12 IT Outsourcing Risks and Ways to Manage Them 

Most businesses have partnered with an IT Outsourcing company at least once during their growth. Some said it worked wonders for them, while others were not satisfied. Thus, how can we ensure that your project does not fall into the short end of the stick? The first step is to learn about the potential IT outsourcing risks and ways to tackle them.   

In this article, Synodus gathers 12 challenges and risks of IT outsourcing services from our experience of working with multiple clients (and, of course, how to win over it too) 

1. Loss of Control  

Working with IT outsourcing companies means you have to share control of the project with them. However, transferring day-to-day management to an outsider can lead to the risk of losing control and becoming reliant on the provider. Of course, this doesn’t always happen. If it does, what’s the point of partnership and outsourcing?  

Yet, acknowledging this problem with outsourcing software development will help you plan better management and collaboration with the vendor.  

To effectively solve this IT outsourcing risk:  

• Take the time to find and hire a software development company you can trust and that is a good fit for the project. You should always look for references, past client reviews, and their portfolio. 
• Fill out a “RACI” matrix to determine who owns what. This will help everyone stay in their lane and work within it throughout the project.  
• You will inevitably have to relinquish some control, but the risk is reduced when you can rely on the team to bring you concerns or issues as soon as they arise.  
• Requiring frequent reports from the vendor will provide you with insight into their work process. Also, keep an open line of communication by using a joint group chat or email sequence. 

2. Trusting The “Wrong” Guy  

When you delegate your project to a third party, you risk encountering an unscrupulous vendor. As a result, you could end up with a failed product, missed deadlines, lost customers or jobs, or even security violations.    

Some vendors might offer an attractive price lower than the market’s average, which seems to be the best deal to take but watch out! There is always a hidden reason for that. But this doesn’t mean high-price contracts equal high quality. That is why you should not jump right into the seem-to-good deal. Consider it!   

Here’s how to avoid this IT outsourcing challenge, whether because a vendor embellished their self-presentation, or you under-vetted your candidates.    

• Go through their portfolio on their website to get a complete picture of the outsourcing company’s background, expertise, and project selection.    
• Ask around for references, and always demand proof of how they communicate, treat less experienced clients, compete, and so on.    
• Use Service Level Agreements (SLAs), which detail the services offered by the outsourcing company and their associated charges to set clear expectations and safeguard against potential quality problems.   
• Hire a tech-savvy professional to act as a “secret shopper” to check the work of the outsourced team and ensure the caliber of the final product code. 

3. Lack of Domain Knowledge 

If you want to build a website, find someone good at it. This is common sense but does not mean domain knowledge.  

You should find a vendor that has experience in a niche industry (Financial, eCommerce, Manufacturing), a certain technology (AI, Blockchain, JavaScript, Python), or a type of application (native app, PWA, or even more specific such as a digital wallet, a game app). Most software development companies claim they can build anything, but they only excel at some aspects. By looking through their portfolio and credentials, you can see what projects they did that are the most successful. This helps you make a better choice.   

Both the client and the service provider must share an adequate amount of domain knowledge. This boosts better collaboration that prompts in-depth discussions from both technical and business viewpoints.  

For the IT outsourcing vendor, the team leader or project manager usually has the best overview of the field. They will guide the others to follow the path. Thus, if the leader is not qualified, the project might take longer, and the quality might not be delivered as expected. This is a huge IT outsourcing risk. 

We recommend that you:  

• Use third-party vendors for some, but not all, aspects of new product development.  
• Create a phase for a product discovery portfolio to use as a blueprint for your product’s technical specification and deeply identify the developer’s lacking areas.  
• Before deciding, verify the website, contact the development company personally, and look at the case studies for experience proof to determine the area of expertise. 
• Interview their domain knowledge. 

4. Risks of Cost Overrun 

The primary goal of outsourcing is to gain a competitive advantage through cost savings and profitability. There are 2 common payment contracts: fixed-price and time & materials. Both have hidden costs and can lead to cost overruns without good project and finance management. You should acknowledge this IT Outsourcing risk before signing any contract.  

For fixed-price, unexpected expenses include things like:  

• Additional adjustments outside of the contracts 
• Additional troubleshooting 
• New requirements during development 

For T&M, unexpected expenses include things like:  

• New features 
• Additional resources (people + time) 
• Updates on software, technology, and devices 
• After-hours services 
• Additional troubleshooting 

All of them add up to the project’s overall cost, which causes it to exceed its initial budget. Before outsourcing a service, it would be best to compare vendor pricing with current in-house development costs and all additional expenses. This provides an estimate of the vendor fees. How to tackle this IT outsourcing risk:  

• Examine all of the estimates provided by your potential vendor and the type of contract they prefer.  
• Signing a Service Level Agreement and being aware of all hosting costs, scheduled and unscheduled team visits, acquiring additional essential equipment, fees, etc. 

5. Security & IP Protection 

When working with an IT outsourcing vendor, you not only co-manage the project with them but also exchange data and information to develop the application.  

A significant security breach resulting in the loss of sensitive data and subsequent cyberattacks is one of the most dangerous IT outsourcing risks. Almost every company considers intellectual property to be one of its most valuable assets. Private and financial information about your employees and clients is essential data.   

Protect your ideas and personal ID by:  

• Checking whether they are adhering to policies and regulations.  Top security standards and regulations for software development include ISO/IEC 27001, HIPAA, NIST SP 800-53, GLBA, Sarbanes-Oxley. 
• Use non-disclosure agreements to ensure you do not end up with stolen information, data leaks, or other cybercrimes. 

6. Contract Misalignment 

Teamworking means that misalignment and misunderstanding can happen at any minute. But you don’t want it to occur after signing the contract. It’s like you order something expecting it to be delicious but, in reality, completely tasteless.  

