challenges in outsourcing Archives

Ever since the phenomenon evolved in 1989, outsourcing has only grown. Today, it is an integral part of business strategy. That is not to suggest that outsourcing has gained universal approval. Opinions about outsourcing travel the entire spectrum from the condemningly negative to the enthusiastically supportive. Though there are some disadvantages of outsourcing, it has some unparalleled benefits for businesses.

Outsourcing Is Here To Stay

Whichever position across the spectrum you hold, one thing is for certain. Outsourcing is definitely not on its way out.

Statista informs that the global market value of outsourced services increased from US$ 45.6 billion in 2000 to US$ 92.5 billion in 2019.

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All the surveys by known market research experts inform us that two primary reasons drive outsourcing: cost-cutting and access to talent.

There are several models of outsourcing to help businesses achieve these two objectives simultaneously. Let us examine two of them: the project-based and the dedicated team models.

Examining the Project-based Model

In the simplest terms, the project-based model implies:

You hire a third party for an entire project at a fixed cost contract
You first explain the full project requirements to a third party and double-check that they have got it right the best you can.
Then, you draw up a contract with as many details put in as you can think of, with strict deadlines, and failure punishment clauses.
The hired team is then supposed to finish the entire project exactly the way you want it and deliver it on time.

Seems easy and relaxing, does it? At one level, the project-based model of outsourcing does take a lot of responsibilities off one’s shoulders. However, you may have to pay a rather heavy price for that if you ignore the disadvantages of outsourcing, especially the project-based model.

A Relevant Anecdote: Outsourcing Failure

Hertz, a car rental giant sued the IT mammoth Accenture over a website redesign task that never met its completion. They actually ended up paying Accenture $32 million for a website that never wet live. Hertz is a U.S. organization that operates popular car rental brands including Hertz, Dollar, and Thrifty having approx. 10,200 corporate locations across the globe.

The company faced tough competition against the rising on-demand car hiring apps like Uber and Lift, which resulted in a drop of its stock prices by 85% within 5 years. To this, Hertz outsourced its website revamp task to Accenture in August 2016 and the site was due to go live by December 2017. But there was some delay in the development cycle from Accenture’s end and the due date was delayed to January 2018. But, a second go-live date was requested (April 2018) which was also missed.

By that time, Hertz had noticed that the website revamp task has not even travelled half-way and it isn’t in line with what was planned in the project scope, this caused them to terminate Accenture and the new website never saw daylight.

If you dig this episode carefully, the 7 problems that you may typically face with the project-based model of outsourcing become clear.

7 Disadvantages of Outsourcing for the Project-based Model

1. It’s Never Easy to Capture the Project Details in Totality

It is extremely difficult to think through all the details down to the nuts and bolts of a project before it actually starts. No matter how thoroughly you think, articulate, and communicate – there’s always a chance of missing out on some aspects that do not seem important enough. And most fixed-price agreements relate to this limitation of outsourcing.

2. Possible Gaps in the Understanding of Project Requirements

Communication issues hassle us at an everyday level. How can they simply vanish when trying to communicate complex project needs? And by this, we don’t mean there are no benefits of outsourcing, but communication and management have a significant role to play.

Accenture, too, had accepted their lack of understanding ultimately.

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3. No Control Over the Everyday Functioning of the Project Team.

In case there are delays in between, it may be too late before you know. Sudden and unforeseen changes in team members will also remain beyond your control. Lack of control is one of the major disadvantages of outsourcing through a project-based model. And the impact may hurt the project delivery. The onus of putting up a strong reporting process often, unjustifiably, falls on the client’s shoulders.

Hertz couldn’t transparently look into the progress of the project development cycle.

4. Change in Project Requirements will Require Cost Renegotiation

One of the most evident disadvantages of project-based outsourcing model is that you may be in a position where you have to pay what the vendor asks for, or risk not getting it done at all. The contract becomes the sole driver of relationship in many client-offshore team engagements. The solution is, of course, to either keep a favourable clause in the contract or work with agencies that are culturally attuned to the idea of rapidly changing engagement models so as to benefit the client.

5. Project Delay or Crash from the Vendor’s Side pushes you in a Royal Soup

You may penalise them financially. However, your projects will still remain incomplete or imperfect. No way can you estimate just what kind of losses you may have to suffer. The truth is, agencies would rather have their work done in time, rather than impose penalties on their vendors.

Hertz paid Accenture $32 Billion for a website project that was never completed.

