Top 10 Risks of Outsourcing (and How to Manage Them)

risks of outsourcing

Curious about the risks of outsourcing?

Outsourcing became a trend after the Great Recession, which forced several countries to outsource teams for cost reduction and business continuity. 

So even though it was a business continuity measure then, outsourcing is still in practice. 

And now, with companies operating remotely due to the COVID pandemic, outsourcing is back in the news.

But aren’t there any risks with outsourcing? 

In this article, we’ll cover what outsourcing is and highlight the top 10 risks of outsourcing your business to service providers. We’ll also provide a few tips to manage each risk.

This Article Contains: 

(Click on the links below to jump to a specific section) 

What is Outsourcing?

Top 10 Risks of Outsourcing (and How to Manage Them)

  1. Loss of Control 
  2. Communication Barriers
  3. Unforeseen and Hidden Costs
  4. Difficult to Find the Perfect Vendor
  5. Privacy and Security Concerns
  6. Lack of Experience with Remote Teams
  7. Outsourcing a Key Product
  8. Vendor Failure to Deliver or Constant Delays
  9. Quality of the Outsourced Product
  10. Geolocation

Let’s get started.

What Is Outsourcing?

( Note: This section is a brief introduction to outsourcing. Feel free to skip ahead to the risks section.)

Outsourcing is the business practice of hiring a third party service provider (foreign or local),  agency, or consultant to manage a portion of your business that is normally done by an in-house team. Social media, healthcare, and software development tasks are some of the most commonly outsourced services.

However, in such working arrangements, the hired service provider remains in charge of their team and technology to deliver the required services either at an on-site or external location.

Now there are three types of outsourcing:

  • Onshore outsourcing: A service provider from your own country.
  • Nearshore outsourcing: A service provider from a nearby country.
  • Offshore outsourcing: A service provider far away or even on another continent. 

And what type you go with ultimately depends on your business needs. 

But why should you outsource?

Here are some benefits of outsourcing:

  • Reduced costs as outsourcing allow hiring contract workers.
  • Helps you focus on core areas.
  • Access to a global talent pool.
  • 24×7 market availability.
  • Shorter boarding process.

Read more about outsourcing here.

Top 10 Risks of Outsourcing (and How to Manage Them)

Here are the top 10 risks of outsourcing:

1. Loss of Control 

The biggest risk of outsourcing is the lack of control

A business process that was previously executed by the in-house team when outsourced to external agencies leaves you with little to no control over it. And when mismanaged by the service provider, it can affect the quality of the outsourced service.

Additionally, the level of control depends on the geographic distance of the vendor. 

With a larger distance, in-person meetings and inspections become difficult, leaving you to rely on virtual communication services. 

This can make performance and productivity monitoring challenging. It also makes it quite difficult to collaborate with offshore vendors.

How to Manage this Outsourcing Risk

Before hiring an outsourcing company, weigh what responsibilities you are willing to hand over to the service provider. In order to do that, you need a well-thought plan.

You can include a few project management measures like:

  • Set timelines for meetings.
  • Track KPIs and metrics.
  • Identify the person of contact.

By following this, you’ll also be well aware of everything at every stage of the process.

2. Communication Barriers

Regardless of the type of video conferencing tool you would be using, it is more difficult to communicate over phone and video calls than in-person — especially in offshore outsourcing.

But with time, even if you work around it, there are scheduling issues to consider.

For example, if you hire a remote team from the Philippines for IT outsourcing, then either you will have to clock in early to accommodate their working hour, or they’ll need to work in the middle of the night to be present during your working hours. 

And what if you don’t follow this?

You’ll need to wait a whole day to meet up, which only translates to wasted time!

Moreover, if something goes wrong with your software, then you can’t just walk to the next desk to discuss it with your vendor. 

This leaves you with the only option of virtual communication. So you would have to either send an email or a message to communicate, which can make software outsourcing less efficient.

How to Manage this Outsourcing Risk

Here’s what you can do to bridge the communication gap:

  • Set core business hours.
  • Use effective project management tools.
  • Set standardized formats for communication.
  • Use proper escalation mechanisms.

These tips can help avoid problems, resolve issues quickly, and facilitates knowledge transfer — which eventually makes your outsourcing arrangement effective.

3. Unforeseen and Hidden Costs

The main motive behind outsourcing is gaining a competitive advantage through cost savings and profitability. However, if it leads to any hidden cost then it becomes a risk.

Before outsourcing a service, compare the vendor pricing with current in-house development costs along with all the additional expenses. This gives a rough idea of the vendor charges. 

However, later in the development project phase, you can get hit with unforeseen costs like:

  • Hardware or software upgrades. 
  • Relocation or redeployment.
  • After-hours services.
  • Troubleshooting

All of these add up to the total cost of the project, pushing it beyond its original budget.

How to Manage this Outsourcing Risk

The first step is to clearly define outsourced project requirements. This will ensure that the business process is running smoothly and avoid instances of errors.

You’ll also need to pay close attention to every detail and money estimates your outsourcing partner provides. 

Finally, use employee productivity management tools like Time Doctor to accurately clock in the work hours of each outsourced employee. 

This way, you can see how long your tasks actually took and even track overtime hours to pay the vendor accordingly. Additionally, with Time Doctor’s payroll management feature you can generate payrolls at any point in time.

outsourcing costs

4. Difficult to Find the Perfect Vendor

Picking the right vendor or service provider is tricky. 

They need to have the required skill sets and expertise for the job. 

But along with that, you need to consider a few other things like:

  • Does the vendor have access to the latest technology?
  • Are they experienced in solving complex problems?
  • Are they passionate about your project?
  • Are they in a different time zone? Then, do you have common working hours?  

