The ability to engage external teams has transformed the way businesses operate, offering a strategic pathway to efficiency and reduced operational costs. This appeal extends across all business sizes, from startups to large corporations, allowing them to focus on their core activities while remote teams manage other tasks. As IT services dominate global outsourcing, companies benefit from enhanced access to a broad talent pool, promoting profitability and streamlined processes.
However, despite its numerous advantages, outsourcing is fraught with challenges. From choosing the wrong partner to hidden costs, security issues, loss of control, and quality compromise, to mention a few, these risks can have detrimental effects on a project.
In this article, we will explore the risks of outsourcing as they relate to software development and provide practical tips on mitigating them.
Outsourcing is the business practice of delegating certain services or job functions to external third-party organisations rather than handling them in-house with the aim of enhancing performance and conserving time and resources. The three primary types include onshore, nearshore, and offshore, each offering different benefits depending on the company's specific needs and geographical considerations.
IT services stands out as the most heavily outsourced sector, with 37% of operations being contracted out. This underscores the industry's reliance on hiring third parties to access specialised services and expertise, which is essential for staying competitive in a tech-driven market.
Statista's Technology Market Insights categorises the IT outsourcing industry into four main segments:
Together, these sectors generated more than $460 billion in revenue in 2023 [1].
Furthermore, notably, 60% of large companies globally are opting to outsource development teams, a trend underscored by the $731 billion spent in 2023. This widespread adoption is evidenced by the fact that more companies utilise it to fulfil their technological needs, reflecting its critical role in modern business strategies.
The accessibility of outsourcing is further demonstrated by the 37% of small firms that contract out at least one business process, proving that this practice is beneficial not only to large corporations but also to smaller enterprises seeking efficiency and expertise [2].
Other than this, the United States leads the global outsourcing market, generating $62 billion and representing a major portion of the international revenue [3]. This highlights the pivotal role of the U.S. in shaping the global dynamics.
Looking forward, the industry is expected to experience a yearly growth rate of 4% from 2021 to 2025. This steady growth trajectory suggests ongoing expansion opportunities for market participants, reinforcing this practice as a key strategy for companies aiming to innovate and optimise their operations in an increasingly digital world.
Now, let's explore some of the challenges of outsourcing and consider ways to mitigate them.
Setting a budget is essential, but actual costs can exceed initial estimates due to hidden expenses. Often, the costs presented by vendors don't cover every potential expense, leading to surprises down the line.
For instance, unexpected costs may arise from setup, training, customisation, or unexpected changes in project scope. These unforeseen expenses can significantly affect the cost-effectiveness of the arrangement.
Moreover, if the project's scope expands, this can further increase costs, complicating budget adherence and financial planning.
Consider these strategies to overcome outsourcing challenges:
Contracting out business functions often means relinquishing direct control over certain aspects of your operations. For example, if you outsource mobile app development, your influence over the quality of the solution is diminished because you cannot select individual developers from the other agency.
Aside from that, geographical distance further complicates matters. Local vendors allow for regular in-person oversight, but with remote teams, you must rely on virtual meetings. These can be less effective due to the absence of nonverbal cues and potential technical issues, complicating seamless collaboration.
To reduce this challenge, consider these approaches:
A cost overrun occurs when unforeseen factors increase a project's total expense, often due to economic, technical, or psychological reasons.
More specifically, economic factors may arise from inaccuracies in the initial budgeting or scope definition. Technical issues often stem from incorrect data gathering or flawed price estimations. On the other hand, psychological factors, such as scope creep or diminished project commitment, can also drive costs higher.
To tackle this outsourcing risk, follow these suggestions:
Effective communication is paramount in any outsourcing arrangement and is one of the reasons why outsourcing fails if not managed properly. Inherent challenges often arise with distributed teams, yet deeper issues frequently stem from differences in national and organisational cultures, as well as language barriers.
Moreover, the varying dynamic between clients and service providers can exacerbate these problems, as external staff may feel pressured to agree with the client, thus avoiding confrontation over unrealistic demands.
