10 Top Outsourcing Risks (& How to Prevent Them)

Businesses often turn to outsourcing as a strategic way to enhance efficiency, reduce costs, and tap into specialized expertise. Outsourcing can offer numerous benefits, such as focusing on core business activities, gaining faster time to market, scalability, etc. 

That’s why the global outsourcing market is on the rise. A report from Grand View Research states that it was estimated to be at $261.9 billion in 2022.

However, the decision to outsource comes with its own challenges, among which selecting the wrong partner exposes organizations to many potential risks. From compromised data security to misaligned objectives, the risks can significantly outweigh the benefits if you don’t take the proper measures to prevent them.

In this article, we will look at some common outsourcing risks and how to prevent them to help you start on the right track to outsource your projects.

What Is Outsourcing?

Outsourcing involves contracting out specific tasks to external third-party organizations or individuals rather than handling them internally within the company. 

Companies usually pursue this practice to access specialized expertise, reduce operational costs, improve efficiency, etc.

A common example of outsourcing is when a business hires a third-party software development company to develop an application. In fact, IT and telecommunications hold the largest share, accounting for around 34% of the overall global outsourcing market.

10 Outsourcing Risks to Keep In Mind

Despite all the benefits that outsourcing offers, the process also comes with some risks you should be aware of. The only way to mitigate these risks is by learning more about them. 

So here are some common outsourcing risks you should be aware of:

#1. Loss of Control

When you outsource business functions to a third-party vendor, you relinquish some control over them. For instance, if you outsource mobile app development, you will have less direct influence over the solution’s quality.

That’s because outsourcing allows you to choose a third-party vendor for your project but not the specific developers from the app development agency who will work on it.

The geographical location can also impact the extent of control you have. For instance, if you hire a local vendor, you can plan in-person meetings to inspect everything efficiently. But with remote teams, you have to rely solely on virtual meetings, making it challenging to collaborate seamlessly due to a lack of nonverbal cues, limited engagement, technical challenges, etc.

How to Mitigate This Risk

• Crafting a precise agreement is the first thing that can help mitigate the loss of control. This should include work specifications, quality benchmarks, and timelines.
• You can maintain regular check-ins to verify the outsourced company's adherence to your schedule requirements. Also, keep track of Key Performance Indicators (KPIs) to ensure optimal end product or service quality.

#2. Contract Misalignment

Contract misalignment occurs due to misunderstandings between what you and the vendor expect from the outsourcing arrangement and what is stated in the contract. Such situations can arise if the contract does not clearly define the contract terms.

For instance, if you and the service provider have different assumptions about the work scope, deliverables, performance metrics, and quality standards, it can lead to disputes. 

At the same time, if the contract lacks critical information like exit strategies it can also cause a problem. In such cases, disengaging from the outsourcing arrangement can become messy and costly.

How to Mitigate This Risk

• Ensure the contract outlines all the critical information thoroughly and that you discuss it with the vendor. Here are some things to include in the contract:

• The scope of work
• Deliverables
• Responsibilities
• Performance metrics
• Reporting procedures
• Change management protocols
• Risk management strategies
• Exit procedures

• Involve legal experts who are well-versed in outsourcing contracts to review and draft agreements that protect both parties' interests.

#3. Unforeseen Expenses

Setting a budget is one of the most crucial steps in outsourcing any project. 

But things might not always go as you planned, as outsourcing can also come with hidden costs. This means the initial cost projections provided by outsourcing vendors might not account for all potential expenses.

There could be hidden costs related to setup, training, customization, or unforeseen changes in project scope. These unexpected expenses can significantly impact the overall cost-effectiveness of the outsourcing arrangement.

There are also cases where the project’s scope may change. This scope expansion can also lead to additional costs that were not initially planned for. For instance, SaaS app development costs can range from $40,000 to $200,000. Suppose you initially planned to include only three features in your app and entered a collaboration with the vendor. However, during the SaaS app development, you realize that the app needs to have two more features, which would lead to additional costs.

How to Mitigate This Risk

• Conduct a comprehensive analysis of the outsourcing vendor's capabilities, reputation, and financial stability to identify potential risks.
• Ensure that the outsourcing contract is well-defined and covers all aspects of the project, including potential changes in scope and associated cost implications.

#4. Wrong Vendor Choice

While outsourcing can pose numerous risks, it depends on your chosen vendor. If you select a vendor that doesn't have the necessary skills, experience, or resources, there's a high likelihood that the quality of their work will be subpar. 

In fact, according to the 2022 Global Software Outsourcing Trends and Rates, around 50% of companies end their outsourcing partnerships because of performance issues.

How to Mitigate This Risk

• Assess the technical and operational expertise of the vendor before entering into a partnership. You can also assess communication skills and whether the company is a cultural fit.
• Evaluate the experience and previous work of the vendor.

Want to work with the perfect software development vendor for your needs? Make IT Simple can be that vendor for you. 

