Top 7 Risks of Outsourcing and Best Practices to Avoid Them
When the outsourcing provider is yet to earn your trust, you may consider them outsourcing risk. After all, you need to share your confidential data and know-how. On top of that, there are many other risks, starting with hidden costs undermining cost reduction benefits through quality issues and ending data security.
It is important to consider the risks of outsourcing and take the steps necessary to mitigate them. In this article, we take a look at some of the more common risks of outsourcing and how you can mitigate them and build trust with offshore vendors that meet the high standards.
- Top 7 Risks of Outsourcing
- 1. Lack of control over the process and management
- 2. Communication and culture issues
- 3. Quality of outsourcing provider services
- 4. Lack of domain knowledge in the field
- 5. Higher-than-expected service provider costs
- 6. Lack of experience with remote teams
- 7. Data security and IP protection
- Conclusion - How to avoid outsourcing risks?
Top 7 Risks of Outsourcing
Whilst there are many separate challenges involved with transferring work from within your company to another organization, the main outsourcing risks can generally be classified into 7 separate categories as follows:
1. Lack of control over the process and management
As a business leader, it may feel uncomfortable and alien to be handing over vast swathes of the management and processes of your organisation to another company and indeed this perceived loss of control can be disconcerting. Of course, the lack of control itself is not a risk, but rather what may arise as a result.
Transparency will be required between your organization and outsourcing firms regarding which elements of the management structure you will require to retain control of. A “RACI” document showing responsible/accountable/consulted/informed can help here.
Focus on outcomes and metrics whether this be throughput, customer experience or something else. Allowing the outsourcer to focus on results can provide some leeway in terms of how those results are achieved.
Determine a communication cadence. Often regular reports can be a good way for the outsourcer to provide periodic updates to the client.
2. Communication and culture issues
A recent study showed that nearly 90% of businesses believed communication to be one of the key challenges with outsourcing capabilities. This can arise from a number of factors such as culture (both national and organizational), language, and the distributed nature of teams.
This can be further compounded by the client/service provider dynamic, where service provider staff might feel compelled to be agreeable towards the client and not challenge unachievable requests, ultimately leading to disappointment when results do not materialize.
Ensure that the outsourced team members have a good command of English, using an established standard such as the Common European Framework of Reference (CEFR) and ensure that your contract states the appropriate minimum standard you require for any new resource.
Make sure that those leading your meetings have excellent facilitation skills, checking for understanding and asking attendees to confirm their alignment.
Make use of face to face or video calls as a lot of communication can be non-verbal.
Make sure that working patterns across time zones are agreed. If there is a significant time zone difference this can impact collaboration.
3. Quality of outsourcing provider services
Outsourced services' poor quality standards are both a nightmare and one of the most common risks of outsourcing. For the cost savings, companies choose outsourcing companies with the most favorable price, overlooking the reason for such a low cost of services.
More often than not, you need to look beyond the price and learn more about the development partner to understand its true value for you.
Ask the outsourcing company for examples of previous work. See who they have worked with previously and what type of jobs they have done. This serves a number of purposes.
Make sure your outsourcing partner uses project management methodology and DevOps practices.
Establish clear expectations with Service Level Agreement (SLA) that lists services provided by the outsourcing firm and their costs.
Find or hire someone on your staff who can inspect the work of the remote team: a tech-savvy specialist on your side will be an additional guarantee of high quality of the finished product code and will help to avoid this and other risks of outsourcing associated with technical challenges.
4. Lack of domain knowledge in the field
By hiring an offshore company to work on your core project you become dependent upon an outside vendor. And while outsourcing is cost-effective and makes the job easier, you eventually start to lose your product expertise and core competency.
Shared understanding is a critical success factor in achieving high quality software that meets stakeholders’ needs. Research into software team coordination has confirmed that aligning organizational factors and technical factors affects software quality and cost.
Experienced software development companies are specialized software service providers who have expertise gained from various projects in different domains and sectors. This plays a critical role in reducing the risks of outsourcing. For the final product, and operational risks, knowledge transfer from the service provider to your business is a competitive advantage.
Remote team members might have all the technical skills required, but they may lack product and specific domain knowledge that can result in costs and missed deadlines. So it’s better to hire expert individuals like engineers or analysts who can lead your development team to improve your product rather than offshoring your entire product.
See who they have worked with previously and what type of jobs they have done. This serves a number of purposes.
It allows you to see if they have done something similar to what you require.
It gauges the level of experience the company has.
It lets you understand the scale of jobs the company has done and if they are able to handle your task.
