Works

While each instance of fraud in outsourcing may have nuanced motivators, some commonalities should be understood.

Outsourcing Fraud by Vendor Employees

Vendor employees will often commit simple fraud to speed up a process, reduce their workload, or do what they think is needed to keep the customer happy. Often, simple fraud happens without any grand criminal intent.

However, motivators change as fraud moves into the moderate or severe category. There are numerous great books and research reports that dive deep into motivators for white-collar crime.

The first common motivator is simple greed. The employee is looking for a quick profit. I worked with a large US bank in resolving a theft committed by employees of their chosen vendor. These employees accessed customer bank accounts and stole a large amount of money. When interviewed by the police, these employees noted they believed they could make a lot of money and felt they had little chance of being caught.

The second common motivator is the feeling of not being recognized or given credit for the work done. Outsourcing adds layers between top stakeholders and the team performing the work. The client’s senior management team may never know who performed extraordinarily well, ensuring project success. Likewise, praise from the client’s senior management team may be lost before ever reaching the end workers.

One of my customers was contacted by a competitor. The competitor noted that two people attempted to sell them my customer’s source code. After a criminal investigation in the US and India, the two former employees of my client’s outsourcing vendor confessed. On numerous occasions, these two individuals did not receive the recognition from my client they felt they deserved.

Similarly, I dealt with a customer who had a ransomware attack initiated by an employee of their outsourcing firm after the client refused to increase her bill rate. This increase would have allowed her to receive a promotion.

Outsourcing Fraud by Client Employees

Fraud committed by client employees is common enough that it should be addressed. Even if there is no planned job loss, it is quite common for employees to act out after learning their job is outsourced. I have seen client employees steal IP and sabotage the future outsourcing vendor once they find out the company will outsource their function or project.

Additionally, client employees collaborate with outsourcing vendors to defraud the client. There are many ways this can manifest. Some that I have dealt with:

  1. The top customer engagement manager added two weeks of vacation to the end of a trip to India. Unknown to the customer, their employee went to the Maldives with the vacation paid for by the outsourcing vendor in return for a favorable review of key deliverables.
  2. The outsourcing vendor retained the engagement manager’s husband for over-priced legal services in return for manipulating KPIs each month.
  3. The client engagement manager traveled to the vendor to inspect the planned infrastructure build-out. When problems were found, the employee asked for a bribe to look the other way. Fortunately, the outsourcing firm called the client.

Fraud by Outsourcing Vendors

Fraud orchestrated by the actual outsourcing firm is less common. However, it still occurs and needs to be understood.

1. Speeding Things Up

In most fraud cases committed by the vendor (not their employees), the vendor is trying to speed things up or improve their margins. The vendor likely does not intend to negatively affect overall project costs or deliverables.

I spoke with an outsourcing firm that got caught having four people act as the interviewee for a much larger team. The vendor stated that they had no intention of placing low-bar talent on the project. The vendor claimed only to play the interview game because the interview process mandated by the client would have made the team build-out process untenable. I reviewed the vendor’s hired team and agreed the quality was good. I also reviewed the interview plan mandated by the customer and agreed it was not reasonable. Although I had sympathy for the vendor, they still committed organizational fraud.

2. Improving the Deal

Outsourcing Fraud: Mozok Works

Outsourcing firms have matured greatly over the past two decades. Of special note, outsourcing firms are now quite sophisticated in rating and ranking deals.

There is a real model that establishes an equilibrium point between the fees paid (reward), the amount of work done, and the risk involved. We often refer to this equilibrium point as a “fair deal” and widely accept the concept.

The amount we pay someone to clean the bottom of a boat will vary based on the size of the boat and if the boat is dry docked or not. The effort changes with each variable. Likewise, the fee we pay someone to clean the bottom of a boat will increase if sharks are circling the boat. The risk profile changed.

This risk, effort, and reward model is critically important in understanding fraud. The odds of fraud skyrocket as the deal moves above or below the equilibrium point.

 

The most obvious scenario is a customer demanding a price below the equilibrium point, given the effort and risk. The adage “be careful what you ask for…” quickly applies. Highly ethical vendors will push back or walk away from a deal that is not fair. Unfortunately, many outsourcing firms will not.

