5 Biggest IT Outsourcing Risks: How to Stay Away
IT outsourcing is a huge market. Growing at a rate of over 4%, IT outsourcing was worth over $530.15 billion globally in 2021 and companies of all sizes often outsourced IT work to partners, suppliers, and vendors.
As a trend, outsourcing is a popular and often-used approach all over the world. Whether you are the CEO of a global Fortune 500 company or co-founder of a startup, leveraging the benefits of cost-effective experts that are external to your organization comes with numerous advantages.
Unlike internal staff, your company takes advantage of the benefits of IT outsourcing, as it doesn’t carry the risk and cost of payroll, admin, office costs, insurance, pensions, and other associated expenses. All of that is carried by the company you are working with. This way, your internal risks are reduced.
In addition to this, outsourcing can be scaled up or down according to the need. IT outsourcing makes companies more efficient without increasing capital or payroll costs, helping organizations to hit deadlines, and leverage growth opportunities.
Some of the world’s largest companies regularly use IT outsourcing across numerous divisions. And even in the technology sector, dozens of multi-million and billion-dollar firms were built — and still rely on — remote and outsourced developers.
Companies that rely on IT outsourcing
The companies listed below, alongside dozens of others such as Alibaba, Spotify, Slack, and Skype — now owned by Microsoft — regularly work with remote and outsourced developers, with many of them dependent on the skills of remote engineers in the early days.
AppSumo (remote developers)
“A name that is no stranger to many in the marketing community, AppSumo launched in 2010 and is now worth over $2 million with an impressive mailing list of over 700,000.
Founded by serial entrepreneur Noah Kagan, it is a daily deal site for entrepreneurs, marketing professionals and some might say, professional hustlers.
To begin with, Noah paid a remote developer to integrate PayPal into a landing page, costing him $50. Even today, AppSumo runs lean and still relies on remote and outsourced developers for a wide range of tech needs and projects.
Google (outsourced developers)
“A name everyone is familiar with all over the world, so commonplace it has become a verb.
Despite being known for taking good care of in-house teams, Google has always relied on working with remote developers (front and back-end developers, Python and Java engineers, etc.) and a wide range of other job roles, including virtual assistants and customer service agents.
One area that might surprise people that they outsource is phone and email support for Google Ads (formerly AdWords; Google’s main revenue generator).
Slack (remote developers)
“It is a tool that millions of remote developers use around the world. It is always one we’ve used and would recommend. Would it surprise you to learn that in 2013, work on the product and design was outsourced to a remote firm? In 2013, the founding team — Stewart Butterfield, Eric Costello, Cal Henderson, and Serguei Mourachov — came up with the idea, created an MVP and beta tested it, before outsourcing the development work to a remote team.
WhatsApp (outsourced developers)
“Yet another startup success story. Founded in 2009, it grew at a rapid rate and then was bought by Facebook in 2013 for $19.3 billion. It also has WhatsApp Business Platform for business communication. Development of the original app was outsourced to Russia, to a contractor iPhone developer named Igor Solomennikov, who eventually joined to the team as CIO.
Basecamp (remote developers)
“Launched back in 2004, it embodies the ‘grow slowly and carefully’ mindset that not every tech company manages to achieve. At the time, Basecamp, then known as 37signals, was a web-project development tool, but not the main revenue source for the team. They were mainly doing consulting projects and this product emerged to help them with those projects.
As CEO, Jason Fried explains:
“As demand for our services grew, we found ourselves increasingly disorganized. We didn’t like the rag-tag image we were portraying to our clients.
They were paying us good money — and our work was good — but the way we organized the work, communicated about the work, and presented the work wasn’t becoming.
It was time to [get organized].”
So that is what they did, outsourcing the development work on the product to increase the cost-opportunity gain. In time, Basecamp generated more than consulting work and they now manage a remote team of 50 people in 32 countries.
However, not every IT outsourcing project is as successful as the Basecamp or WhatsApp experience. Companies need to understand the expectations and realities and put structures and strategies in place to mitigate the risks of outsourcing development.
Although the world’s leading companies benefit from the use of outsourcing, this model is not perfect. In this article, we’ll tell you about the most common ‘expectation-vs.-reality’ situations that disrupt the outsourcing in general.
IT Outsourcing: Expectations vs. reality situations
IT Outsourcing mistake #1: Poor communication between parties
Expectation: Companies want clear and consistent communications between two remote teams working on one project. Whether it is one person — the client — and one freelancer, or a whole team in two companies, there needs to be a near-constant flow of dialogue between both to ensure expectations are met, the information is clear and project outcomes are achieved.
Reality: There is always a risk that communication won’t be clear. One party can let the other down. Information isn’t always transmitted in a timely fashion, or it isn’t clear, or more detail is needed but the other party isn’t forthcoming with that information.
Managers in both teams could fail to shepherd the project along, causing missed deadlines, project timescales to drag, a lack of clarity, and an increase in the amount of confusion between parties.
In situations such as this, a creeping feeling of distrust can cause serious problems and potentially derail an outsourced IT project. Other problems, such as language barriers, working in different time zones, and even small cultural differences, can cause real and unforeseen gaps in understanding between both parties.
