International Conference KNOWLEDGE-BASED ORGANIZATION Vol

International Conference KNOWLEDGE-BASED ORGANIZATION Vol. XXIII No 1 2017

RISK MANAGEMENT IN THE DECISION MAKING PROCESS CONCERNING THE USE OF OUTSOURCING SERVICES IN THE BULGARIAN ARMED FORCES

Nikolay NICHEV

“Vasil Levski“ National Military University, Veliko Tarnovo, Bulgaria [email protected]

Abstract: Outsourcing services in the armed forces are a promising tool for reducing defence spending which use shall be determined by previously made accurate analysis of peacetime and wartime tasks of army structures. The decision to implement such services allows formations of Bulgarian Army to focus on the implementation of specific tasks related to their combat training. Outsourcing is a successful practice which is applied both in the armies of the member states of NATO and in the Bulgarian Army. Using specialized companies to provide certain services in formations provides a reduction in defence spending, access to technology and skills in terms of financial shortage. The aim of this paper is to analyse main outsourcing risks that affect the relationship between the military formation of the Bulgarian army, the structures of the Ministry of Defence of the Republic of Bulgaria and service providers, and to assess those risks. The basic steps for risk management in outsourcing activities are determined on this base.

Keywords: outsourcing, risk management, outsourcing risk

1. Introduction It is measured by its impact and the Outsourcing is an effective tool to generate probability of occurrence, and its new revenue, and the risks that may arise, management is the process of identifying, draw our attention to identifying the main analysing, evaluating, monitoring, types of outsourcing risks. This requires the countering and reporting the risks that may focus of current research on studying and affect the achievement of the objectives of evaluating the possibility of the occurrence an organisation and the implementation of of such risks, and the development of a the necessary control activities in order to system for risks management on this basis. limit the risks to an acceptable level. In accordance with this, it becomes Risk management in the Ministry of necessary for the Bulgarian Armed Forces Defence of the Republic of Bulgaria is a and the structures of the Ministry of dynamic process which should provide a Defence of the Republic of Bulgaria to better understanding of potential threats, retain control of their own key functions in actions or events that may positively or the public sector of defence. negatively affect the ability of the military According to the guidance documents of the structure to achieve its objectives and Ministry of Defence, risk is the possibility planned activities. It is a mandatory part of of the occurrence of an event which will management of defence and its resources, affect the achievement of the adopted and a key activity which contributes to the (planned) objectives of the structure [2, 8]. achievement of set goals.

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2. Types of Outsourcing Risks contract, scarce supply markets, and Studies show that the most frequently specificity and variability of the assets. observed risks are those when the Outsourcing risks which should not be outsourcing provider does not offer the underestimated are belittling the main expected and pledged quality of the service activities and reducing competence. These to military units. Experience shows that are risks which occur when the governing immediately after outsourcing, the service bodies of military units do not pinpoint its reduces its quality in comparison with core activities, i.e. fail in properly previously offered services in the distinguishing major from minor activities organisation [3, 4]. To overcome this risk, in the military unit. The refining of an adjustment period of about a year and a peacetime and wartime tasks has particular half should be planned, during which the importance. The transfer of certain activities supplier is able to get to know the process or services to external contractors puts the and the customer requirements. It can be units of the Bulgarian Armed Forces at the expected that the quality of the outsourced risk of having limited control over the service will increase after the specified planning of these services. Therefore, the need period. This requires finding the appropriate of conducting more frequent meetings with external contractor. the contractor occurs so that the military units It is noteworthy that before the transfer of are not in isolation from the outsourced the service to an external supplier, the services [5, 6, 10]. achievement of the required quality of the Another problem for the structures of the activity is a responsibility of the personnel armed forces in the use of outsourcing of the designated military unit – the client. services may occur in the misuse of After making the decision to use classified information under the Law on outsourcing, the management of the military protection of classified information. To unit should rely on the conditions laid down prevent such a threat, it is appropriate to in the contract and ensure that the external take measures at the conclusion of the provider adheres to them. To ensure this, contract for transfer of services. Concluding guarantee measures should be co-ordinated an agreement for non-disclosure of and bound to the current national quality information (a non-disclosure agreement, certificates [9]. Giving orders for NDA) may be pointed as a preventive inspections at regular intervals is another measure. measure to prevent such kinds of risks. The decision to use outsourcing services in Along with the quality problem, hidden the Bulgarian Armed Forces can create risks costs may sometimes occur. To avoid this, for specific activities of the various units the financial parameters in the outsourcing arising from making wrong decisions to contract related to the appropriate level of reducing the level of service because of the service should be clearly established, and worse quality of provided services. This is the text must specify that there will be no the reason why the foreign experience and additional costs for the customer except the mistakes should be examined before indicated ones [4]. making a decision to use outsourcing in the The personal interviews with servicemen Bulgarian Armed Forces and the specific from different units show that there is an activity of the military unit, which does opportunity for risk caused by inadequate services transfer, should be taken into performance of the contractor when account. Outsourcing in military structures activities or services are outsourced from contains specific risk of corruption. the armed forces. The basic marks for the According to Terziev, Nichev and Bankov, appearance of this disadvantage most often the corruption encourages state officials to are factors such as poorly composed create new rules and delays in procedures.