6. There May Always be Hidden Costs

To leverage the benefits of outsourcing you need to bear some hidden costs. Such as the time and energy you need to monitor. Whether the project is moving as per the agreed timeline. Is the vendor maintaining the quality standards specified?

7. The Biggest Risk, of course, is Security.

With limited control over the project team, the security of all the company information you have to share with them will always remain at risk. Especially as you will have no direct control on how the vendors maintain their security. This disadvantage of outsourcing persists across various models of outsourcing. However, working on white label contracts with defined NDA and detailed documentation can assure you complete security of your crucial company information.

The Solution: Dedicated Team Model

Quite clearly. Dedicated team model eliminates all the risks that the project-based model presents. You choose the team and retain full control over it.

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However, this model also retains the benefits of outsourcing. You get access to global talent and you pay only when the team works..No monthly paychecks to issue when the contract is over and there’s no work.

Also, long-term relationships foster dependability and trust.

Quick Summary: This blog discusses why offshore outsourcing is failing for some businesses and what are the major struggles and disadvantages of offshore outsourcing. First, there are some statistics that show a drop in total IT outsourcing revenue from 2019 to 2020 and then there are some real struggles businesses have witnessed with offshore outsourcing. But we do not conclude here and we give the most perfect solution to make offshore outsourcing productive and so away with the listed struggles through dedicated teams.

It’s frustrating, we know.

Outsourcing promised the world to global companies, only to reveal that there were pitfalls hiding under what seemed to be a smooth road surface.

Here are some routinely cited challenges CxO’s face with offshore outsourcing key departmental functions.

Before that, Some Numbers:

The total contract value of ITO across the globe decreased from US$76.6 billion in 2019 to US$66.5 billion in 2020, informs Statista.
A 2019 article mentions that many large multinational companies (MNCs) are moving away from outsourcing to global in-house centers (GICs).
The British outsourcing market crashed by 25% in 2018, indicating the burgeoning distrust of the model across geographies.

Why’s that a Bad News?

Because companies that have had their hands burnt while trying outsourcing models are finding it hard to nail down the true cause of failure:

Is it the offshore outsourcing model that’s failed?
Or, is it the lack of control inherent in the traditional offshoring model, that caused the failure?

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By saying NO to offshore outsourcing, they’re failing to pinpoint the cause of failure, and as a consequence, foregoing the tremendous benefits of offshore outsourcing.

We could fill out pages if we were to go into the reasons that make offshoring lucrative for companies.

There are some inevitable benefits that make the disadvantages of offshoring fade away:

Increased competition in a globalized market has big businesses searching for offshoring their IT needs to keep costs low.
For many industries, offshoring is an avenue of competitive edge.
The talent shortage is also a factor fueling the ITO market.

These advantages of offshore outsourcing are too good to ignore, which means global leaders need to address the challenges posed by the traditional offshoring model and overcome them.

Here, we present the real challenges a majority of companies face with managing offshore teams and their offshore company partners. We also provide a solution, of course!

Top 5 Disadvantages of Offshore Outsourcing and their Solutions

1. Limited Control over Shared Resources

Sharing resources, including proprietary business knowledge, is necessary for any outsourced project.

Offshore IT outsourcing is not beyond that. But the headache level is different when dealing with the advantages and disadvantages of offshoring.

How do CxOs deal with this, traditionally?

You will try to develop a watertight contract, of course, believing that to be an adequate guarantee against the unauthorized use of shared resources.

However, with your offshore team working at the other end of the world, your control of the shared offshore resources will remain constrained.

The 2013 Trust-wave Global Security Report (2013) studied 450 data breach investigations and found that 63% were linked to a third-party component of IT administration.

It will be difficult, if not impossible, to detect data leakage. There may be sufficient damage by the time you detect it. In the case of shared resources involving data protected by privacy regulations in your country, the challenge increases manifold.

By design or by mistake, your offshore team causes a data breach. Can you even begin to think about how drastic the impact could be for your company?

Solution

You need to sign a White Label contract with strict NDA terms and have your documentation complete. With this, the best solution for managing security while offshoring is by hiring a dedicated offshore team, so you know your exact team structure and can identify the resources working on your project. This gives you the same level of transparency as your inhouse team.

2. Frustrations with Managing Offshore Teams

One of the major offshore company benefits is supposed to be the reduction in overhead costs. But what about the exasperation overhead?

Here are some examples:

Chances are that your offshore company follows business and management processes very different from your own.
Time zone differences and linguistic and cultural barriers make matters worse.
Expect friction around documentation standards, nomenclature, level of detail, etc.