There are many methods vendors use to improve the financial performance of deals they feel are not fair. Vendors will intentionally overstate the quality and seniority of team members. The vendor may not implement infrastructure requirements, etc.

Even key components of the outsourcing engagement may intentionally be excluded. I worked with a US healthcare company that hired an outsourcing firm to digitize their historical medical records. The contract mandated that two teams operate independently, entering all medical records in duplicate. The vendor was to run a QA function comparing key data entered by both teams for a single record. Any variation between the two versions would trigger a review. The vendor never implemented the two-team model. The vendor did not feel the contract was fair. Rather than push for a better deal, the vendor chose to defraud my client.

Pricing work abnormally high is also not advisable. Ethical outsourcing firms will question the pricing with the customer. Unethical vendors will sign the contract, grinning after the fact.

What is even more concerning is that many outsourcing firms will then attempt to take advantage of the customer on an ongoing basis once finding an overly profitable deal.

I worked with an outsourcing company that signed a fixed-fee contract for software development. During internal bid-preparation efforts, the vendor felt the project should bid at a specific price. The vendor gave the client a formal proposal. The client opted to increase the fee paid, noting they felt the higher price was fair. The vendor made no effort to correct the client and quickly accepted the deal.

The first project was completed on time and appeared to have been scoped accurately by the vendor. The client gave the vendor additional work. Just as with the master golf ball thieves from earlier in this article, the vendor pushed the scale of their fraud with each additional project. The client eventually realized they were being taken advantage of and severed the relationship.

3. Shoring up the Tail

Outsourcing Fraud: Mozok Works

Outsourcing engagements that span multiple years often have higher fraud rates as the contract progresses.

Even if the customer agrees to incremental rate increases throughout the contract, the engagement can easily become a liability for the outsourcing vendor. There is a difficult balancing problem all vendors face in multi-year engagements. The vendor needs to price the deal low enough to sell. At the same time, pricing needs to be high enough that the vendor can turn a profit throughout the length of the engagement. That balancing act is often a guess. Most commonly, vendors fail to predict significant labor cost increases.

I have been in the shoes of both the client and outsourcing vendors. Even the best outsourcing firms with great cost forecasting capabilities can get the prediction wrong.

I helped a major European company select Hyderabad, India, for a new captive center. Leading up to the site selection, I spent countless hours with officials in the city, capturing all known expansion plans in various SEZs. We felt a 20% labor cost increase forecast would stand over the first three years.

Unfortunately, things rapidly changed. Both Microsoft and Infosys announced an unexpected and major expansion of their teams in Hyderabad. Some skills we intended to place inside the new captive center increased in cost by 50% before we broke ground.  

Fraud rates skyrocket later in outsourcing engagements. Vendors play games with their customers to ensure outsourcing engagements stay profitable.

4. Some Outsourcing Companies Just Want to Watch the World Burn...

Sad to say, some vendors do not care and seem to thrive when committing fraud. In 2003, I created an outsourcing strategy and advisory firm (Ventoro) with several investment banks as partners. My firm would work with various outsourcing firms that were clientele of the banks. I remember clearly a meeting with the top executive team for one of the world’s largest outsourcing firms. I attended a public Q&A session following their quarterly report. I spoke with one of the C-Suite executives when the head of sales jumped into the conversation. Their top sales executive boasted of selling an extremely expensive and unneeded add-on to a Fortune 100 client. The outsourcing firm’s sales executive openly celebrated his ability to trick a company into buying something they did not need and would not use. I was shocked by the openness of this conversation, and the head of sales quickly asked me, “what? Aren’t you a businessman too?”

What to Watch Out For

Outsourcing Fraud

Games outsourcing firms play changes as the engagement moves through the outsourcing lifecycle.

The Procurement Phase

I was teaching an executive education class to UBS Investment Bank when the topic of fraud during the procurement phase came up. I noted that I felt every RFP has some form of fraud. One of the attendees challenged me on this. After a debate for a few minutes, I challenged him (and the rest of the class) to prove me wrong. I would buy dinner if they could reasonably prove that no vendor committed any fraud during an RFP they ran.

Several months later, I was back in the UBS office for another project and bumped into the attendee. He was mid-step in reviewing proposals for a new engagement and offered to prove me wrong with the materials on his desk. Challenge accepted.