This is not to say that companies with a wide range of customers and a company’s portfolio are the best for your use case. The key point is that the outsourcing partner has experience in your business processes. If the software development company claims to have experience doing something similar to what you want, but can’t share any information, then this can be a red flag.
It’s true that outsourcing companies may not always be able to share their previous projects due to non-disclosure agreements. However, they should at least be able to give you a broad outline of their previous projects, how they were developed, and how they benefit the clients.
5. Higher-than-expected service provider costs
Outsourcing is often expected to reduce cost, by making use of the economies of scale that are inherent in the third party’s organization and the opportunity of moving effort to overseas geographies where labor can be cheaper.
However, there is an old adage of “buy cheap, buy twice” and it is important to make sure that the costs saved up front are not realized elsewhere. Such examples might be that a lower rate of delivery or poorer quality could result in a longer timeline to make up the shortfall.
Ensure that you are as explicit as possible regarding quality standards, on-site visits, and working overtime from the beginning. Any cost for the time wasted by the third party in clarifying these matters will be picked up by your organization
Make a decision about the operating model of the third party. A time and materials arrangement will tend to be at a lower day rate than a fixed price agreement, but in a fixed price model there will be more incentive for the third party to deliver on time and therefore more predictability.
Watch for common third-party tactics such as adding extra team members to the project (thereby increasing cost), or swapping out experienced “A Team” members for newer, less experienced team members, which is likely to extend delivery timelines and reduce efficiency.
Establish a robust quantitative quality measurement process so that you can determine where quality has fallen short as well as qualitative feedback loops allowing employees to highlight any concerns or improvement opportunities
6. Lack of experience with remote teams
We're in an era where working remotely is becoming increasingly common. Many businesses, in fact, are totally remote. Remote teams allow companies to tap into a larger talent pool and allow everyone to work where and how they are most productive.
Clearly state project success definition. Probably the most important aspect is both parties being aligned in what success looks like. If it’s at all unclear what you want to achieve at the end, rewrite it.
Show top-level user journey walkthrough. This urges the offshore team to adopt a more user-centric approach and better relate sprints/milestones deliverables to the big picture
Over Communicate. Assign someone in-house to ensure that the offshore team gets all the info they could possibly need. This person's role would be to keep an eye on any changes to the project and communicate to the offshore team.
7. Data security and IP protection
In the outsourcing model, you need to be aware of this risk and implement all measures necessary to avoid damages that may result from the potential violations of data security and/or intellectual property rights when outsourcing services.
Share sensitive information about your IT systems can result in decreased security. Keeping your data secure when using a service provider requires a multi-pronged approach and regular risk assessment. It’s important to address these separately as you evaluate a service provider.
Data security is often weighting on the outsourcing decision. You should hold the outsourcing firms accountable for any risk that may come from outsourcing. Outsource to a partner who knows how to handle security and implements contingency plans to mitigate risks.
Before hiring an outsourcing company, or after hiring a vendor but before sharing any confidential information, you should enter into a non-disclosure agreement (NDA) with the vendor (following your local IP laws).
Conduct due diligence on independent review platforms before entering into an agreement with the vendor. The scope of such due diligence should include the vendor’s reputation and any past breaches of its clients’ intellectual property rights. You should also investigate the vendor’s internal risk measures, their ability to safeguard your IP, and what its response would be to a data breach within their organization.
Conclusion - How to avoid outsourcing risks?
Outsourcing and offshoring have been around in various guises now for well over 40 years, so the main challenges are well known and understood. By planning in a sufficiently detailed manner, ensuring a high degree of alignment both contractually and non-contractually, and ensuring a high degree of transparency, it is possible to mitigate most of these risks.
Where organizations are working in a highly dynamic environment, these risks may still develop into issues and the key here is ongoing contract and performance management of suppliers to identify when these issues materialize so that they can be managed.
Outsourced engagement models are very much collaborative relationships between two organizations and communication at various levels is of paramount importance to ensure good alignment and good ongoing delivery. For that reason, it’s worthwhile having meaningful and structured kick-off meetings at the beginning of new engagements and keeping up these discussions throughout the duration of the relationship.
Outsourcing can prove to be a very cost-efficient method of achieving your goals, but not only should the aforementioned items be considered, but also other geo-economic factors such as tax implications, the likelihood of industrial action, local political and civil unrest which will all add to the bottom line.
Whilst the challenges of outsourcing can be numerous, it is a great way of allowing businesses to grow their delivery capability without having to increase their employee headcount and thereby grow hidden costs. The risks should be acknowledged and mitigated, but they should not dissuade growing organizations from adopting this model.