How to Avoid IT Outsourcing Failures

As an early-stage or funded startup, you might consider outsourcing as a strategic move for your software development projects. Outsourcing offers a cost-effective way to save time and resources, allowing you to focus on your core business while achieving high-quality results. But, like any business strategy, IT outsourcing has its own risks and challenges. However, with careful planning and a clear understanding of potential pitfalls, you can mitigate these risks.

Table of Contents

1. Why Do Companies Outsource?
2. When Does Outsourcing Fail?
3. 5 Examples Of Outsourcing Failures (key takeaways for businesses)?
4. Avoiding Potential Pitfalls When Hiring an Outsourcing Team: Tips to Follow
5. Summary

Why Do Companies Outsource?

Companies outsource for various reasons, including:

1. Lack of in-house expertise or technical knowledge.
2. Need for quality processes, methods, and techniques.
3. In-house development offering minimal value and requiring excessive management.

These reasons, among others, drive the decision to outsource. However, not all outsourcing projects succeed. Let's examine why some fail.

When Does Outsourcing Fail?

Statistics show that 25-50% of outsourced projects fail or underperform, with 76% of companies facing supplier management issues and hidden costs. Communication problems affect 30% of companies, and 51% express dissatisfaction with performance, saving only an average of 26%.

Many outsourcing failures stem from the client’s lack of understanding of software development and outsourcing processes. Avoid these common causes to ensure success:

• Lack of strategic objectives: Don’t focus solely on cost reduction.
• Unclear requirements and expectations: Align your expectations with reality.
• Insufficient understanding of risks: Be aware of potential risks.
• Inappropriate technology: Avoid outdated or unsuitable technologies.
• Poor knowledge transfer: Ensure effective communication.
• Scope creep: Prevent your project scope from expanding uncontrollably.
• Poor communication: Establish a common workspace for collaboration.
• People factors: Retain talent to maintain focus and loyalty.
• Over-management or micromanagement: Avoid frustrating your provider with excessive control.

5 Examples Of Outsourcing Failures (key takeaways for businesses)?

Learn from these companies that experienced outsourcing failures:

1. Hertz and Accenture case: Hertz hired Accenture to redesign its website and mobile app, but the provider ignored scalability requirements and created a product that wasn’t applicable outside North America. As a result, Hertz filed a $32 million lawsuit against Accenture for supplying a substandard product. Key takeaways: define expectations, document claims, and communicate constantly.
2. Queensland and IBM case: The Queensland Health Department contracted IBM to develop a payroll system for $6 million, but the costs escalated to $850 million, and the system never functioned correctly. The government tried to sue IBM, but the lawsuit was dismissed. Key takeaways: determine outsourcing team capabilities, assess risks and cost estimates, and maintain realistic timelines.
3. Virgin Australia and Navitaire сase: Virgin Australia’s reservation system crashed when Navitaire failed to resolve critical issues promptly, causing financial and customer losses for both companies. This failure underscores the significance of technical expertise in IT outsourcing. Key takeaways: consider logistics and time zones when choosing a vendor, and involve in-house developers to find solutions with outside specialists. Verify the competency of IT outsourcing companies to handle related issues.
4. Royal Bank of Scotland case: RBS’s botched software update paralyzed the system for weeks, denying millions of customers access to their accounts. As a result, The FCA fined the bank ￡42 million. Key takeaways: define clear procedures and milestones and hold teams accountable.
5. The State of Texas and IBM case: The State of Texas hired IBM to consolidate data center operations, but after four years, IBM completed only 12% of the project, leading to backlogs and increased fees. Through this outsourcing failure, Texas suffered a loss of $863 million. Key takeaways: stay up-to-date with project developments, create an official contract, and select the best contract model.

Avoiding Potential Pitfalls When Hiring an Outsourcing Team: Tips to Follow

1. Ask yourself: Why do I need to outsource?

Clearly define your objectives and evaluate your available resources. Consider outsourcing if your team is overstretched, but avoid it during major company restructurings.

2. Determine outsourcing goals and scope

Identify your requirements and clearly outline responsibilities and expectations. Avoid outsourcing core functions or strategic initiatives without clear goals and defined scope.

3. Choose the right vendor

Research potential partners, compare their services, and evaluate their expertise. Select a vendor that aligns with your business objectives and culture. Checking the previous track record of clients, their retention, and direct feedback helps.

4. Focus on value over cost

View outsourcing as a strategic tool rather than just a cost-saving measure. Choose vendors based on skills, experience, and quality rather than the lowest rate.

5. Avoid Fixed Price contracts if possible

Fixed-price projects can lead to higher long-term costs and quality compromises. Be prepared for changes in project volume and avoid rigid pricing models.

6. Draw up a detailed written contract

Create a comprehensive contract with a clear Statement of Work (SoW) and shared risk levels. Include a detailed refund policy and plan an exit strategy.

7. Prepare your in-house team

Communicate the benefits of outsourcing to your team and prepare them to collaborate with remote colleagues. Address potential resistance and encourage cooperation.

8. Set up proper management

Actively participate in managing your outsourcing team or appoint dedicated managers. Establish a reporting schedule and provide feedback, but avoid micromanagement.

9. Build relationships, not only software

Cultivate trust and respect with your remote team. Get to know team members personally, and create a positive and motivating atmosphere.

10. Start developing the product as an MVP (Minimum Viable Product)

Validate project assumptions early on by creating an MVP. Test core components and incorporate feedback to increase the chances of market success.

Summary

As an early-stage or funded startup, facing challenges with outsourcing is natural. While many mistakes can occur, you can avoid them with the right outsourcing partner. We've supported over 100 companies worldwide in establishing top-performing engineering cultures and recruiting remote developers. Our reputation as a reliable partner spans businesses in the USA, UK, and Europe. Reach out to us to access exceptional tech talent and ensure your outsourcing strategy is a success.