The first proposal listed UBS as a client in background materials. I had spent a few months reviewing outsourcing vendors used by UBS across all banks (IB, wealth management, etc.) I did not remember this company ever doing work for UBS. We reached out to procurement and verified the vendor had never worked with the bank. I won the bet with the first proposal picked up from the desk.

There are MANY games outsourcing vendors play during procurement. Most are not moderate or severe. However, all need to be understood and addressed. Some can be a fishhook causing problems later in the engagement.

1. Overstating Experience

Almost every company is guilty of puffery during a sales cycle. Although I do not condone it, I do not necessarily exclude outsourcing firms from consideration for presenting an overly attractive version of their experience or capabilities.

Often, there is a major gap between an outsourcing vendor’s sales team and their delivery team. Sales individuals may overly state experience and capabilities to win a deal without awareness from the vendor’s greater management team.

Validate any story or claimed experience that may sway your decision.

2. Over-Promising Access to SMEs, Leadership, and Infrastructure

Similarly, outsourcing firms are quick to promise involvement or material access to additional internal assets such as subject manager experts, access to top leadership, and tools or technologies. Each of these carries a cost (including opportunity cost) to the vendor. Outsourcing vendors are cautious in granting access regardless of what was promised during the sales cycle. If any such promises are made during the sales cycle, include them in contracts.

3. Bench

Outsourcing vendors often claim to have a team waiting for the vendor- no need to recruit. My experience is that this is rarely true. A bench is a liability for the vendor. If the vendor cannot instantly place a team rolling out of another client, they often will simply let the team go.

There are certainly examples of outsourcing vendors having talent available. However, it is rare enough that clients need to validate the team exists before using the offer for an existing team in selecting the vendor.  

4. The New Practice Game

I participated in an offsite executive retreat with UBS years ago. The retreat started with the top bank executive commenting that the bank had just entered into a strategic partnership with a Tier 1 outsourcing firm. Through this strategic partnership, the vendor would work with UBS to establish a new banking practice. In return for helping the vendor, UBS would receive a discounted bill rate and greater access to top executives inside the outsourcing firm.

I was skeptical enough that the top executive asked me why I was not impressed. I opened the vendor’s website and navigated to their financial services offering. I showed the executive the list of current clients the outsourcing firm served. Deutsche Bank, Credit Suisse, Chase, Bank of America, etc. All major competitors to UBS were already clients of an existing financial services practice.

I then asked if the UBS team had seen a business plan or met the new executive tasked with building the new practice for the outsourcing firm. The only response I got from the UBS executive was, “Shit!”

I have high regard for UBS and have met some of the smartest people I know through the bank. Even the best and brightest can be conned by an outsourcing firm.

If a vendor is selling you the idea of establishing a new practice, ask for the business plan, meet with the executive with P&L responsibility, etc. Lastly, search the web for information about your competitors working with the chosen vendor. A practice may well already be operating.

5. Zombie Clients

Every company attempts to up-sell during a sales cycle. Every company also attempts to make their product or service “stickier”- making it harder to disengage the vendor after purchase. Most of the time, vendors attempt to do so by providing something better than the competition. However, many unethical outsourcing firms will take this too far.

Outsourcing vendors will often intentionally create this dependency and use this gained leverage to take advantage of the client. As much as the client wants to fire the vendor, they may not be able to.

I had a customer ask for help transitioning a specific business process outsourcing engagement from one vendor to another. For years, the client was not happy with the service from the vendor. However, they felt trapped. The customer transferred all internal SMEs, infrastructure, etc., to the vendor. The service quickly became a black box with the customer having no understanding of how the function worked, without an internal team to do the work or the tools necessary.

This trap starts (but does not end) during sales. Unfortunately, it can be incredibly difficult to decipher an honest vendor attempting to upsell from unethical vendors intent on hooking you. The best advice is to never outsource to an extent you cannot bring the function back in-house quickly.

The Outsourcing Engagement Phase

Every outsourcing engagement needs a phase between selecting the vendor and signing contracts where the mechanical aspects of the engagement are defined.

Common tasks that occur during this “engagement phase” include:

  1. Hiring the team.
  2. Building out any needed infrastructure.
  3. Knowledge transfer.
  4. Negotiation of final contracts.