Here’s an example.

Think of something as simple as an invoice.
Your company needs the invoice from your offshore team in a particular format.
Your offshore team insists that they do their invoices in a different format and they see no reason to change that.
They may also say that any change in their invoicing format will land them in legal trouble.

For all you know, you may need several email exchanges with one or two Skype calls thrown in to sort out just this simple thing. Can’t you imagine how exasperating that can be?

You thought one of the best advantages of offshore outsourcing would be to offload most of your responsibilities, did you?

Solution

Yes outsourcing your project requirements to offshore teams help you cut down the operational expenses and sometimes if you outsource to a country like India you can get good IT expertise at a lower cost as compared to your in-house team. But, management can be a hassle and it is a good idea to hire dedicated experts offshore or a team of dedicated experts, who would be managed according to your project priorities and can work according to your time zone.

You would be amazed to know that 80% of the Fortune 500 companies have their dedicated offshore development teams for cutting down on their operational costs.

3. Limited Control over Offshore Team Structure and Functions

With an offshore company partner, you have no control over the offshore team structure, or over how different functions are allocated to different team members. Staff retention is also an issue. The remote team manager will have the full right to shift around team members.

How’s this a problem?

You may suddenly discover that one team member you could best communicate with has been allocated to a different project.
Worse still, you may receive an email informing you that your offshore team leader is no longer working for that company.
With no idea about the capabilities of this new person, you’ll naturally worry about what impact this change might imply for your project.
Combine with that the need for you to establish a rapport with a new person just when you thought you and your offshore team leader have started to speak in the same language.

Doesn’t seem to be a very inviting situation, does it?

Solution

Decide your team structure and team members yourself by choosing the dedicated team model. You can choose the number of members, the expertise level and can transparently build your own team offshore. As you choose the dedicated team model, the outsourcing vendor cannot change your team size or structure and the resources allocated will dedicated work on your project. You can manage them as easily as your in-house team and get great expertise at almost half the cost of your in-house resource.

Does this sound a fair deal now?

4. Lack of Transparency in Pricing, Resulting in Overcharging

Management processes of your offshore partners could be rigid enough to disallow any such mid-project scalability.

In fact, this is a major value-leakage for traditional outsourcing contracts, with key issues such as:

Keeping teams top-heavy to inflate billables by compromising agility
Low potential for upskilling people to enable internal promotions

Your offshore team leader may argue that the hike that seems unreasonable to you is something they cannot do without if they have to get extra human resources for your project.

With little control over the team structure and functions, little knowledge of the employment rules in that country, you will be in a difficult position to negotiate too much. And this can be a hidden disadvantage of offshoring.

Solution

The fixed-price model or the traditional project-based model fades the scope for flexibility or scalability in project requirements once the project cycle begins. And therefore brands have started utilizing the ‘dedicated team model’ where they have the power to change the project priorities, alter its scope and manage the offshore team and resources according to their business priorities.

5. Lack of Control over Day-to-Day Work

When working with an offshore company, you will have no access to the daily activities of the remote team. You may feel that your project progress is slower than you had expected. You may certainly share your concern and ask for an explanation.

But you’ll be compelled to accept whatever explanation your offshore company provides. With no visibility of day-to-day work, you will be in no position to figure out what exactly is wrong.

And that’s like being in a room with a spider; you know it’s there, you just can’t see it.

Combine with these the other typical disadvantages of offshore outsourcing like an urgent communication being delayed because of time zone differences. Or the cultural difference that makes you feel your offshore team leader beats about the bush far too much while they may think you are downright rude.

There are certain apparent disadvantages of offshoring. However, developing a GIC is not feasible for every company. What, then, is the solution?

Solution

Sometimes the nature of your project requires you to take a look at the day-to-day work progress or there may be issues like delayed timelines or a deflection from the actual project scope. And therefore a better choice would be to hire a dedicated team where you could not only transparently look but manage the day to day activities of your offshore team. This could help you earn the expected productivity from your offshore teams and keep you informed about the progress in your projects.

We Recommend The Dedicated Team Model

No, we are not blind to the advantages of offshoring ITO. We are not asking you to give up on offshore ITO altogether. We are not proposing that you do everything in house, which will undoubtedly increase your overhead costs considerably, among other things.

We are proposing a dedicated team model, which combines the top benefits of offshore outsourcing with the top advantages of having an in-house team. And, it eliminates the disadvantages of both! The dedicated team model offers the ideal cost-effective solution for your ITO needs.

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