Five Risks of Software Development Outsourcing

The outsourcing business model is on the rise across a variety of industries, and IT is no exception. Software development outsourcing means delegating a part or all your development activities to an external vendor.

COVID-19 has redefined business priorities, accelerating the need for digital transformation and modern technology solutions. To achieve that, companies are increasingly relying on external support — 45% of organizations are planning to outsource more in the next 18 months. By 2024, the global IT outsourcing market is expected to reach USD 486.16 billion.

SaaS till 2024
Impact Analysis of COVID-19 on Software Outsoursing

Source: Business Wire

IT outsourcing enables companies to tap into the global talent pool and fill the expertise gaps while reducing development costs and time to market. While the benefits of outsourcing are far-reaching, it is not without challenges.

These numbers, however, should not discourage you from outsourcing your next development project. To build a sound outsourcing strategy, you need to know the most common risks and pitfalls. And that’s exactly what we will try to help you with.

Read on to learn more about the top 5 risks of software development outsourcing and — more importantly — how to level them.

Insufficient domain expertise

One of the most daunting outsourcing risks is a vendor who doesn’t know the ropes of your industry. After all, building a fintech platform is very different from developing a HIPAA-compliant EMR/EHR system. If your outsourcing services provider has no domain-specific knowledge and skills, it will be difficult for the team to navigate the industry’s needs and address challenges in an effective manner.

How to mitigate:

  • Third-party vendors happily showcase their portfolios and success stories. When choosing a potential partner, always ask for relevant case studies and projects to screen out those who lack the experience to do the job.
  • Many vendors offer consultation services that you can leverage to get a better understanding of your vendor’s expertise or vet your project idea.
  • Include a discovery phase — an intensive research period that allows the team to gain an in-depth understanding of the project, its goals, and limitations.

Poor communication

Even with an in-house development team, it takes time and effort to build effective project communication. With outsourcing — whether onshore, offshore, or nearshore — all activities are remote by default, meaning disparate teams working in different locations and different time zones. Throw in the mix outsourcing to a non-English country, and communication can become really challenging.

How to mitigate:

  • A common practice is for clients to participate in the interviewing process and hand-pick their dedicated development teams. This can help build rapport and trust right from the start.
  • Onsite meetings are a great way to establish communication channels but it’s not always possible. Video-based communication is the next best thing to face-to-face meetings — take full advantage of the abundance of video conferencing solutions for remote work.
  • Implement a plan with a clearly defined communication cadence (i.e. daily or weekly syncs) to stay on top of what’s happening and resolve any issues in time.

Failure to understand the project scope

Another risk factor that can undermine the outsourcing success is the lack of clarity for the project scope. If the expected deliverables, timeline, and other project details are not properly and timely communicated to the development team, it can lead to misalignment with stakeholders’ vision and a serious expectations gap, not to say wasted efforts and depleted resources.

How to mitigate:

  • Prepare a statement of work (SOW) that will include the project scope, deliverables, schedule, as well as acceptance criteria and underlying assumptions.
  • Write a detailed software requirements specification (SRS) document describing product functionality and specific project requirements that your dev team needs to know about.

Hidden costs

While one of the primary objectives of software development outsourcing is to reduce expenses, there are plenty of horror stories about unforeseen costs that significantly diminish or even cancel out potential outsourcing benefits.

It’s not rare that companies do not consider the time, effort, and resources spent on preparing RFx, assessing responses, negotiating an outsourcing agreement which can account for up to 10% of your projected budget. Furthermore, unexpected changes to the requirements, whether caused by fluctuating market conditions or ever evolving user needs, can lead to scope creep and budget overruns.

How to mitigate:

  • Augment your team with experienced BAs and PMs for eliciting and analyzing technical requirements as well as effectively prioritizing them throughout the development project.
  • Make sure that your vendor has a robust change management process in place to effectively accommodate new change requests.
  • Implement budget management tools to stay on top of project expenses.

Security and privacy concerns

Even with in-house development, information security remains a major concern, given the average cost of a data breach was USD 3.86 million, according to IBM’s 2020 Cost of a Data Breach Report.

When outsourcing a software project, a third-party vendor can get access to sensitive customer information like login credentials, medical records, credit card information, depending on what kind of solution you are developing. There are also IP risks to be considered, including misappropriation of trade secrets and loss of IP rights. This graphic shows how companies address cyber risks associated with outsourcing their tasks.

Cyber risks control when working with a SaaS company

Source: Deloitte

How to mitigate:

  • Find a vendor who is certified to comply with ISO 27001 — a standard that proves that an IT services provider has reliable information security management procedures in place.
  • Always sign a non-disclosure agreement (NDA) to protect your confidential information from being disclosed to external parties.
  • Depending on your specific industry, try to find a partner who also supports the respective standards like PCI DSS and HIPAA.

The bottom line

Starting as an initiative to drive cost savings, application development outsourcing can easily snowball into a headache unless all major risks are accounted for. And to keep these risks at bay, you first need to know what they are.

Top software development outsourcing risks include the lack of domain expertise, poor communication, failure to understand the project scope, security issues, and unforeseen costs. And although the risks are real, a mature IT services provider will help you mitigate them. Look for an IT partner with 10-15 years of experience under its belt. The expertise and know-hows accumulated over that period allows an outsourcing vendor to build effective communication channels with customers, provide accurate time and budget estimates, and implement robust project management to avoid outsourcing traps.


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