Top 09 Risks Of Outsourcing And Best Practices To Avoid them

The risk of outsourcing is an important problem that many businesses are interested in. It is widely acknowledged that outsourcing work comes with greater risks compared to keeping it in-house. Aside from the possibility of subpar quality and late deliveries, there is also the potential of relinquishing control over crucial processes and functions.

By taking appropriate precautions, it is possible to circumvent many of the most prevalent issues associated with outsourcing risks.

In order to evade such risks, it is imperative for companies to evaluate their requirements and goals meticulously. Moreover, they should conduct thorough due diligence on potential vendors, scrutinize their capabilities, and track records. The following blog post will delve into the risks of outsourcing and provide optimal strategies for mitigating them.

It is essential for businesses to establish robust communication and management protocols to ensure efficient monitoring and control of outsourced projects.

Implementing precautions can enable an outsourcing company to minimize risks and enhance the likelihood of achieving a favorable outcome.

What Is Outsourcing?

Outsourcing refers to the practice of engaging a third-party service provider, agency, or consultant, either foreign or local, to undertake a segment of a business that is typically handled by an in-house team. Commonly outsourced services include social media, healthcare, and software development tasks.

In such work arrangements, the contracted service provider assumes responsibility for their team and technology to furnish the requisite services, either at an external or on-site location.

There exist three distinct types of outsourcing:

• Onshore outsourcing: involves engaging a service provider located within the same country as the hiring company. 
• Nearshore outsourcing refers to engaging a service provider from a neighboring country
• Offshore outsourcing involves contracting a service provider located in a far-off location, sometimes even on another continent.

Why should you outsource?

Here are some benefits of outsourcing:

• Cost savings

• Access to specialized skills

• Improved focus on core business functions

• Flexibility

• Increased efficiency

Read more about outsourcing here.

Top 09 Risks of Outsourcing and How to Manage Them

Risk of Outsourcing 1: Loss Of Control

When a business opts for outsourcing its operations, it essentially relinquishes control to an external entity. This often results in a dearth of control and elevated risk levels. There are several underlying reasons for this phenomenon.

First, primarily, the business cedes control over its own fate, as it becomes reliant on another company for the provision of a service or product. If the outsourcing partner fails to deliver as per expectations, the consequences can be significant.

Second, collaborating with a contracted provider can result in a loss of expertise. When a business outsources a critical function, it may no longer possess the in-house expertise required to execute that function proficiently.

Finally, IT outsourcing may also give rise to communication challenges. Maintaining transparent lines of communication can be arduous when companies are located in different countries. Such obstacles can lead to a heightened risk of misunderstandings, unforeseen costs, and errors.

In summary, the risks linked to outsourcing are frequently rooted in the relinquishing of control. As a result, businesses must remain cognizant of these risks when outsourcing and implement measures to minimize them.

How to manage this outsourcing risk

1. Ensure that you have a lucid and succinct agreement with the outsourced company, which should comprise detailed specifications of the assigned tasks, along with quality and timeliness expectations.
2. Regularly touch base with the outsourced company to verify that they are complying with your project standards.
3. Develop a contingency plan in the event that the outsourced company fails to meet your requirements. This plan may involve recruiting additional personnel or searching for an alternative service provider to take over the project.

Partnering with a well-managed IT outsourcing services company, such as ours, can help decrease the hazards linked to contracting and enable your business to operate seamlessly. By doing so, you can reduce these risks and concentrate on your core competencies – running your business.

Risk of Outsourcing 2: Communication Barriers

Irrespective of the video conferencing tool employed, communicating through phone and video calls can be more challenging than in-person interactions, particularly in offshore outsourcing scenarios.

Moreover, despite adapting to these challenges, scheduling conflicts must also be taken into account over time.

For instance, if you engage a remote team from the Philippines for IT outsourcing, you may need to start work earlier to accommodate their working hours, or they may have to work during the middle of the night to align with your working hours.

And what if you don’t follow this?

Meeting up in person can often result in a whole day wasted waiting for the meeting to take place.

Furthermore, in case of any issues or concerns with the software, you cannot simply walk up to your vendor and discuss it in person. This limits your communication options to virtual means, such as sending an email or a message, which may not be as effective as face-to-face communication. This can potentially impact the efficiency of software outsourcing.

