10 Risks of Outsourcing

Queuing with any other business relationship between at least two actors, outsourcing is anything else than a risk-free endeavour. Although it might lead to numerous, lucrative benefits, buyers and providers should be aware of possible shortcomings and pitfalls, which to their worst extend ruined whole businesses. This article explains the 10 most frequently occurring risks in outsourcing engagements.

Managerial Challenges: Already before and during an outsourcing engagement, managers have to meet the challenges of finding a reliable offshore partner and effectively coordinating as well as monitoring the cooperation with the offshore company.

Loss of Quality: The quality of the development processes as well as resulting services received from an offshore partner might be lower as if they would have been developed in-house. Reasons for missing out on high quality are often connected to poor service provision. Nevertheless, clients should keep in mind that expectations might be relative and should be realistic from the start.

Hidden Costs: Unexpected expenditures occur due to the impossibility to quantify costs. It is further challenging to precisely determine impacts of change or failure on cost aspects. Hidden costs are caused intentionally by fraud activity and unintentionally by miscalculations due to inexperience. Sometimes additional costs depend on unforeseen external factors as for instance the events on September 9/11 or disastrous health epidemics such as the H1N1 influenza.

Geographic Discrepancies: Outsourcing relationships often involve partners from geographically very diverse parts of the world. Risks due to such discrepancies are errors due to language problems, time zone differences or unbridgeable cultural gaps.

Communication Failures: Errors of communication might occur during development processes especially as interaction is constantly mediated due often vast geographical distances.

Lack of Expertise: It might occur that the offshore partner does lack significant skills for the project he is allocated with. This is an error that might have significant impact on the quality of the end-product.

Loss of skills/knowledge: Once business processes are successfully outsourced to an offshore partner, they are unlikely to move back in-house. This might lead to a loss of essential business knowledge and skills on side of the internal staff. In case the in-house team does not stay to be up-to-date it will be less equipped for future negotiations.

Over dependence: Over dependence on a third party organization is closely related to the foregoing point. Although outsourcing ideally lead to long-term business relationships from which buyers and suppliers benefit, there should not occur interdependence especially because the strategic direction of one party might change during long lasting business relationships.

Data Security Threats: The security of a company’s data is an issue of priority. Every business executive must primarily secure a company’s confidential and sensitive info before entering any business engagement. This major objective becomes especially challenging with a third party service provider who does not operate under the same business laws and regulations.

Loss of Control: The benefit of redistributing operational activities might go hand in hand with a loss of control due to different business goals of the own in-house staff and the offshore provider. Different working ethics, mission understandings and levels of commitment might be mentioned as reasons.

Considering the foregoing capacious overview of potential risks companies might start to wonder why outsourcing is a successful business strategy at all. There is to underline that most of these risks can be avoided or met easily if both parties invest a decent amount of effort. Only then the final outcome of engagement processes is satisfactory for both, buyers and suppliers. Being aware of potential shortcomings in the outsourcing process is the first step towards their prevention. Expectations can then also be formed accordingly.