Risks of IT Outsourcing: Guide for the Founders

Outsourcing continues to develop and gain popularity in different business areas. According to Computer Economics, large companies have invested a lot in the services of third-party specialists lately: in 2019, their outsourcing budget was 12.7%, and in 2020 it grew to 13.6%.

As you can see, more and more business people are striving to delegate tasks to other organizations because it is unprofitable to maintain a staff in current conditions. The benefits of this cooperation model have long been proven and difficult to argue with.

But, despite all its advantages, do not forget about caution: there are many risks of outsourcing IT services that you may encounter at the start. Today we’ll talk about the pitfalls of the model.

A Few Words About the Peculiarities of the Outsourcing Model

Outsourcing means involving third-party specialists in solving any business tasks. As a rule, it is about non-core areas that do not belong to business priorities. The idea is to reduce the workload on staff and free up time to work in key areas, for example, expanding the distribution network, attracting customers, marketing, etc.

Customer-contractor cooperation is widespread in different areas: many corporations use the services of cleaning, object security, transportation of goods, or repairs. Small businesses often delegate legal and financial tasks.

It allows them not to spend money on hiring and maintaining full-time accountants and lawyers. IT remains the top direction: from creating software products and their support to the design and management of databases.

The results of a global study demonstrate the demand for outsourcing services in today’s business environment. During 2020-2024, the IT outsourcing market will grow at an average annual rate of 5%.

In general, it may increase by $98 billion. Such trends are not surprising, considering the benefits of this cooperation model for companies of all sizes and fields of activity.

When is it profitable to attract outside specialists:

• The company is small, and it is unprofitable to create a separate department to solve specific problems.
• Although the enterprise is large, its subdivisions do not achieve the required results and do not bring enough profit.
• A business cannot afford to hire additional staff to perform non-core work.
• Management is forced to lay off staff to reduce labor costs as the business has difficult times.
• On the contrary, business is developing rapidly, and you need to focus on the main tasks, for example, during the peak of the season.

As you can see, this model is used in different situations to reduce operational and management costs, access specialized talent, and accelerate product release. The main thing is to choose the right approach.

Now there are 3 options that differ in the location of the service provider: in your country (onshoring), neighboring country (nearshoring), or a distant one (offshoring).

Far distance often entails risks for software development outsourcing. First of all, it is about timely communications and the convenient monitoring of work. Of course, not all difficulties are associated with location: the decency of the performer also plays an important role.

Next, we will look at the problems you may encounter at any cooperation stage and briefly explain how to prevent them.

Risks of Outsourcing and Advice on How to Reduce Them

1. Control over processes

Losing the ability to control some of the processes — what could be worse for a business owner? After all, it means the inability to manage the project properly.

Outsourcing means that some tasks and functions are entrusted to another company, and it is good if it is truly competent. Improper management may reduce the quality of services, and the fruitfulness of cooperation will be quite doubtful.

Furthermore, if you work offshore, you cannot monitor progress and track productivity personally. Such a customer-performer relationship is built on trust, understanding of each other’s requirements, and a mutual desire for success.

What to do:

• Choose tasks that can be delegated “painlessly” and leave vital processes under your control.
• Create a plan outlining the contacts and responsibilities of all parties responsible for overseeing work, reviewing results, and giving feedback.
• Decide on the communication channels, focusing on videos, demos, and tools for real-time monitoring.

2. Complex communications

It is one of the obvious IT outsourcing risks arising when working offshore. All communication comes down to one-time calls, and they are not always timely due to the difference in time zones (up to 6-8 hours).

But it’s good if difficulties are connected with communication times only. It is easy to fix by simply adjusting the schedule.

However, you may face language barriers or, even worse, misunderstandings due to cultural, political, or religious differences. It leads to endless debate and expectation/reality mismatch.

What to do:

• Check with the contractor if they have experience with your time zone (if not, if they are ready to work on the new schedule).
• Work with the outsourcer to create a clear schedule with exact times for online meetings and reporting.
• Find out if the team speaks the language you need and explore cultural differences (holidays, weekends, etc.).

3. Unexpected Costs

Most companies choose the outsourcing model to cut staff costs. But when it comes to financing, everything is transparent only at the start of cooperation. Further, unpleasant surprises may await you as additional fees for related services, which are often not specified in the contract.

It applies to software updates, purchase of plugins and paid integrations with other systems, urgent fixes of technical errors, services outside of working hours, etc. Simply put, hidden costs are beyond your initial budget and should be avoided.

What to do:

• Examine the company’s tariff plans and analyze how they fit your budget and goals.
• Draw up an SLA, where you indicate prices for all types of work that need to be performed, including related services.
• Regularly use tools to monitor the activity of remote executors.

4. Incompetent performers

There is no perfect development team, but experience, skills, and work methods must correspond to your goals as much as possible. Sometimes misunderstanding arises: you expect results that the developers cannot provide you because they do not have competencies in your industry and don’t know how to solve your problems.

In some cases, inexperience is supplemented by irresponsibility, dishonesty, or unwillingness to learn and adapt to new requirements. Then success is impossible.

