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By 2025, the global IT outsourcing market will be worth $397.6 billion. This is undoubtedly a positive tendency, considering the same market of $92.5 billion in 2019. The rise of this business practice has been further reinforced by the pandemic-induced automation trends.
Numbers attest to that. According to the 2020 Global Managed Services Report, over 4o% of global corporations planned to outsource more work in the next 18 months.
What Is Outsourcing?
IT outsourcing refers to the business practice when a company farms out a part of its production or business processes to an outsourcing vendor. The latter specializes in these specific processes and can take over the tasks. Thus, any company can delegate supplementary processes and focus on strategically important business tasks.
Outsourcing is a mutually beneficial business practice that helps companies reap the following benefits:
- Reduced development costs
- Variable-capacity
- Faster time to market
- Vast talent pool
- No hiring hassles
- Variety of industry expertise, and others.
Businesses can build a pool of additional revenue by outsourcing non-core activities, ushering in new opportunities for growth and innovation. Outsourcing opens up new possibilities and makes better use of existing resources, allowing businesses to get the most out of their current employees.
However, there are some blots on the landscape that hamper global businesses from delegating their tech needs – the risks of outsourcing IT.
Spoiler: they can all be eliminated provided you know the formula.
Risks of IT Outsourcing:
According to a report, the tech outsourcing market is projected to grow by $98 billion during 2020 – 2024. Technological breakthroughs, Big data, and hyper-automation boost the sector and offshoring countries that can support its rapid development.
However, the dangers of outsourcing still give chills to budding business owners who haven’t yet tried this business practice. So what are the risks of foreign outsourcing?
Less Control
Poor control is one of the most popular risks of outsourcing IT services. Whether you’re outsourcing one function or the whole department, you are handing over managerial control to another company. This risk, in turn, may translate into higher costs with a mediocre product that was built behind schedule.
Also, geographical boundaries can further loosen the level of control. Besides, one-to-ones become more challenging leaving you with virtual meetings and calls. Finally, when mishandled by a vendor, insufficient control takes a toll on the project’s transparency.
How to Avoid This Outsourcing Risk
Within the tech continuum, it may refer to specific development stages or software functionalities.
To maintain a stronghold, chart out your future cooperation by listing mutual responsibilities and processes as well as communicating your expectations. Choose a transparent vendor with proven risk management processes. Look for compatible goals and common ideas with your technical partner.
Also, you can assign a personal Project manager or Product owner who will be responsible for monitoring the team’s work. Ideally, your vendor should assign a middle person in case you’re willing to hand over management.
Communication Difficulties
Lack of communication is another risk of outsourcing. Whether it’s a language barrier, different time belts, or both, companies sometimes grapple with communication breakdowns. Teams can struggle to discuss complex technical details or find a time zone overlap.
Sometimes, the wrong choice of a communication channel can also take a toll on effective cooperation. In the end, the lack of a communication standard creates a chaos of information scattered across different messengers and emails. Some tasks may not get accounted for, while confusion will snowball as you get divided by different working hours.
How to Avoid This Outsourcing Risk
In reality, effective communication isn’t difficult to establish provided you work with an experienced tech supplier. Thus, your provider should offer you a unified communication channel or a project management tool to streamline your development and communication process. Popular tools like Slack and Jira allow you to monitor project progress, assign tasks and leave comments.
You should also choose an outsourcing provider that has at least a few overlapping hours with your time zone. Although you will have to schedule meetings in advance, you can still use it to your advantage. You will thoroughly plan the agenda of your meeting, thus boosting the productivity and effectiveness of your collaboration.
Consider having one file storage where each team member can share, edit, and comment files without losing them somewhere down the road. This way, you will facilitate the file exchange process and prevent possible file losses.
Unforeseen and Hidden Costs
Estimating the exact cost of software development has always been challenging, let alone outsourced services. Although cost savings are the primary objective of outsourcing, companies are often afraid of unexpected outsourcing expenses.
Although most expenditure items are clearly stated in the outsourcing agreement, the dependency between the requirements and cost may be hidden from the client’s eyes. This leads to misunderstanding between the parties and ruins trusted collaboration.
How to Avoid This Outsourcing Risk
When choosing your vendor, review each proposed statement of work to identify and reduce extra fees. Also, you should make sure you have clear requirements before the start of cooperation. You can even use a two-stage process to identify requirements, which includes business and technical discovery. This will allow you and your vendor to discern the scope of work and reduce the chance of unforeseen costs.
As a rule, providers offer a variety of engagement models that suit different client needs. Carefully study each option and pick the one that bodes well for your project length, requirements, and financial resources.