 

Common games outsourcing vendors play during the engagement phase include:

1. Racing Past the Engagement Phase

Every outsourcing firm knows that the longer the delay between being selected by the client and signing contracts will increase the odds of the deal falling apart. The sales team will receive constant and significant pressure from their management team to “get ink” quickly.

Great outsourcing firms will have a methodology for walking the client through this engagement phase as efficiently (and thoroughly). Unethical outsourcing firms will attempt to race past this engagement phase altogether.

2. Outsourcing Hiring Practices

Games vendors play during hiring are among the most common in outsourcing. I have yet to meet any customer with a history of using outsourcing vendors that have not experienced:

  1. Multiple people in a conference room coach a candidate through answers in real-time during a customer interview.
  2. The interviewee used vendor-supplied reference materials during the interview.
  3. Having ringers pretend to be someone else during an interview.

 

The extent vendors will play games during the hiring process is mind-blowing. What is troubling for me is how accepted this has become in outsourcing. Customers do not consider this fraud. It is, and it should be taken seriously. This is NOT a standard operating procedure in outsourcing that should be tolerated. Like the golf ball story at the start of this article, giving a pass to an outsourcing vendor for conducting such tricks may open the door to more serious issues later on.

3. Outsourcing Infrastructure Build-Out Shortcuts

Every outsourcing engagement will have some infrastructure build-out need, including facilities, tools, technologies, etc.

Outsourcing firms will review all infrastructure requirements and often cut corners or omit the requirement altogether. Common examples include:

  1. Providing the team with laptops below the client’s specifications.
  2. Failing to provide a digital ID controlled facility specific to the client.
  3. Failing to provide an isolated digital infrastructure.
  4. Failing to provide additional amenities for the team that the client mandated and paid for.

 

Essentially, every infrastructure requirement the vendor does not believe is needed to ensure delivery is at risk of being cut. Infrastructure requirements that are difficult for the vendor to verify remotely are equally at risk.

4. Continuing to Upsell

Outsourcing vendors routinely use the engagement phase to upsell additional services to the client. While I generally do not have an issue with this, vendors often take this too far and do it for the wrong reasons.

Vendors know there is a significant time and cost burden for any client who needs to pull the offer from their chosen outsourcing vendor before signing contracts.

Unethical vendors will low-ball bid a contract to win the deal. Once the deal has been awarded, the vendor will present their real solution with updated costs during the engagement phase. The vendor is banking on the fact that the client will face additional costs by pulling the offer.

This happens frequently, and vendors are very good at selling this larger package.

5. Gaming Outsourcing Contracts

Outsourcing vendors are phenomenal at gaming contracts. I covered some of the games vendors play with the SLA in an article about performance-based contracts.

When negotiating contracts, watch out for two specific games:

  1. Ambiguity in any contract (including the SOW, SLA, etc.).
  2. Bloating the SLA to the point that it cannot be used.

6. Outsourcing Knowledge Transfer

Knowledge transfer is a critically important part of all outsourcing engagements. Unfortunately, vendors frequently manipulate the function.

  1. If the client provides online courses, the vendor will have one person take the course and related online tests for the entire team.
  2. Outsourcing vendors may skip training altogether if the client does not provide instructors or proctors.

 

The best advice is to have one of the client’s team members provide training in-person or through video conference tools.

Outsourcing Delivery Phase

The delivery phase opens the doors to all types of fraud. The horror stories told about outsourcing engagements are often true. There are simply too many examples of fraud during the delivery phase to list them all. That said, two key points need to be raised:

1. Trust but Verify

I flew from Switzerland to India on an emergency trip with a client executive who found out his chosen outsourcing vendor had intentionally mishandled confidential bank information to save money. I am sure this person was highly stressed from the ordeal (he had to deal with Swiss banking regulators, etc.) On the plane, he seemed to sigh, making the statement, “if you don’t check on what is in the oven, it will burn.”

The client needs to be actively involved in the entire outsourcing engagement. Even small tasks such as attending weekly meetings are critical. Outsourcing engagements that do not have an active client engagement manager have significantly higher fraud rates.

2. The Risk of Fraud in Outsourcing Changes With Time

The equilibrium point in the risk, effort, and reward model changes throughout the outsourcing engagement. In multi-year contracts, the financials may change enough to make the outsourcing engagement unprofitable for the vendor. Even great outsourcing vendors will face changing external dynamics that may sink an occasional outsourcing engagement.