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Corruption leads to decreased compliance the pressure of reduced deadlines; with environmental, nutritional and other inadequate technology and financial standards, reduces the quality of provided resources for fulfilling the obligations; services and increases budget costs [11]. All increase in the price because of the fact that the above mentioned requires military units upon signing the contract the service price to develop and implement a system of does not include its continuous ongoing monitoring of the entire improvements; bankruptcy of the outsourcing process. contractor; breach of confidentiality and A great deal of the outsourcing agreements security of the military unit; occurrence of depend on the access to internet, the unexpected costs; non-compliance and connectivity and the need for adequate failure to comply with contractual rights infrastructure, which suggests that there and obligations; violation of other activities may be an IT risk as well. at the military unit; lack of opportunity for The best practices and the analysis of the professional development [5, 6, 7, 10]. studied literature suggest that the risks The analysis of the studied literature leads arising from incorrect or formal to the identification of the factors implementation of outsourcing in the generating risks in the course of co- structures of the Bulgarian Armed Forces operation between a military structure and are the following: loss of direct control and external contractors (Table 1) [7]. supervision of the transferred services; information leak; negative quality caused by

Table 1. Factors associated with the formation of risks arising in the course of cooperation between military units and external contractors Groups of factors Features Legal factors Risks due to changes in the regulatory framework and levels of quality of outsourcing services. Military and economic Risks that depend on outsourcing market development, factors quality selection of external contractor, validity of the contract, outsourcing operations quality control. Corruption risks leading to increased outsourcing costs and creation of unfavourable terms for military units. Military-psychological Risks associated with changes in the organisational and social factors structure of the military unit as a result of the transfer of services to external contractors. Risks related to social tension which arises or increases among the personnel of the given unit as a result of altered job functions or redundancies in the official staff list. IT factors Risk of improper use of information by both the military unit and the contractor of outsourcing services. Risks due to a lower level of command staff awareness at military units about possible negative consequences of outsourcing services.

All the risks that the transfer of services and assessment of criteria supporting the choice activities to external entities may cause in in using outsourcing services as well as by the sphere of the armed forces can easily concluding precise contractual agreements. become more than the benefits. This can be Another important activity to prevent the avoided by a consistent approach to the majority of these risks is the creation of an