What to do:

• Study examples of work of a potential contractor in your field, find out about the attitude to innovation, contact their clients.
• Start cooperation not with large-scale tasks but with the discovery phase, a pilot project, or a basic version of the product.
• View company reviews and ratings on reputable independent resources.

5. Leakage of important information

Along with the tasks, you transfer important information about your business to the outsourcer. You cannot avoid it since specialists must have some data to study the specifics of your project, build a strategy, and make management decisions.

They need access to confidential information about your internal team, IT systems, and business assets, as well as be aware of changes in your goals and requirements. It is vital to ensure that your copyrights, patents, and business data are in good hands and not transferred to competitors.

What to do:

• Engage a lawyer who knows how to ensure data security in IT outsourcing to conclude the SLA.
• Be sure to sign an NDA indicating the rules for exchanging information and access restrictions to other participants.
• Check out the methods and tools used by the contractor to protect the data of their customers.

6. Dependency in key areas

As we indicated above, many business people seek to get rid of secondary tasks (for example, IT infrastructure maintenance) to free up time for priority ones (search for partners, expanding the client base, etc.). What if you decide to delegate the main tasks for your key project? For example, if your staff lacks skills or all employees are very busy.

It’s hard to argue with the fact that it is cost-effective and convenient. But it is not associated with serious risks of outsourcing IT services. For example, when you stop developing your main project, you will begin to lose valuable knowledge about it over time.

In addition, if you have been operating this model for years, you will become dependent on the contractor’s technology and knowledge base. But even this can be avoided.

What to do:

• Rely on outsourcing some of the work while retaining critical tasks and leadership.
• Agree that all processes will be documented and emphasize ownership of the source code.
• Choose a collaboration format that expands (rather than replaces) your team, such as a dedicated model.

7. Delays in product release

This risk is directly related to those described above: communication problems due to distance from each other and time differences, misunderstandings due to cultural differences, etc. All this can lead to missed deadlines and, as a result, to the late product release.

You should understand the seriousness of this situation. The longer it takes to create a product, the later the audience learns about it. During this time, a more progressive (and faster) competitor may appear on the market who will grab the attention of your potential customers.

Another reason for delays is staff turnover in the outsourcing company. It could be singled out as a separate risk, but we want to emphasize that the change of performers seriously affects the timing. If a new employee is not aware of your project’s specifics, they must get acquainted with their responsibilities, which is also time-consuming.

What to do:

• Get to know the contractor in person (if possible) and visit their office to make sure they have a team.
• Consider the actions of both parties in emergencies so that issues can be resolved without delay.
• Discuss changes in the team composition when replacing the specialist who worked on the project with a new one.

8. Poor quality

This is one of those risks of IT outsourcing that can be associated both with the incompetence and irresponsibility of the performers and with your desire to save money. Of course, the fact that a contractor should be familiar with your industry and have a serious approach is out of the question.

But you, as a customer, need to look at the situation smartly and understand that high quality is equal to high prices. This rule works 99% of the time.

Choosing a cheap offer, you automatically select a questionable quality. It is unlikely that a team of professionals will undertake a project almost free of charge and simply give you their knowledge accumulated over many years.

Low prices are usually set by those who want to attract attention in any way. As a rule, clients do not return to such companies after first cooperation, which forces them to set such prices.

What to do:

• Study the portfolio and customer reviews, find out the quality standards that the company follows, technologies and methods.
• Establish precise requirements and monitor quality, e.g., independent audits.
• Compare prices with the market average and weed out those companies that agree to work for almost free.

9. Breaking promises

The company you select will always talk only about its positive sides. You have to doubt their words because it is just a subjective opinion and a desire to attract customers. There is always a risk that the quality will not meet your needs or their promises will not be fulfilled at all. Faced with newbies is not as scary as with scammers, so you should be especially careful if you are promised everything at once.

What to do:

• Request examples of successful works and how they performed them. Contact the company’s clients personally to ask about their quality.
• Explore all the details about the contractor on independent platforms like Clutch, which indicates the TOP companies.
• Write down the actions in the contract in case of violation of the terms by the contractors.

10. Termination of work

Events can develop in a more severe scenario, for example, if an agency suspends its activities due to bankruptcy. It will lead to non-performance of functions and a temporary decrease in the effectiveness of cooperation.

It is also possible that the outsourcer suddenly decides to terminate the contract. It can have severe consequences for you, up to blocking access to necessary services and technologies. You are obliged to protect yourself from risks. Especially if it is possible to do at the start.

What to do:

• Write down in the contract all the conditions related to the termination of the cooperation, whether by your company or the outsourcing company.
• Describe all the nuances of regulating organizational, managerial, and financial issues.
• Consider actions in case of unforeseen circumstances and violation of conditions.

It is not a complete list of the risks that can arise from outsourcing. We have highlighted only those that are met most often. If you plan to hire outside experts, we recommend preparing well.

And it is worth starting with the analysis of the market and selecting companies that operate on transparent conditions, have a high rating, and are competent in your tasks. The rest will become clear in personal communication with the management and the team.

The main thing is not to rush to conclude an agreement until all essential nuances are discussed and documented: your control over the project, work schedule, deadlines, communication methods, tech stacks, prices, quality standards, access to data and assets, and early termination of cooperation.