Ethical vendors will approach their customers to talk about their challenges. If the customer is not reasonable or understanding, fraud rates will increase. I frequently state that even the most ethical outsourcing firms will have at least one unethical employee. If the vendor’s engagement manager does not feel the client is reasonable, they may game the engagement to ensure they hit their financial targets for senior management.

Addressing Outsourcing Fraud: The Corrective Action Plan

Outsourcing Fraud: Mozok Works

Over the years, I have fielded many calls from outsourcing buyers asking for help resolving vendor fraud. Every time, I ask the customer for their Corrective Action Plan (CAP)- or their playbook for fraud in outsourcing. Surprising to me is that many customers do not have one.

Ensure You Have an Outsourcing Corrective Action Plan (CAP)

Before any company heads down the outsourcing path, the company needs a Corrective Action Plan (CAP). The CAP should include:

  1. Internal categorization for the severity of any fraud committed by a vendor.
  2. Methods for actively monitoring for fraud.
  3. An explicit and highly detailed action plan for handling any instances of fraud.

 

The CAP should be co-authored by the various internal teams, including legal, procurement, finance, PR, risk, sales, customer relations, HR, etc.

Dry Runs

Like business continuity plans (BCP), I believe that no company has a real CAP unless they conduct drills occasionally.

I previously had a banking customer who would hold a fire drill yearly with their CAP. The head of their risk group would prepare a one-page scenario, such as the theft of customer data. This sheet would be sent to an engagement manager initiating the CAP. The last step in the CAP drill was a collective review of the entire process discussing what went well, issues, needed improvements, etc.

Include Your Outsourcing CAP In RFPs

Companies should include the CAP in all RFPs for two specific reasons:

  1. The customer provides an explicit definition of what they consider fraud.
  2. The vendor will know the exact consequences of committing fraud.

 

Including the CAP in RFPs does change the behavior of outsourcing firms.

Use It

Once the CAP has been created and included in the RFP, use it in your outsourcing engagements. If the vendor commits some fraud (even little ones), use the set playbook defined for the specific type and severity of the fraud.

How to Reduce the Risk of Fraud in Outsourcing

Outsourcing Fraud: Mozok Works

Fortunately, there are numerous steps customers can take to reduce the risk of fraud in outsourcing engagements greatly.

Preparation

Going back to the risk, effort, and reward model, preparation reduces risk to the vendor. Before engaging an outsourcing vendor, take the time to complete tasks such as:

  1. Map and improve internal processes and functions such as project management, change control, risk management, issue resolution, etc.
  2. Implement an effective documentation function that maintains documents and demonstrates the greater team is using this documentation.

 

More information regarding preparation can be found here.

Outsourcing Executive Education

Over the years, I have taught countless outsourcing executive education courses. It is shocking how much two days spent in the classroom can improve an entire outsourcing engagement.

Outsourcing engagements are odd. The customer and vendor both contribute to creating something entirely new. 1+1=3. Sort of a Quantum Entanglement in business. The more the client’s management team understands unique dynamics specific to outsourcing engagements, the better the engagement performs.

Even if the client has significant experience with outsourcing, invest in sending employees to an outsourcing education program. The cost is small, and the return can be transformative.

Ensure a Fair Deal

I was attending a bidder’s conference (as a vendor). As the conference ended, my team huddled in the hallway, and all stated their belief the client was being overly aggressive in pursuing a lost-cost option. As we walked to our cars, the top executive from a competing vendor approached me. I asked him what he thought, and he responded, “you can only take so many bolts out of an airplane before no one wants to fly on it.” I laughed and agreed.

The customer holding the conference eventually found a vendor willing to bid. I heard some months later that the engagement was not going well, and the client may be seeking another vendor. We passed on the second opportunity to bid on the project.

In outsourcing, customers that demand a price well below a range that would be considered fair will almost always find a vendor willing to take the deal. However, that vendor knows they will need to cut corners or play games to make the deal pencil. The vendor is scheming from the start.

Save yourself a great deal of pain. Figure out what a fair price is, and find a reputable vendor that also feels the deal is fair.