To minimise miscommunication, implement the following strategies:
Any company's primary objective is to procure functional, high-quality software products accompanied by excellent service. However, uncertainty of outcomes when engaging with a new vendor is a prevalent issue.
Importantly, cost-cutting measures such as hiring a cheap development team with little to no experience and attempts to save on development time can backfire if the end product is unsatisfactory, potentially necessitating starting anew with another vendor.
To prevent these risks, adopt these approaches:
Outsourcing exposes your business assets, either fully or partially, to an external party. This vulnerability necessitates a vigilant approach to privacy, intellectual property, and data protection, including copyrights, patents, and trade secrets.
Although the risk of information theft or leakage is lower with reputable vendors, the possibility remains, particularly with international arrangements where your country's laws may not bind the vendor. Consider a scenario where a member of an outsourced software development team steals code; navigating legal actions across borders can be complex and fraught with challenges.
To mitigate these threats, consider the following precautions:
Hiring an inexperienced development team can lead to significant project setbacks, including poor quality outputs, delayed timelines, and escalated costs. The core of the issue lies in the lack of requisite skills and understanding needed to meet project specifications effectively.
This challenge is heightened when projects require specialised knowledge or advanced technical skills that inexperienced developers may not have.
To reduce this risk of outsourcing, consider these solutions:
Constant delays can disrupt project timelines and impact overall business performance. These holds often arise from a lack of clear communication, inadequate project management, or unforeseen complications that the external partner may encounter.
Such challenges are particularly prevalent in complex projects where precise coordination and technical expertise are required. Delays can lead to increased costs, missed market opportunities, and strained relationships between the client and the service provider, making it a critical issue to address in any outsourcing engagement.
Implementing the following strategies to minimise the risk:
Remote teams require different administration techniques compared to traditional, in-office staff, including adjustments in communication styles, work schedules, and performance monitoring methods. Without prior experience, organisations may struggle to effectively coordinate and motivate experts, potentially resulting in missed deadlines, lower productivity, and suboptimal project outcomes.
To overcome this challenge, consider these strategies:
This occurs when there is a discrepancy between the expectations you and the vendor set and the details documented in the contract. It often stems from the contract's failure to clearly work scope, deliverables, performance metrics, and quality standards.
Misalignment can lead to disputes, and without clear exit strategies included in the contract, disengaging from the arrangement can become problematic, leading to messy and costly separations.
The contract should include:
Additionally, legal experts experienced in outsourcing agreements should be involved in reviewing and drafting these documents, ensuring they protect the interests of all parties involved and align with legal standards.
If you are looking for a partner who can accelerate your digital development, look no further than Deazy. We help agencies, enterprises and startups build software products for their businesses by providing access to vetted programmers from nearshore squads.
Our standout benefits include:
To ensure risk-free engagement, we provide transparent pricing and help you estimate your project budget from the onset to prevent issues along the way.
Aside from that, we help you take the pain out of project administration with our internal delivery management platform that helps track changes and get up-to-date delivery oversight. Our delivery managers take charge of your project from beginning to end to ensure that you get quality software that exceeds your customer's expectations.
Ready to outsource your software development project risk-free? Schedule a consultation with us today.
While outsourcing offers significant advantages in terms of cost reduction and access to specialised skills, it also presents unique challenges, such as contract misalignment, wrong vendor selection, and privacy concerns. Understanding these risks is essential for navigating the complex landscape of successfully hiring external teams.
Businesses can enhance their strategies by taking proactive steps to eliminate these threats through careful planning, clear communication, and thorough vetting processes. Remember, the key to success lies in handling challenges efficaciously to harness the full potential of your external partnerships.
Outsourcing software can expose businesses to threats such as quality issues, loss of control over project management, and potential breaches in data safety.
The three disadvantages of outsourcing are communication difficulties, quality control problems, and a dependency on external entities, which might not always align with a company's goals.
Managing outsourcing risks involves conducting thorough vendor vetting, setting clear contractual terms, and maintaining strong communication channels to oversee task progress effectively.
Outsourcing involves hiring external organisations to handle certain business tasks. Advantages include cost savings and access to expert skills; disadvantages may include less control over business functions and potential quality issues.