So before putting your pen down, have countless discussions to ensure your vendor is on board with you. Exaggerated or unreasonable expectations may arise if both teams fail to discuss each task in advance. It may result in overly critical feedback and a failed partnership.  

3 ways to tackle the issue:  

• Try to include both decision-makers and relevant staff in the negotiation process.   
• Encourage team members to speak up about any ambiguous or overly complicated issue.   
• Maintain control over your process or timeline expectations.   

7. Miscommunication 

Nearly 90% of businesses said communication is the top challenge when working with outsourcing companies. Many reasons cause this: 

(1) Language barrier mostly happens when you work with offshore software development companies. 

(2) Cultural differences can affect the mindset and work ethics depending on the region. For example, Europeans rarely work outside office hours. Meanwhile, East Asian countries generally work outside office hours. This doesn’t mean Asian is more hardworking than Europeans. The contrast shows how each region approaches “work,” and you should find a vendor that matches your mindset. 

(3) Working remotely can be another reason. Outsourcing requires using technology to help with collaboration and information exchange.  

(4) A lack of structure, a failure to share critical information, and gaps between critical parts of the process cause team members on both sides to pull the project in opposite directions. 

Regardless of where miscommunication stems from, you should acknowledge this IT outsourcing risk first and learn how to prevent this:  

• Verify the English proficiency of the members of the contracted team through interviews and discussion 
• Make sure that the vendor-side leaders have great meeting facilitation abilities.   
• Implement weekly face-to-face or video call meetings for updates on the development process because a lot of communication can happen without words.  
• Ensure that work schedules across time zones are negotiated  
• Ensure that your outsourcing vendor has all of the information from the start. 

8. Working Remotely in Different Time Zones   

Outsourcing means working online and remotely. You talk and manage your development team digitally, and this requires some dedication to get used to. This primarily lies on the client side since the vendor works with different clients worldwide every day. If you have little experience with remote work, it can be challenging at first.  

Some suggested solutions for this IT outsourcing risk:  

• Ascertain that everyone understands the project’s objectives and what constitutes success. 
• Provide a high-level user journey walkthrough. This motivates the offshore team to take a more user-centric approach and better connect milestone deliverables to the big picture.  
• Assign an internal employee as the primary contact point. This person can respond to questions from the offshore team and communicate any project changes asynchronously.   
• Plan your next online meeting and the overlapping times when everyone on the team may be reached via phone, email, or video chat.  
• Frequent check-ins and frequent praise can significantly enhance the team’s morale and make you feel informed about every choice and adjustment.    

9. Risks of Vendor Being Late on Delivery  

It’s a red flag if your vendor is constantly being late for deadlines.

(1) They probably handle too many projects simultaneously and can’t focus on yours. You can guess how it will run down the road, or

(2) They are irresponsible, and you are scammed.  

Yet, being late isn’t always caused by the vendor. Sometimes the clients keep asking for additional requirements outside the first contract, slowing the process. It’s essential to find what causes it.  

As the client, you must ensure you have cleared out every requirement before development takes place. You only adjust when necessary. Remember that every additional means your team has to stop what they are doing and redo it all over again.  

As the vendor, you should remind your clients beforehand of potential obstacles. 

10. Your Outsourced Developers Dropping Out of Projects 

One of the most unwanted IT outsourcing challenges is the sudden drop of your project’s developer. When it occurs, make sure to have an alternative instantly to keep the project going.   

To avoid this risk of outsourcing IT positions, your top priority when looking for a partnership is agreement transparency to tie both parties’ commitment. 

11. Risk of Not Having The Right Tools 

We don’t talk about programming languages or back-end or front-end tools here since you already look through the vendor’s tech stack before making a final decision. 

It’s about collaboration and management tools that are usually neglected. Both parties should be on board with what to use to keep communication in line. 

12. Don’t: Outsource A Key Product 

Instead, it would be best if you established an in-house team to develop and manage the core aspects of your tech product. I understand you may not have the time and resources to wait and build such a team. But you can first work with 2 to 3 core members and partner with an outsourcing company for other parts. 

Since the key product always plays a crucial role in business sales, the companies must be aware of some risk tors that might come at any time during the application process. The company’s brand name could be ruined in case there is a disqualification in outsourced product performance.  

After all, there’s always a chance of a vendor’s outcome failing our expectations. Remember to set a contingency plan to protect your business. 

Despite All The Risks of IT Outsourcing, Why Should You Consider It? 

Did you know that GitHub went for IT Outsourcing to build their MVP’s back end? Or Skype was founded by non-technical entrepreneurs, and they hired 4 developers to build the application while they focused on marketing and pitching.   

Tech giants have opted for IT outsourcing at the early stages of their business growth. Meanwhile, around 90% of G2000 companies used and are using IT outsourcing for some part of development. We can all see that startups and big enterprises go for IT Outsourcing, despite the potential risks. Why is that?  

1. IT Outsourcing is an excellent way to save resources.   

2. You can utilize global tech talents.   

3. Companies mostly use IT Outsourcing to tackle the gap between the high demand for digital transformation and the lack of technical employees.   

4. Using IT Outsourcing allows them to focus on other core business activities.   

5. It gives more flexibility in terms of human resources and financial management.  

6. Gain new competitiveness   

Even though working with a third party contains certain risks, it’s still a good strategic move for any business. On the other hand, most of the IT Outsourcing risks can be prevented if you carefully evaluate and choose a qualified development partner.   

Wrapping Up 

Acknowledging all the IT outsourcing risks will help you prepare and plan for a seamless development process. Note in mind that all the risks can be prevented and mitigated, but it takes effort from both clients and vendors. Despite the challenges of IT outsourcing, this is still a strategic move if you correctly utilize the partnership model.