Also, make sure you have a Service Level Agreement in place. This document lays out the level of service you expect from a supplier, specifying the quality and penalties. Finally, get acquainted with additional costs like overtime, subscriptions, and others.
Difficult to Find the Perfect Vendor
The choice of the right vendor can either make or break your development project. With over 4000 tech companies in Ukraine alone, the agony of choice becomes a real struggle. A time-consuming search can shift your focus and waste your energy and resources. But there exists a shortcut that many companies aren’t aware of.
How to Avoid This Outsourcing Risk
First of all, your choice shouldn’t be based on the price only – nobody likes to pay twice for a low-quality product. Therefore, vendor rating and expertise are the two pillars of a successful selection.
Start your choice by checking the references and customer reviews. Popular rating platforms like Clutch and Glassdoor will shed light on your future collaboration with a provider. Then narrow down your search by shortlisting those who demonstrate a proven track record of delivering similar projects, while having positive client feedback.
Once you have picked potential candidates, send your Request for Proposal or Request for Quotation. Based on the responses, make the final choice of your technical partner. Vendor agreements can also influence your selection criteria depending on whether they include any items that seem to be counterproductive to your business model.
Privacy and Data Security
Security perils are also among the most-feared risks of IT outsourcing. Data privacy along with personal information privacy is often a concern for companies looking to outsource their work.
Since it’s almost impossible to have complete control over the process, the outsourcer will always have some kind of security lacunae. Moreover, any sensitive customers or corporate data places additional responsibility and regulatory compliances that must be abided by.
How to Avoid This Outsourcing Risk
Secure collection, storage, and data usage should be front of mind for your vendor. Therefore, your technical partner should have robust security measures built-in to their processes, IT infrastructure, and network. The latter may include but are not limited to :
- Legally binding contracts (NDAs)
- Audit trails for all system activities
- Limited system access
- Scanning of servers for penetration testing
- Leak-proof traffic, and others.
Also, to prevent the illegal use of sensitive data or its possible transfer to third parties, your contract should thoroughly list the company’s rights and obligations regarding the disclosure of information.
Quality of the Outsourced Product
The quality of final deliverables can be the subject of concerns as well. And it’s completely understandable – nobody wants to turn their business idea into a subpar software solution. All companies aim to reduce the time to market and build first-rate solutions without delays.
And when you’re resorting to outsourcing, you want your expectations to be met. However, some software vendors cannot stand up to the requirements due to the absence of expertise, experience, or deficient technologies.
How to Avoid This Outsourcing Risk
Lay out clear blueprints and references for your vendors to reduce this risk of outsourcing. This way, your vendor will have a thorough understanding of your requirements and expectations as a result of this.
You can also validate the quality of outsourcing services by wading through previous vendor projects that are close to your domain. Industry-standard certifications and seniority level of your future team can also point at high-grade services and reliable product quality.
After onboarding new team members, take a positive stance on bringing up issues. Your employee should feel comfortable enough to identify issues so you can address them before they affect the final deliverables. As you communicate with your outsourced team, make sure to provide regular feedback so that they know your quality bar and maintain standards.
Geolocation
Geographical proximity is an obvious challenge that naturally goes hand in hand with outsourcing. Distance also translates into cultural, language, and operational differences that can sometimes lead to ineffective communication or deferred feedback and slow problem-solving.
Regional differences can also influence core collaboration aspects, including interaction, understanding, and even the commitment and productivity of the team. Misunderstandings and friction may also naturally occur when having your development teams oceans apart.
How to Avoid This Outsourcing Risk
Remote practices have never been more common than at pandemic-dominated times. Therefore, most companies must have already adapted to work from home realities and abandoned the stigma of remote work settings. Businesses have already got used to telework and have the technology in place to ensure stable connection and business continuity.
In the case of outsourcing, the drill stays the same. Thus, you can achieve frictionless collaboration by synchronizing your schedules and establishing regular feedback loops. You can also visit your vendor’s office to arrange a traditional meeting that ensures better sync with your vision. The advent of remote-friendly technologies like cloud platforms and multi-user access blur geographical boundaries and promote comfortable offshore collaboration.
The Final Word
When paid due diligence, outsourcing can unlock hidden benefits otherwise unavailable on site. Lower development costs, access to skills, and increased flexibility are among those edges that make a difference for outsource-friendly companies.
However, this business practice can turn out ineffective in the hands of the wrong vendor. Therefore, focus on selecting an experienced vendor that churns out high-quality deliverables and has acquired a good reputation on the market.