- Before a project starts, make sure both parties are clear on the roadmap, milestones, expectations, deadline and where/when input is needed and at what points there are complicated factors that can make miscommunications more likely.
- Acknowledging all of this beforehand and sticking to delivery schedules (of development work as well as information from the client’s side) is one of the most effective solutions for mitigating this risk.
- It is always better in the early days of every project to over-communicate, then dial it back as both teams get familiar with one another, thereby increasing the amount of shared trust and experience working together.
IT Outsourcing mistake #2: Ignoring company culture
Expectation: In an ideal world, any outsourced teams should take clear guidance from the company culture of any client they’re working with. It also helps relations between a client and supplier that this works both ways. Culture is as important as the source code in a development project, and therefore it needs to be protected.
Reality: In reality, culture may not be front-of-mind for developers working on a project, unless a clear makes this aspect of the project clear. Not taking team culture into consideration can cause a breakdown in communications and expectations not being met.
It could also cause working practices that one company considers normal not to be delivered upon, such as keeping clear and accurate documentation of an IT project.
- Make it clear what you’re — as the client — culture is, what your values are and why these are important to note as part of an IT outsourced project.
- Outline what this means in practical terms and what impact this should have on how work is delivered, how the project is documented, and how an offshore team should communicate with internal team members and managers.
- If an outsourced IT project impacts external partners, suppliers, and stakeholders, including customers, then special consideration needs to be made of the culture to make sure the design, user experience, and appearance of any finished project meets with brand guidelines and cultural values.
IT Outsourcing mistake #3: Insufficient business analysis
Expectation: Without the involvement of a business analyst, which ideally should happen before a project starts, there is a risk that the needs of the business and functionality of any IT project will be misaligned. Even with the involvement of a business analyst, they are tasked with much more than gathering requirements.
Ideally, a business analyst (BA) should be tasked with supporting the project from start to finish and communicating the needs of the client clearly, then ensuring an IT assessment is clearly communicated back to the client.
Reality: In reality, a business analyst can be sidelined or what they’ve understood about a project either isn’t understood or taken onboard, causing mission creep and unexpected misunderstandings and a misalignment. This can cause cost overruns and delays.
- Work with a BA from the beginning to scope the entire project and establish then maintain communication between all stakeholders;
- Business analysts need to translate the needs of a client into a language and tasks developers understand and translate back messages that require the client to make changes;
- Business analysts should also be involved in the testing stage of a project to ensure the end result meets expectations.
IT Outsourcing mistake #4: Poor technical documentation
Expectation: Technical documentation is a roadmap for the project. It’s also vital to ensure the client has complete ownership of the project IP and can hand it over to an internal team to manage, or another vendor if they wanted to do so.
Reality: In reality, when projects are rushed or not managed well, or there is poor communication between the client and outsourced IT partner, documentation isn’t always top of the agenda.
The risk is this could be poorly maintained, thereby failing to document the project successfully and leaving the client and anyone else who might work on the code with knowledge and logic gaps.
- The client needs to keep track of the development of this document as a key part of the outsourced project.
- A technical writer and the business analyst, and key players in the client company should be involved in its production.
- If in doubt, this documentation should include as much information as possible to reduce the risks from IT outsourced projects down the road.
IT Outsourcing mistake #5: Loss of control/lack of trust
Expectation: A client should always be able to manage and trust offshore development teams in almost the same way they would with internal projects.
Reality: Without clear communications, there is always the risk that true will breakdown or decrease during the project and a lack of control or transparency will always make this worse.
- Maintain a clear and consistent dialogue at all times.
- Make sure key stakeholders are informed and a business analyst is involved;
- Keep the documentation up to date.
Key takeaways: how to mitigate the risks
Outsourcing IT projects is something that every company from Fortune 500 giants to tech start-ups do; it is a normal and vital part of IT project management. It is an effective way to manage and reduce costs while minimizing risk and internal complexities.
But managers within client companies need to be clearly aware of the risks before commencing with an outsourced project. As we’ve noted in this article, the risks include:
- Poor communication
- Not paying enough attention to company culture
- Insufficient business analysis
- Poor technical documentation
- The fear that a company will lose control
Some of the most effective ways to reduce these risks, or mitigate them as much as possible involve clear communications, and setting expectations in the very early stages of the project. Working with business analysts and project managers, and from the client’s side, avoid having too many chiefs and managers involved.
Don’t make an IT project more complicated than it needs to be. Make sure those responsible from the client’s side have sufficient leverage and C-suite support to make decisions, thereby supporting and increasing the chances of a more successful outcome.
Want to succeed in IT outsourcing hiring remotely? We can source a list of dedicated teams of highly qualified developers in 48 hours or less. YouTeam is a Y Combinator-backed marketplace that works with 500+ pre-vetted outsourcing agencies from Eastern Europe and Latin America and leverages a dynamic pool of 50,000+ experienced software developers. We know who’s going to be available next week, and we know whom to recommend you right after you leave your requirements. Let us help you hire an offshore development team in only a week.