8 Major Risks of IT Outsourcing and Ways How to Overcome Them

Outsourcing your business idea is a high-risk, high-reward venture. Used by 92% of G2000 companies, the cooperation model offers cost-efficient growth, allowing companies to focus on core activities, cut costs, and tap into global expertise.

However, understanding and navigating common software outsourcing challenges can turn this investment into a strategic advantage for both startups and large enterprises.

Acropolium

With over two decades of matching great businesses with talented and skilled teams, Acropolium has gathered decisive insights on avoiding the risks of software development outsourcing.

Today, we will guide you through ways to address remote cooperation challenges, helping you build a successful product and profit from the collaboration.

Why Do Companies Outsource Software Development?

IT outsourcing is a business practice in which a company hires an external service provider to handle software development tasks instead of managing them internally. This can involve coding, developing user interfaces, quality assurance testing, product design, project management, and other related services.

Statista projects the IT outsourcing market to reach $512.50 billion in revenue by 2024, with an annual growth rate of 10.99% from 2024 to 2028, hitting $777.70 billion by 2028.

Currently, 60% of large companies worldwide opt for outsourcing for various reasons:

• Cost and time optimization. Outsourcing saves money on developers, hardware, software, recruitment, and office expenses. In 2023, 56% of small businesses expected revenue growth through IT outsourcing.
• Faster time to market. Experienced dedicated teams with established processes deliver solutions quickly, allowing for immediate project initiation.
• Access to global talents. By outsourcing software development, you can quickly fill expertise gaps with skilled IT professionals worldwide and hire experts with deep domain experience.
• Focus on core business. The outsourcing model enables focus on critical areas like marketing and sales. It allows you to delegate support and updates, allowing in-house developers to concentrate on strategic tasks.
• Improved security. Certified and seasoned vendors provide advanced cybersecurity measures and ensure compliance with industry regulations.
• Scalability. With outsourcing, you can easily scale IT operations based on business needs and adapt to market changes without the burden of hiring new staff.

Top 8 Outsourcing Software Development Risks and How to Deal with Them

Since remote cooperation models imply far-off management and communication, they might pose several challenges in process establishment. There are also many potential problems with outsourcing software development, and, if not properly managed, they can jeopardize your product’s quality, security, and cost-efficiency.

1. Misaligned Vision

Misunderstandings between the client and the contractor lead the list of risks of outsourcing software development. These can arise from unclear project scope, communication barriers, lack of insight into the client’s business processes, and poor technical awareness on the client side.

Solution

For a successful partnership, both parties must align on the project’s goals, timeline, and budget to avoid disappointing results.

2. Communication Barriers

Effective communication is challenging even for in-house teams, and it becomes more complex with remote teams, whether onshore, offshore, or nearshore. Popular outsourcing destinations like India, Poland, Ukraine, the Philippines, China, Brazil, and Malaysia often face language barriers.

Solution

To address such risks of outsourcing IT services, you’ll need to actively participate in interviewing and hiring a dedicated team. Meet the project team in person or via an introductory video call for project estimation and schedule regular catch-ups to stay informed.

3. Insufficient Domain Knowledge

Significant IT outsourcing risks and challenges lie in the contractor’s insufficient industry expertise, including trends, regulations, audience preferences, and suitable programming languages. This may cause project delays, missed deadlines, extra costs, and substandard quality.

Solution

Always review the company’s portfolio and success stories, focusing on similar projects. Discuss their domain experience with an outsourcing agency, outlining your challenges.

4. Lack of Tech Experience

Similar to industry expertise, developers’ lack of proficiency in required technology can lead to project failure. Vendors may overstate their developers’ skills with frameworks and languages, but they may lack experience in building your specific solution.

Solution

Don’t accept this unless you want your project to serve as a testing ground for an inexperienced team to avoid technical IT outsourcing challenges. Instead, examine the company’s case studies, focusing on the detailed descriptions of the technologies, tools, and frameworks employed.

5. Lack of Integrity

Poorly selected contractors might refuse warranty services after project completion. A warranty ensures free fixes for system defects, but with an unreliable firm, you may have to cover these expenses yourself.

Some companies face software development problems when hiring a team of middle and senior-level developers. Sometimes, they find out that the project is handled by junior engineers and is overseen by seniors. This might result in paying $50–70 hourly for work worth $20–30.

Solution

Examine the vendor’s market tenure, employee count, client retention rate, testimonials from clients and staff, and their track record of successful projects on Clutch.

6. Hidden Costs

Additional fees, obscure overheads, and unexpected charges are the software development risks that can inflate your bill beyond the agreed amount. These unforeseen costs can significantly impact your project budget, covering various services like limited free iterations, upgrades, relocation, redeployment, after-hour support, and troubleshooting.

Even services you assumed were included, like quality assurance testing, may incur surcharges if not communicated properly.

Solution

When negotiating a contract, ensure your vendor specifies hourly rates and pricing models.

To manage costs effectively, appoint a business analyst to estimate technical requirements and prioritize tasks, preventing unnecessary spending.

7. Poor Task Management

Common risks of software development outsourcing often include task chaos, inefficient processes, and delivery delays, mainly due to inadequate project management.

Contractors typically assign a dedicated project manager to oversee tasks, communication, and progress reporting. Still, the risk of poor management exists, resulting in slow progress and delays.

Solution

Before engaging a project manager, conduct a thorough interview to assess their English proficiency, experience, tool proficiency, and task review process. Request a description of the company’s task management process from their representative to ensure alignment with your expectations.

8. Security and Privacy Concerns

One of the biggest software outsourcing challenges refers to data security and privacy. These include risks such as insecure data processing leading to leaks of sensitive information and potential appropriation of code and intellectual property.

Lack of essential compliance certifications such as ISO 9001, ISO 27001, GDPR, or SOX is also a red flag for future cooperation.

Solution

It’s crucial to verify the vendor’s compliance certifications, ensure the signing of a comprehensive non-disclosure agreement (NDA) to safeguard confidential information, and prioritize thorough documentation of all created code.

Additionally, inquire about the vendor’s risk management policies aimed at mitigating security risks.

Final Words

While initially sought for cost savings and faster development, IT outsourcing can pose challenges. However, understanding the risks can prevent disasters.

Choosing a reliable outsourcing partner is crucial for mitigating risks. A reputable vendor offers cost savings, quality, and adept management of challenges.

With a proven track record of 170+ successful solutions, Acropolium has vast experience in addressing outsourcing risks. Contact us today — we are here to elevate your business with expert, cutting-edge solutions!