Top 7 Risks of Outsourcing and Best Practices to Avoid Them

Lack of control

Doing business with outside vendors is likely nothing new to you. But handing over control to an unknown vendor can nonetheless be disconcerting.

With outsourced software development, it’s important to consider the risks of not controlling the every-day management of the project. The team will lose a level of visibility and control. That’s a given.

This, in many ways, is where the value of outsourced development comes in, but if you’re not working with a team you trust, this value can quickly become a risk.

Communication issues

A recent study showed that nearly 90% of businesses believed communication to be one of the key challenges in the outsourcing process. Some communication challenges are inherent when working with distributed teams, but often the root of the issue is deeper. National and organizational culture differences and language barriers can be at play.

These issues can be further compounded by the client-service provider dynamic, where outsourcing provider staff might feel compelled to be agreeable towards the client. This can cause teams to not speak up and challenge unachievable requests. What may seem like a communication issue was inherently a cultural issue.

Poor communication can wreak havoc on your project. It’s critical to be aware of these risks and find ways to proactively avoid miscommunication regardless of where it stems from.

Poor quality software & services

One prominent outsourcing risk for many companies is the risk of receiving a bad end product. The ultimate goal is always working software, right? And, I’m certain you’d like to receive quality service along the way, too.

The trouble is you don’t 100% know what you’re going to get when you work with a new vendor. Any aim at cutting costs or saving development time could be shattered if you have to start over with a new company. As much as possible, you should aim to protect yourself from receiving poor quality service and software from your software vendor by doing some due diligence upfront.

Lack of domain knowledge

Shared understanding between the client and software team is crucial if you want to achieve high quality software. It’s important that the client and service provider have adequate relevant domain and industry knowledge.

It’s important to understand that there's a risk of a lack of domain knowledge on both the client and service provider side.

On the client side, you could become dependent upon an outside vendor. You may eventually start to lose your product expertise and core competency if you outsource many projects or even all aspects of one project. It’s not unusual for clients to lose all touch with the product, market, or customer when they outsource development. This could become quite the issue long term for the client’s business.

Because of this, it can be helpful to retain some control over the project by outsourcing some but not all of the development. Or, you could consider hiring expert engineers or analysts to augment your team internally.

On the service provider side, you of course have the risk of working with a team that doesn’t come to the table with adequate domain knowledge for your project. Team members might have all the technical skills required, but they may lack product and specific domain knowledge that can result in costly education or even missed deadlines. A contractor’s expertise plays a significant role in their ability to deliver a quality end-product.

Depending on your project, you may want to look for a team who has specific experience in your market, sector, or domain.

Research into software team coordination has confirmed that the amount of domain knowledge across all team members is a key factor in software quality and cost. We recommend you prioritize knowledge transfer both at the beginning and end of any outsourced project. This sharing of information can be helpful for both the client and vendor to avoid losing (or never gaining) the necessary domain knowledge.

Unexpected costs

Utilizing an outsourcing model for development is often expected to reduce costs. Vendors can offer economies of scale with a fully-staffed development team. Some companies may also offer lower labor rates, especially if you are looking overseas.

However, there is an old adage that says “buy cheap, buy twice.” And it is important to make sure that the costs saved up front don’t come back to bite you. Low cost can sometimes also mean low quality. It can also mean hidden costs. It’s best to avoid both.

Lack of experience with remote teams

We're in an era where working remotely is becoming increasingly common. Many businesses are totally remote. Remote teams help companies to tap into a larger talent pool and allow everyone to work where and how they are most productive.

It sounds great, but if your team doesn’t have experience with remote work, you add risk to the equation. There can certainly be a learning curve when working with a remote team for the first time.

Security breaches and IP protection

You need to be aware of the risks of a vendor mismanaging your data or IP. Anytime you share sensitive information about your IT systems, you inherently reduce security. Of course this is often a risk that is necessary to take on, but it’s important to think through the implications before engaging with vendors.

Consider what kind of damage could be done if your data security practices or intellectual property (IP) rights are violated. Make sure you have your security practices and expectations documented in order to avoid any ambiguity.

Ultimately, you need to be willing to hold any outsourcing vendors accountable for security of your data and IP. You should plan to do a regular security risk assessment throughout your engagement with a software outsourcing company.