407 emergency plan which provides for only the resources that are not used by it to termination of the outsourcing project and carry out its main specific activities. consequently returning the services The expected risk level of the joint work of provided by the external supplier back into the unit as a client and the external provider the units. is an indicator which depends on the Risk management of outsourcing services is intensity of the impact of related a gradual process of identifying, evaluating, professional risks and probabilities for risk monitoring, and control, as well as situations. It is characterised by the amount developing and implementing measures of damage and losses caused by the failure aimed at reducing the negative impact of of the outsourcing process. Therefore, it is these risks on the activities in the military essential to provide for a certain amount of unit. Risk analysis has a significant impact compensation actuated by a particular risk on the successful development of the situation to offset possible losses. This outsourcing process. Considering the element must be defined and included in the complexity and importance of identification outsourcing contract. and management of outsourcing risks, the In view of the above, the decision to personnel of the military unit involved in outsource may be accepted if the expected the outsourcing process must have the risk level is less than the maximum level of necessary skills and knowledge to evaluate risk. the impact of this process on the overall The management of the outsourcing risk in activity of the unit by using appropriate the structures of the Bulgarian Armed methods, such as analogy, expert methods, Forces is an activity that requires a number analytical methods, etc. of decisions related to identification, evaluation and control of the risk. A sample 3. Strategy for Managing the Risk of process for outsourcing risk management Outsourcing Activities can be described by the following step The decision to conclude an outsourcing model: deal should define the risks which the First step - identifying the risk factors for respective structure of the Bulgarian Armed outsourcing by analysing the economic, Forces can take, as well as the activities social, legal and information-technological which it should perform, in order to limit factors. and avoid diversification. To do this, it is Second step - determining the expected appropriate to form a strategy for managing level of risk based on potential losses from the risk of outsourcing activities. a risk situation, and assessing the The main problem in forming the strategy is probability for occurrence of risk situations. to determine the maximum level of risk that Third step – comparing the expected to the the military unit can assume, taking into maximum outsourcing risk and making account its specific activity, availability of decisions about outsourcing of services and resources and ability to neutralise the activities. If the expected level of risk is less negative effects of risk situations in than the maximum level of risk, the outsourcing [7]. Maximum risk level can be outsourcing proposal is accepted. If the defined as the situation when the military expected level of risk is greater than the unit exceeds its ability to offset expected maximum level of risk, the outsourcing losses caused by risky situations without proposal must be rejected [2, 7]. deterioration of its combat readiness and The planning and implementation of financial potential. Therefore, in decisions on the use of outsourcing in the determining the amount of funds which the structures of the Bulgarian Armed Forces military unit as a client can use to cover any should be based on the determination of the losses, it is necessary to take into account maximum amount of risk that can be taken,

408 and compared with the expected level of culture and develops the skills of the armed risk in the cooperation with the external forces. provider. The military unit - client will be The main objectives in making the decision able to act and make managerial decisions to outsource are not only improving the depending on the estimated amount of efficiency and effectiveness of the losses upon the occurrence of risk capabilities of military logistics, but also situations. completing defence tasks by reducing the However, when one of the structures of the volume of activities and minimising costs. Bulgarian Armed Forces cannot afford to The new economic realities of the additionally recruit highly skilled and beginning of the 21st century tend to highly paid personnel for the performance strengthen the trend of shifting the world of some services, then outsourcing is the economy based on domestic markets, only decision. The armed forces structures interconnected by trade and investments, to should aim at results with the highest an economy which encourages public- quality of service, without risks and with private partnerships. Globalisation as a lower costs. progressive form of integration of nations is The list of outsourcing risks remains open not only manifested in economic terms, but and may be supplemented depending on the also in all spheres of cultural, political and individual characteristics and specificity of social life. It is driven by new relationships the various military units and structures between regions and countries in the new which use outsourcing. international policies, including Military units can decide to use outsourcing governments, business and society [1]. for the purpose of increasing the Partnership at different levels leads to the effectiveness of outsourced services. creation of a new type of interaction, However, the outsourcing process can have including in terms of defence and security. a negative effect on performance. This requires the evaluation of the 4. Conclusion appropriateness of using outsourcing Outsourcing in the armed forces, regardless services in the relation with the capabilities of the risks involved in its use, is a of the military unit and its specific perspective tool for reducing the cost of activities. Outsourcing decisions should be defence. flexible and in accordance with the security The analysis of outsourcing risks and the of information. The success of such a following decision to use outsourcing in the decision is indirectly linked to the logistic support of the Armed Forces of the performance of activities as: precise Republic of Bulgaria is in direct relation analysis; assessment of possible services with the peacetime and wartime tasks of which the military unit can provide for military units. Military units with a high outsourcing; market research and research degree of readiness should use their own of companies providing outsourcing logistic structures to provide the necessary services; consistency in the selection of resources just in time and place, with the external providers, and last but not least the necessary quality and at an acceptable price. conclusion of precise outsourcing contract. The applicability of outsourcing in the The effective implementation of Armed Forces of the Republic of Bulgaria outsourcing is associated with many risks allows commanders to focus on the that should be distributed between the implementation of specific tasks related to armed forces and the private sector. Using the combat training of military units. the skills of the private sector changes the

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