How to Manage this Outsourcing Risk

Here are some ways to bridge the communication gap:

• Establish fixed business hours that overlap with your outsourcing team’s working hours to ensure better communication.
• Employ project management tools that enable real-time communication, task tracking, and progress reporting to facilitate collaboration.
• Develop standardized communication formats and protocols to ensure clarity and consistency in all interactions, such as email templates or meeting agendas.
• Establish clear escalation procedures and contact points for addressing issues, questions, or concerns that arise during the outsourcing project.

By implementing these tips, you can avoid potential problems, quickly resolve any issues that may arise, and facilitate knowledge transfer, ultimately making your outsourcing arrangement more effective.

Risk of Outsourcing 3: Poor quality software & services

A significant concern with outsourcing for many companies is the possibility of receiving a subpar end product. After all, the ultimate objective is to obtain functional software. And undoubtedly, receiving high-quality service throughout the process is also desirable.

Working with a new vendor carries the risk of receiving subpar end products. Despite the goal of working software and quality service, cost-cutting measures or accelerated development can lead to starting over with a new vendor. Protecting yourself from this outcome involves performing due diligence upfront to minimize the risk of receiving poor-quality software and service.

How to manage this outsourcing risk

In brief, it’s crucial to conduct a thorough vetting process to identify the appropriate software development team.

Instead of solely focusing on the price, evaluate the value that the vendor brings to the table. Choosing the cheapest option may result in poor-quality software and subpar service. It is essential to consider the vendor’s experience, expertise, and reputation in the industry. Ultimately, investing in a high-quality software development team may save you time, money, and headaches in the long run.

Request the outsourcing company to provide you with examples of their previous work. You can evaluate their expertise and job quality by reviewing their past work experience and the type of jobs they have undertaken in the past.

Establishing clear expectations with a Service Level Agreement (SLA) is crucial. This agreement should outline the services provided by the outsourcing firm and their associated costs. It will serve as protection against any potential quality issues down the line.

Having someone on your staff who can inspect the outsourced team’s work is crucial. A tech-savvy specialist can help guarantee the quality of the finished product code and reduce the risk of quality issues.

Risk of Outsourcing 4: Unforeseen and Hidden Costs

Outsourcing is primarily done to gain a competitive edge by reducing costs and increasing profitability. However, if it results in any unforeseen expenses, it can pose a risk.

Before outsourcing a service, it’s important to compare the vendor pricing with current in-house development costs along with all the additional expenses to get a rough idea of the vendor charges. However, it’s important to keep in mind that later in the development project phase, there may be unforeseen costs such as:

• Hardware or software upgrades. 
• Relocation or redeployment.
• After-hours services.
• Troubleshooting

All of these expenses accumulate and can exceed the project’s initial budget, resulting in an overall increase in the project’s cost.

How to Manage this Outsourcing Risk

To ensure a successful outsourcing project, it’s crucial to start by defining clear project requirements to ensure seamless business processes and minimize errors.

It’s also important to closely review and verify all cost estimates and details provided by the outsourcing partner.

Using employee productivity management tools like Time Doctor can also help ensure accuracy in tracking the work hours of each outsourced employee. This allows for tracking of overtime hours and accurate payment to the vendor. Additionally, Time Doctor’s payroll management feature allows for the easy generation of payrolls at any time.

Risk of Outsourcing 5: Wrong choice of vendor 

Delegating your project to a third-party vendor can come with the risk of encountering an unscrupulous provider. This could lead to a subpar-quality product, missed deadlines, lost business opportunities, and even security breaches. Whether it’s due to a vendor’s exaggerated self-presentation or inadequate vetting, there are ways to avoid such risks.

How to manage this outsourcing risk

It is essential to gain a comprehensive understanding of the outsourcing company’s background, expertise, and project selection. Start by reviewing their portfolio on their website. Additionally, you may want to reach out to some of their previous clients for more detailed feedback beyond what is available in short reviews.

However, don’t stop there. If you still have doubts, seek feedback from the outsourcing community, review platforms for references, and demand evidence of how they communicate, handle-less experienced clients, deal with competition, and more.

In addition to checking for current and previous clients, it’s important also to examine the outsourcing company’s partners. Make sure that they are experienced and have a good reputation. However, it’s not enough to judge solely based on reputation. The outsourcing company’s choice of friends and partners can also be revealing.

Risk of Outsourcing 6: Privacy and Security Concerns

When engaging with a service organization for outsourcing, you are entrusting some or all of your business assets to an external party. It is crucial to prioritize privacy, intellectual property, and data protection considerations, which encompass copyrights, patents, trade secrets, and other related matters.