Be Actively Involved

I estimate that nine out of ten times I have been asked to help a client resolve fraud problems, I ask the client’s manager for details of the engagement, and they do not know.

  • How did the performance compare to the same month last year? I don’t know. I didn’t take measurements.
  • Was the entire team working over the period claimed? I don’t know. I wasn’t in meetings.
  • Did the vendor provide the infrastructure promised during the engagement phase? I don’t know. We never looked.
  • How many days was the team offline due to the storm? I was not aware there was a storm…

Citing my Swiss customer’s engagement manager again: “if you don’t check on what is in the oven, it will burn.”

While ethical outsourcing firms will remain honest without direct customer involvement, many outsourcing firms will not. They will use the lack of involvement to cut corners. You need an engagement manager intimately aware of the details of the outsourcing engagement daily. You need to be involved.

Get to Know the Team

I took a customer for on-site vendor visits at the end of their outsourcing RFP. While visiting the delivery center for a Tier 1 Indian firm, we walked through a large cubical room with hundreds of employees working for various customers.

We walked past a team supporting a major international sports apparel company near the end of the day. The team was having a small party with a team member before she left for maternity leave. The end customer sent this team member a bag with various baby clothes made by the company. Branded baby shirts, shoes, etc. It was fun to see how grateful the woman was.

We asked the team if they liked their job. Every person we spoke with raved about the client. They consistently stated that they felt important to the client.

We met another team with a high turnover rate during the same trip. We asked a few employees if they liked their job. Although the two teams were performing the same service, the second team just felt heavy. One team member stated that they had worked for the same customer for the past six months and would be surprised if the customer even knew their name.

That night, I sat in the outdoor bar (Citrus at Leela Palace Bangaluru) reviewing the day with my client. The stark difference between the two teams we spoke with was the dominating topic. My client commented that they need to engage with their future team without coaching. The difference between the two teams was startling.

I have thought about that day often in my adventures. There is no question what team would defraud their end client.

Outsourcing customers need to get to know their team. Many simple things can be done. Rather than conference calls, hold video calls allowing both sides to see the other’s face. Have senior management from the customer join occasional video calls thanking the team for their work. Pay for the team to have pizza for lunch after a tough week.

Travel to your team. Spend time in person with your team and do team-building activities. Personalizing the team will do three things:

  1. The turnover rates will plummet.
  2. The performance of the team will increase.
  3. The risk of fraud committed by end-team members will plummet.

Watch for the Signs

It is often impossible to see direct fraud without launching a formal investigation. However, you can watch for symptoms.

I helped a couple of clients address issues stemming from the 2004 Indian Ocean Tsunami. On my first day in India, I tried to comprehend and process the devastation I saw. I hired a tuk-tuk driver to take me through areas affected by the tsunami. The driver told me that his family had passed down wisdom to watch the birds. The driver’s family noticed the birds left the coastal area before the tsunami hit. The family sought safety, potentially saving their lives.

In outsourcing, there are “tells” all clients should watch for that can indicate a growing risk of fraud.

  1. Watch out for the declining quality of workers replacing staff as they leave.
  2. Pay attention to various administrative work products such as status reports, performance reports, etc. A decline in the quality of various status reports or a growing frequency of failing to provide such materials can signify the vendor is disengaging.
  3. Be concerned if the vendor suddenly becomes overly agreeable to every request.
  4. Watch for performance reports that either have a sudden burst in performance without cause or never underperform.
  5. Closely pay attention to production volumes each week. Sudden spikes and drops can indicate the vendor is moving people in and out of your project.
  6. Above all, watch for an increase in turnover rates.

 

There may be a valid reason for any of the above. However, customers should be concerned and investigate thoroughly. If you have a month-over-month increase in turnover rates by 5%, you need to be on a plane to discuss it with your vendor in person.

Be Reasonable

Lastly, be reasonable in your dealings with the vendor. I think Murphy’s Law applies to outsourcing more than most business functions. Both the client and vendor will make mistakes. There will be misunderstandings. Further, externalities will come into play.

At some point in the outsourcing engagement, the vendor will need special consideration from their client. Listen to them and consider giving them a break. Be reasonable- even if the issue is rooted in human error. Experience shows that when customers are reasonable with their vendor (not a “push over”), total performance will increase, and fraud rates shrink.