With the shoulder flaps on the inside, when set up as a tent, they hang down from the sides and into the tent area. I found myself getting caught up on them.
And when worn as a poncho, having the extrs flaps inside didn't seem to make sense either. As any water that made it through the outer layer, would then just run down the flaps and onto you. Where as, with the flaps outside, any leaks through them, would run down outside the poncho.
So I prefered the flaps to be outside and modded it so. It certainly works better for me this way. As a tent, at least.