That’s a long list of requirements — and it can vary from organization to organization.

Additionally, your outsourcing partner should be flexible enough to tend to urgent issues. 

This becomes an even bigger setback if your outsourcing partner is in a different time zone because, with each ticking second of unsolved problems, you’re losing money. 

How to Manage this Outsourcing Risk

You’ll need to spend some time on due diligence. Consider doing a background check on your vendors. 

You’ll need to determine:

  • How long the vendor has been in business and the clients they’ve worked with.
  • The average project-size handled by the vendor.
  • The company’s ranking and reviews on review platforms.

Reviewing these points can help you make this outsourcing decision.

5. Privacy and Security Concerns

When you’re outsourcing to any service organization, you completely or partially expose your business assets to an outsider.

That is why you need to pay attention to privacy, intellectual property, and data protection. This involves copyrights, patents, trade secrets, and more. 

Though the chances are low if you hire a reputed vendor, there’s always a possibility that the third-party organization might steal/leak valuable information or trade secrets. This concern multiplies when you are hiring someone from another country who does not abide by the laws of your own country.

For example, if a member of the outsourced software development team steals the code from your company, it can become quite troubling. How will you take legal action across borders?

How to Manage this Outsourcing Risk

To deal with this security risk, draw up an airtight outsourcing contract or SLAs (service level agreement) with the help of an international lawyer to protect your organization.

And to prevent any case of a data breach, you can even ask the concerning parties to enter an NDA (non-disclosure agreement).

6. Lack of Experience with Remote Teams

Managing a remote team can be more complicated than in theory. 

And the contractor’s expertise plays a crucial role in rightfully managing a remote team. 

You need to keep a few things in mind, like:

  • Constant check-ins on results.
  • Have effective communication.
  • Provide regular feedback.
  • Appreciate their efforts.

Failure to do so can create a communication gap between you and your outsourced team. They might find the job redundant and would be less engaged with the project.

A mismanaged and unmotivated remote team can lead to unmet deadlines, unhappy customers, and eventually, stressed employees.

How to Manage this Outsourcing Risk

You can choose an outsourcing vendor with a well-established setup for remote team integration. Having this outsourcing model in place ensures that a vendor has the needed experience and skills required for maintaining a successful outsourcing relationship.

7. Outsourcing a Key Product

Outsourcing your key product is a crucial decision to make. 

By hiring an offshore company to work on your core project you become dependent upon an outside vendor. And while outsourcing is cost-effective and makes the job easier, you eventually start to lose your product expertise and core competency.

So it’s better to hire expert individuals like engineers or analysts who can lead your team to improve your product rather than offshoring your entire product.

How to Manage this Outsourcing Risk:

The ideal solution to this risk is to outsource only some parts of your project, keeping the crucial management and key employees in your office.

The best idea is to hire a specialist like a designer or developers that will be an extension to your team and not a substitute.

Additionally, you can conduct a detailed background check of your source to measure their reliability. 

8. Vendor Failure to Deliver or Constant Delays

Outsourcing services revolve around a general rule called the 4x rule.

What’s the 4x rule?

It means that it will take four times as long to accomplish an outsourced function quoted by the organization or remote employee. The delay could be due to things like miscommunication, inaccuracies, communication lag, and more.

While it’s not always the case, stick to the 4x rule under circumstances like:

  • When you’re adjusting to new software.
  • When your processes aren’t running smoothly.
  • When you are onboarding a new remote employee.

However, on the brighter side, once you’re more organized and enough time has passed, you’ll see significant improvement in terms of work times and deliverable times. 

How to Manage this Outsourcing Risk

To overcome such operational risks, have constant check-ins with your service provider. You can also draw up a contingency plan or have surplus inventory to deal, in case there are supply chain challenges.

stressed businesswoman

9. Quality of the Outsourced Product

All businesses aim to deliver quality products as quickly as possible.

And when you’re asking for help from a third-party, you need to extend the same commitments. 

It’s not necessary for the outsourcing provider to be familiar with the know-how of your business like your in-house employees do.  

A case of quality failure in a physical product can be more severe if you’ve hired an offshore service provider. 

Why is that?

An international source will have a longer production and transportation time than a domestic one. This can directly impact the time it would take to rectify the concerning issue.

How to Manage this Outsourcing Risk

To help minimize this risk, prepare detailed product specifications for your suppliers, and insist on independent quality control inspections.

You can also request raw material samples on a regular basis to keep the quality of the final product in check.  

10. Geolocation

With communication becoming easier with growing technology, distance seems hardly an issue. 

But if you narrow it down, the efficiency of your outsourcing service depends upon the type of service you’re hiring. 

For example, if you outsource IT services, you don’t need to factor in the distance, but for a physical good, the geolocation of the service provider matters.

How?

Distance translates to transportation costs. The greater the distance, the higher the transportation cost.

You’ll also need to travel a great distance for inspections and frequent check-ins won’t be feasible every time.

Additionally, if you’re unprepared for a quality or supply chain problem, it might take more time to fix it.

How to Manage this Outsourcing Risk

For making the correct vendor selection, ask them three questions:

  • What’s the ideal mode for transportation?
  • Are constant physical check-ins possible?
  • Will you face other supply chain issues?

And once a vendor’s geolocation answers all these questions to your liking, you can begin the onboard processing.

Final Thoughts

Outsourcing is the best way to get your work done at a lower cost. However, like everything, it has its own risks. 

But don’t let that stop you from helping your business grow. All you need to do is check regularly, pay close attention to the details, and you’ll be working towards risk mitigation. 

Use the tips we mentioned here to create a risk management strategy and avoid such situations. Once done, choose the right outsourcing provider and be free to focus on your core competencies!

 
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