While the probability is low when contracting a reputable vendor, there is always a chance that the third-party organization could pilfer or expose valuable information or trade secrets. This risk is amplified when hiring someone from a foreign country who is not subject to your country’s laws.

Suppose a member of the outsourced software development team steals your company’s code; the situation could be very distressing. How would you pursue legal recourse across international borders?

How to Manage this Outsourcing Risk

Mitigating such security risks requires preparing a robust outsourcing contract or service level agreement (SLA) with the guidance of an international legal expert to safeguard your organization’s interests.

Moreover, to preclude any potential data breaches, you can even consider asking the relevant parties to sign a non-disclosure agreement (NDA).

Risk of Outsourcing 7: Lack of experience with remote teams

In today’s age, remote work is gaining widespread acceptance, with numerous businesses operating entirely through remote teams. T
The risk of outsourcing is an important issue for many businesses. Let’s learn more about these and ways to avoid them his approach enables organizations to access a broader talent pool while enabling employees to work in their preferred environment, enhancing overall productivity.

While the prospect of remote work appears promising, introducing this mode of operation to an inexperienced team can increase risk. Initially working with a remote team can involve a learning curve, and adapting to this change can be challenging.

How to manage this outsourcing risk

 

Clearly define project success: To mitigate the challenges of working in an unfamiliar manner, it is vital to establish a clear understanding of the project objectives and success criteria from the outset. Ensuring that everyone is aligned early on can help eliminate any ambiguities and minimize the associated risks.

Share a top-level user journey walkthrough: This incentivizes the offshore team to adopt a user-centric perspective and establish a clear connection between sprints/milestone deliverables and the larger project objectives.

Over-communicate: Designate a point person in-house to serve as the primary contact for the offshore team. This individual can field questions from the remote team and communicate any project modifications asynchronously. This approach can emulate the natural exchange of information that occurs in a physical workplace setting.

Risk of Outsourcing 8: Outsourcing a Key Product

Deciding to outsource your key product is a significant choice to make. Entrusting an external vendor to work on your core project necessitates a degree of dependence. Although outsourcing can streamline operations and reduce costs, over-reliance on external parties can erode your product expertise and core competencies over time.

Therefore, it is advisable to engage skilled individuals, such as engineers or analysts, who can lead your team to enhance your product, rather than outsourcing the entire product.

How to Manage this Outsourcing Risk:

One effective approach to mitigate this risk is to outsource select parts of your project while retaining critical management and key employees in-house.

It is advisable to engage specialized professionals, such as designers or developers, who can complement your existing team rather than serve as substitutes.

Moreover, conducting a thorough background check of your chosen vendor can provide valuable insights into their reliability and suitability for your project.

Risk of Outsourcing 9: Language and culture barriers 

The practice of outsourcing has expanded the market for specialized services, enabling organizations to source high-quality providers from around the world. However, this trend has also introduced cultural and language-related barriers that can impede effective communication, a critical element of successful partnerships.

How to Manage this Outsourcing Risk:

To ensure successful outsourcing partnerships, it is essential to familiarize oneself with local laws and regulations that may impact contracts and foreign relations. Cultural differences should not be feared, as they can often be overcome through thorough research and mutual agreements.

In addition, it is advisable to establish clear standards for English language proficiency, particularly if it is not the primary language for both parties. Effective communication is critical to ensuring that project requirements are clearly understood and executed.

To assess the team’s language proficiency, it is recommended to conduct audio or video calls rather than relying solely on written communication. If the team resists such calls and insists on written communication, this may indicate potential issues.

Conclusion

Outsourcing is a cost-effective solution for getting work done, but like any business decision, it comes with inherent risks.

By careful planning and effective management, the risks associated with outsourcing IT services can be mitigated. The first step is to invest time in proper research to avoid issues that arise from a lack of knowledge. Additionally, transparency is crucial in building a successful partnership with your vendor, so make sure to communicate clearly and demand the same level of transparency from them.

If you have any concerns about the risks of outsourcing, get in touch with us. We are ONextDigital, specializing in providing developers and web design & development services for customers. With over 10 years of experience in the field of IT outsourcing, we have helped thousands of customers benefit from outsourcing IT services. We are confident that we can also deliver similarly good results for you and other future customers.

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