Having worked with many companies from different industries over several years, Make IT Simple can offer all the expertise and skills required to bring your idea to vision.

If you have an app idea in mind, contact Make IT Simple today.

#5. Data Security Issues

The next outsourcing risk you should be aware of is data security issues. 

When you outsource a project or business function to a third party, you typically also have to share some sensitive data required to complete the task. 

For instance, if you outsource customer service, you will share customer data with the vendor.

Sharing such sensitive data can increase the risk of data breaches. If the vendor's security measures are inadequate or compromised, it can lead to unauthorized access to confidential information.

How to Mitigate This Risk

• Assess the security measures implemented by the service provider. This can include strong encryption, access controls, and monitoring mechanisms for data.
• Only provide vendors with the data they need to perform their tasks; avoid sharing unnecessary sensitive information.

#6. Poor Communication

Effective communication is crucial for any outsourcing arrangement's success, making it one of the most significant outsourcing risks. 

Poor communication can lead to misunderstandings between you and the outsourcing vendor. This can result in several other problems, such as contractual misalignment, unforeseen costs, knowledge transfer errors, etc.

How to Mitigate This Risk

• Establish clear and accessible communication channels like email, video conferencing, Slack, or any project management tools.
• Schedule regular status meetings or check-ins to discuss project progress, challenges, and updates.

#7. Language Barriers

Language barriers arise if you hire a service provider from a different country. It is wise to outsource to a different country to save money. 

For instance, hiring software developers from a developing country like India instead of the US or Germany can help you save up significantly. That’s because the salary of software developers in India is at least 2.5 times less than the global average.

However, this can lead to language barriers, because English might not be the first or native language for many developers in developing countries. 

If the outsourced team doesn't fully understand the instructions or requirements due to language barriers, it can result in lower work quality, inaccuracies, and a lack of attention to detail.

How to Mitigate This Risk

• Use visual aids, diagrams, and examples to supplement written instructions.
• Have bilingual team leads or managers who can bridge the communication gap between you and the outsourcing team.
• Use professional translation and interpretation services to facilitate communication if feasible and required.

#8. Knowledge Transfer Errors

When outsourcing, you often need to transfer knowledge about the task or the process to the vendor. However, transferring knowledge can be challenging due to communication gaps, incomplete information, or lack of documentation. 

And, of course, not transferring this knowledge effectively can impact the quality of the end product.

If the knowledge transfer process doesn’t take place effectively, the vendor might not clearly understand the standards and quality expectations. This can lead to poor performance, errors, and inconsistencies in the outsourced work.

How to Mitigate This Risk

• Document all requirements, expectations, processes, and procedures comprehensively to ensure that information is accurately conveyed.
• Provide the outsourcing team with thorough training and onboarding sessions to ensure they understand the project's intricacies and requirements.

#9. Low Quality of the End Product

Another outsourcing risk many companies face is getting a poor end product. 

Ultimately, you aim to get exceptional end products or services from the vendor. However, you cannot be sure that it will happen.

For example, suppose you are working with a software development company to build a SaaS product for food delivery services. You want the development team to add some features, including personalized recommendations, real-time tracking, multiple payment options, reviews and ratings, etc.

The development agency has experience creating user-friendly interfaces and adding GPS Application Programming Interfaces (APIs) for real-time tracking. However, it lacks expertise in creating and adding algorithms and code for personalized recommendations. In such a situation, the end result will likely fail to meet your requirements.

How to Mitigate This Risk

• Carefully choose vendors based on their reputation, track record, and capabilities. Conduct due diligence to ensure they have a history of delivering high-quality work.
• Provide detailed and unambiguous project requirements to the outsourcing company and ensure it has the expertise to address them.

The end product’s quality largely depends on the vendor’s expertise. You can contact Make IT Simple for outsourcing app development, app design, web development, or any other software development project and get end products that outperform your expectations.

#10. Lack of Experience With Remote Teams

Remote work and remote management require different skills and approaches than traditional, in-person work environments. 

If you don’t have said communication skills, you may find yourself facing an outsourcing risk. 

For instance, if the outsourcing team is working in a different time zone, you might be unable to monitor it appropriately if you haven’t worked with a remote team earlier. Similarly, having transparent communication with a remote team is also different from in-house teams because you will be communicating virtually instead of in person.

How to Mitigate This Risk

• Familiarize yourself with remote work best practices, communication tools, and management techniques for remote teams.
• Begin with a small project or pilot phase to gain experience and identify challenges before fully outsourcing a larger project.

Pros & Cons of Outsourcing

Like any other business aspect, outsourcing also comes with its pros and cons. 

Understanding them lets you make an informed decision by weighing the pros against the cons of your specific project.

