Top 6 Risks of Outsourcing: How to Avoid Them

More and more enterprises are switching to outsourcing to strengthen their positions in a dynamic market and increase cost-efficiency. It is confirmed by Techbehemoths, who surveyed 324 small and medium-sized IT companies. About 77% of respondents admit that they value outsourcing for cost-effectiveness and flexibility.

However, things aren’t so clear: 12 companies still deny its advantages. What’s the matter? Perhaps in risks of outsourcing. In this article, we will take a closer look at problems that businesses may face and how to avoid them. But first, let’s remember the features of such cooperation.

The main thing about outsourcing: 5 models of cooperation and their features

In fact, any IT business rests on people, their knowledge, abilities, and efforts. It is impossible to achieve goals and move forward without competent and talented specialists. However, it doesn’t mean that it’s necessary to have a large staff of employees of all profiles and directions.

There is an easier and more cost-effective option. You can hire specialists to manage your main business processes and outsource non-core tasks to third-party performers.

Such a work model is widespread in many areas. In the industrial sector, it is associated with the production of goods. In the financial sector, it relates to reporting and mutual settlements with personnel.

Retailers get rid of the routine in logistics and cash operations, and publishers solve the problems of translation and printing of magazines. But IT outsourcing (ITO) implies support and maintenance of technical infrastructure as well as building digital products.

Almost the entire technical component of business may be delegated: computer maintenance, network administration, or database maintenance. The creation and support of software solutions are especially popular.

It allows you not to assemble your own IT department but to attract professionals to work on the project. Such cooperation is the most economical and organizationally justified choice for many companies. Moreover, there are several hiring options affecting outsourcing risks and benefits.

Outsourcing collaboration models:

• Onsite. Recruiting a specialist for a vacant position in the company and integrating into the team for a specified period. It is an interim solution that helps fill the temporary lack of skills and knowledge. All conditions are agreed in advance, including the workplace, terms, and duties. It is a hybrid option that combines the characteristics of outsourcing and insourcing. It differs from manpower rental in that the service provider retains control over the employee.
• Onshore. Cooperation with a local service provider (from the same country, region, or city). However, unlike the previous type, all tasks are performed outside the customer company. It is convenient if you need close contact with the performers and periodic meetings to discuss plans. It also eliminates the risk of misunderstandings due to differences in languages, cultures, and political environments.
• Nearshore. Tasks are delegated to performers from a country located nearby. It allows you to collaborate in real-time without major schedule changes and reduce costs through favorable pricing and tax differentials. This option is useful when it is difficult to find specialists in your region and cooperation with distant countries is unsuitable due to different time zones.
• Offshore. Hiring specialists from distant countries. It is the most cost-effective model that helps reduce costs and better use labor, capital, and technology. It gives you access to a wide pool of talent from the right industry to work on a permanent or temporary basis.
• Multisource. Several service providers from different countries are involved in solving tasks. The main benefit of this approach is that it expands business opportunities by allowing you to select the best specialists. Of course, the costs are much higher than in other models, especially compared to offshore.

As we mentioned earlier, the chosen model determines what barriers a business may encounter during cooperation. It is natural that most of the difficulties are associated with hiring from distant countries.

However, some relate exclusively to the conscientiousness and professionalism of the contractor. Next, we will look at what disadvantages may nullify all the advantages of cooperation and suggest how to deal with them.

6 risks of outsourcing and how to deal with them

1) Limited communication

The first and most obvious risk is related to communication. When the customer and the contractor are located in different countries and cannot meet, they face problems with planning and controlling work. Especially if they are separated by a huge time difference (4-6 hours).

In this case, performers cannot contact the client at any time to resolve urgent issues, which slows down the creation of the product and its entry into the market.

The difference in time zones is not the only serious problem. Language barriers and even slight cultural differences lead to gaps in understanding between parties, often unforeseen. In addition, the outsourcer and the customer may have different views on the solution of tasks and project management.

It leads not only to a mismatch in expectations but to serious deviations of the finished product from the original requirements.

As you can see, many other problems stem from this risk, so you should make every effort to establish good communication:

• Create a communication schedule, including regular online meetings on current tasks, reporting, agreeing on modifications, and making changes at the end of each sprint.
• Appoint a manager responsible for monitoring the remote team, keeping in touch with workers, and solving unforeseen problems.
• Choose a contractor with experience in different time zones, good reviews from remote clients, and support around the clock (if necessary).

2) Exaggerated Expertise

Outsourcing software development contractors often tend to gloss over their skills, which leads to another risk for clients. Lack of experience is usually revealed too late, when work on the project has already begun. At this moment, the customer understands that promises do not guarantee quality.

As a rule, such promises include a low price and favorable discounts, which motivates cooperation. The desire to save money is one of the main reasons companies make hasty decisions without checking the reliability of contractors.

By neglecting to check the contractor, the client allows unsafe conditions for cooperation. It is necessary to assess expertise comprehensively: philosophy, culture, management style, working methods, data protection methods, and much more.

