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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Here are the most prominent outsourcing advantages:
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:
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:
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.
Do you still have some questions about the risks of outsourcing?
Check out are answers to the most frequently asked questions below;
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.
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.
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.
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.
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.
If you are looking for a bespoke software development company, please get in touch by phone by calling +44 (0) 1905 700 050 or filling out the form below.
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