5 Outsourcing Advantages

Here are the most prominent outsourcing advantages:

• Cost Savings: Outsourcing can often result in significant cost savings due to lower labor and operational costs in other countries. This is particularly true for tasks that can be standardized and performed remotely.
• Access to Specialized Skills: Outsourcing allows access to specialized skills and expertise that may not be available in-house. This can lead to improved quality of work and enhanced efficiency.
• Focus on Core Activities: By outsourcing non-core activities, companies can focus more on their core competencies and strategic goals. This can lead to increased innovation and competitiveness.
• Flexibility and Scalability: Outsourcing provides the flexibility to quickly scale up or down based on business needs without the burden of hiring or firing employees.
• Faster Time to Market: Delegating tasks to external experts can ensure the timely completion of your product, allowing it to arrive quickly into the market.

6 Types of Outsourcing

The outsourcing process varies based on what you’re outsourcing. It is a dynamic landscape that constantly evolves in response to various factors such as technological advancements, economic shifts, market demands, and global events. 

As such, understanding the different types of outsourcing can help you navigate this dynamic landscape effectively.

Here are some of the most common types of outsourcing:

1. IT Outsourcing: This involves contracting out various IT-related services, such as software development, technical support, system maintenance, and infrastructure management, to third-party vendors or companies.
2. Business Process Outsourcing (BPO): BPO involves outsourcing specific business processes, like customer service, human resources, finance and accounting, and procurement, to external service providers.
3. Offshore Outsourcing: Offshore outsourcing is where you select a third-party vendor from a different country to leverage cost savings due to lower labor costs.
4. Onshore Outsourcing: This is when you hire a service provider in the same country as your company, often for easier communication and closer cultural alignment.
5. Nearshore Outsourcing: Nearshore outsourcing blends the benefits of both offshore and onshore outsourcing. Nearshore outsourcing is when you hire a service provider from a neighboring country.
6. Multisourcing: Multisourcing refers to the practice of outsourcing different parts of a project or various services to multiple vendors, whether they are offshore, onshore, or nearshore.

How to Select a Service Provider

Selecting a service provider is an important decision that requires careful consideration to ensure you receive the most qualitative service. 

Here are some tips to help you select the right service provider for you: 

• Define Your Needs: Clearly define what services you require. Understand your specific requirements, goals, and expectations from the service provider. This will help you communicate effectively with potential providers and ensure they can meet your needs.
• Research and Gather Options: Seek recommendations from friends, family, colleagues, or online communities. Personal recommendations can provide valuable insights. You can also use search engines, review websites, and social media platforms to identify potential service providers in your area or industry.
• Check Qualifications and Experience: Verify the service provider's qualifications, certifications, and licenses. Also, inquire about how long the provider has been in business and their experience handling similar projects or services.
• Meet or Interview Providers: Reach out to potential providers and schedule meetings, calls, or interviews. This will allow you to discuss your needs and assess their responsiveness.
• Discuss Pricing and Contracts: Request a detailed breakdown of the pricing structure. Make sure there are no hidden fees or ambiguous costs. You should also carefully review the provider’s contract terms and conditions.

Want to save time, energy, and resources? Contact Make IT Simple today and skip all the hassle of going through each step of finding the right vendor.

Our software developers are experts at understanding the unique requirements of each project and preventing any outsourcing risks.

FAQs on Outsourcing Risks

Do you still have some questions about the risks of outsourcing? 

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Check out are answers to the most frequently asked questions below; 

#1. What Are Some Less-Known Disadvantages of Outsourcing?

Security and data privacy concerns, dependency on third parties, and lack of flexibility are some of the lesser-known disadvantages of outsourcing. The reason they are lesser known is because companies still have a large control over them and can take active steps toward mitigating them. 

By minimizing shared data, outsourced functions, and delegated rights, you can easily overcome these risks. Whereas, more popular disadvantages like hidden costs, loss of control, and poor communication are something you cannot control from your end alone.

#2. Is Outsourcing a Security Risk?

Outsourcing can lead to security risks because when you outsource certain functions, you essentially grant access to your sensitive data, systems, or processes to a third-party provider.

#3. Do Employees Benefit From Outsourcing?

Employees can benefit from outsourcing, as they get time to focus on core business activities like improving customer service or focusing on marketing. 

Outsourcing can also sometimes bring in specialized expertise, offering employees opportunities to learn from these experts and develop new skills.

#4. What Is the Main Negative Effect of Outsourcing?

The main adverse effect of outsourcing often revolves around the potential loss of control and quality. However, hidden costs, data security issues, and language barriers are also some common negative effects.

Conclusion

While the potential benefits are undeniable, it's crucial to understand the top outsourcing risks that can undermine your efforts. You can forge a successful partnership with an outsourcing provider by recognizing these risks and implementing proactive measures to prevent them.

You can partner with MakeITSimple to outsource your IT projects. With several years of expertise in helping businesses craft exceptional solutions, we stand ready to be your growth partner.

Contact us now to unlock the potential of your startup's tech team and drive it toward unparalleled success.

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