Disagreement in views on such issues leads to unpleasant consequences. For example, if the contractor does not care about confidentiality, critical business data can fall into the hands of fraudsters.

There is only one way to avoid problems: ensuring the service provider is reliable. To do this, you need to provide a comprehensive study:

• Study the website, track activity in social networks, and analyze content on thematic websites (success stories, expert research, analytics).
• Study third-party reviews on platforms like Clutch or Goodfirms and contact customers to get an honest opinion on reliability and service quality.
• Ask the contractor to provide information about what technologies, tools, and methodologies they use; check the results of completed projects.

3) Loss of control

When a project falls into the hands of third parties, the company loses control over it. It entails risks of outsourcing because now everything depends on the professionalism and integrity of the IT services provider.

Sometimes an outsourcer offers qualified developers but later delegates the project to less experienced specialists. Also, the team may take on several projects at once and constantly switch between them, which negatively affects the timing.

Sometimes remote contractors want to “outsmart” clients to save their resources. They take advantage of the fact that the customer cannot control the workflow personally. The situation is aggravated if clear requirements and standards were not defined initially: it gives freedom of action to performers, including neglecting quality.

Illiterate project management and negligence on the part of the outsourcer will undoubtedly lead to the loss of money and time of the client.

You can create reliable conditions for cooperation even remotely:

• Develop a strategy where you describe all the deadlines, responsibilities, and requirements, including technologies, languages, tools, platforms, as well as metrics and KPIs (it is essential to track them at each stage).
• Select multiple communication channels and set a schedule for communications and reporting; appoint a person responsible for monitoring the remote team.
• Verify that the contractor provides well-defined product quality control and ask for access to a bug tracking system.

4) Manipulation of data

The data necessary for the work of an outsource partner is transferred outside the corporate network. It causes additional information security risks. Many companies focus on service features and overlook safety issues when concluding a contract. The probability of risk increases if the outsourcer is far away and is not familiar with the laws of the client’s country.

Both parties should be interested in discussing security policies and data handling practices at an early stage. For the client, it is a way to prevent data from being leaked to fraudsters or competitors.

And for the contractor, it is an opportunity to emphasize their professionalism and increase the client’s confidence. In this case, special attention must be paid to protecting intellectual property (IP), i.e., the source code.

Preventing security threats is easier than you might think. Everyone can do it:

• Ask a potential contractor for information about security policies and find out what tools are used to prevent data loss.
• Engage an experienced lawyer, draw up and sign a data processing agreement and NDA determining liability in case of violation of the conditions.
• Describe important nuances related to ownership of the source code in the contract to ensure that your intellectual property is protected.

5) Uncertain Costs

If the goal of delegating tasks is to reduce costs, companies usually hope for long-term savings. However, such hopes may not come true due to some disturbing circumstances. The outsourcer may note the prices for the main work only and not mention the associated costs.

Out-of-hours service, urgent technical troubleshooting, upgrades, modernizations… These and other additional works require additional payment.

Unobvious costs are also associated with negotiating, ensuring compliance with the contract terms, and coordinating work. If the client is working on this model for the first time, they may not be aware of the hidden costs and the need to mention them in the contract. A sudden increase in the price of a project is an unpleasant surprise.

Sometimes it is difficult to predict costs because of unforeseen circumstances or external conditions. But you can also minimize these IT outsourcing risks:

• Ask the service provider for a detailed list of all costs (both basic and related) that may arise when working on a project.
• Engage a lawyer and conclude a contract where you list the costs and determine how the price will depend on the size of the infrastructure, quality of service, and other parameters.
• Describe in the SLA the work that the outsourcer undertakes and clarify their timing to avoid discrepancies between expectation and reality.

6) Dependence on services

If the cooperation lasts for a long time and covers many essential tasks, there is a risk for the company to become dependent on an outsourcer. Especially if the assets have a very specific nature and there is a lack of service providers in this field on the market.

It happens that the contractor decides to use the dependence of the client in their favor and raises prices or neglects quality.

Modern information systems are more integrated and interconnected. Because of this, the problem of technological inseparability arises: it becomes more difficult to determine both the areas of responsibility of different service providers and the areas of interest of the client and the contractor.

Breaking business relationships (especially ahead of schedule) or the termination of the outsourcer’s activities may be a serious blow to the client company. How to avoid this:

• Clarify the conditions for terminating long-term partnerships, fix the scope of work and duration, and delineate IP rights.
• Establish knowledge transfer policies after project completion, describing all assets that the contractor must provide to their client.
• Retain control of critical tasks and choose a team expansion model that will not replace in-house specialists.

Despite all software development risks, IT outsourcing remains very popular. According to Computer Economics, companies are seeking to invest more in this area: over the period 2019-2020, the budget increased from 12.7% to 13.6%. And we are sure it will continue to grow, as the benefits of cooperation far outweigh its weaknesses (which are easy to fix).

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