For all those who are planning to outsource, we have put together a Software Development Outsourcing Guide. This is an all-encompassing guide that will tell you everything you need to know about your costs, calculations, savings, and tips to save more for a successful outsourcing relationship.
Outsourcing is considered an enabler for business transformation today.
Leading a business is a never-ending process of constantly improving, expanding, and modernizing products and services with evolving technologies.
With the economy going global and constantly with evolving technologies, many companies find it hard to develop the whole spectrum of software solutions in-house.
They force to maintain a competitive advantage by optimizing their operational efficiency, improving customer service, and bring new products to the market at a faster speed.
Outsourcing is one of the complicated business decisions that are hard to take by the companies as it involves a lot of risk factors.
But as we know, not all companies succeed in outsourcing. Many fail to get their investment back.
Yes, there are difficult decisions ahead. Should I invest in the major transformational change? How much do I succeed? Or what are the chances of business failure?
After all, it’s a matter of trust in the end. Software Outsourcing is not only a big game changer to many businesses but also a risk provider.
"Digitalization and globalization are rapidly evolving customer expectations and demand a shift in how leaders responsible for logistics approach outsourcing strategy,” says Courtney Rogerson, Senior Principal Analyst, Gartner.
10 Reasons Why Outsourcing Product Development Fails
According to Dun & Bradstreet’s Barometer of Global Outsourcing, “20 to 25% of all outsourcing relationships fail within two years, and 50% fail within five”.
Despite the tremendous growth and huge popularity, global outsourcing also faces high failure rates.
Many organizations big or small, experience delays, low-quality services, and even contract termination.
But what is the core problem behind all this? What is the reason that led almost half of the outsourcing companies unable to deliver the required value?
Why do they fail?
A client’s incomplete software development knowledge, unclear expectations, lack of project management skills and project estimation may all lead to a big outsourcing failure.
Let’s dive into some of the major reasons as to why outsourcing product development often fails:
Reason1: Forgetting The Target Audience
Modern software development is all about delivering high-tech and fast solutions that surpass consumer expectations. Any product you produce for a client must be customer-centric and always catered to its target audience.
Projects that fail to incorporate customer and stakeholder feedback throughout the development lifecycle may no longer be relevant by the time they make it to market.
For example, a website must be user-friendly. It is easier for SEO companies to stuff pages with SEO keywords making customer experience worse.
Customer-centricity needs to be baked into the planning process and outlined in the documentation. Outsourcing teams should contain all the tools, processes, and information they need to apply user response into the software development process.
Always Remember to the target audience when your agency outsources.
Reason2: Lack Of Clarity
Failing to define responsibilities, roles, expectations with in-house and distributed teams is one of the reasons behind many companies outsourcing failures.
Also, ensuring your client understands the process will help them relax and let the company handle things. You should provide your outsourcing partner with a sense of security that everything is being handled correctly and under guidance.
Reason 4: Lack Of Communication
Clients often hide some information with their outsourcing partners as they believe some things are apparent.
But if the outsourcing company doesn’t completely understand what it’s supposed to accomplish, then the work will not be completed as expected.
Don’t hesitate to share every detail of the project with the outsourced team.
Having a central database or shared inboxes that the Outsourcing partners and all involved parties have access to can help communication and understanding.
Reason 4: Insufficient Technical Expertise
Companies usually outsource their software development to eliminate the huge cost and complicated process of hiring skilled employees.
Sometimes due to the deprived skills and experience on the vendor side also leads to a big mess as they can’t deliver the desired outcomes.
The reason behind this could be the development team that doesn’t have the right set of skills. Or maybe their process isn’t compatible with the client’s workflow.
The goal is to find the right partner who has the right tools and resources so that they can deliver the best outcome.
Reason 5: Poor Planning
Every aspect of the milestone should be planned accordingly to ensure smooth operation. You should maintain a balance and do things in an agile way.
Make sure your standards and preferences are clear to achieve the next milestone.
From the documentation, to communication and milestones, all should be predefined. Do apply a consistent and smooth agile methodology in the software development process. Cutting down operating cost is one of the prime reasons why companies choose outsourcing.
At the same time, failing to establish clear costs and benchmarks for an outsourcing project is the biggest disaster.
Reason 6: Choosing The Cheapest Outsourcing Provider
Choosing the cheapest outsourcing provider is not the right way to increase savings. They often deliver substandard results in the form of low-quality code, project delays, or miscommunication.
By compromising on the time zones benefits, companies make big mistakes in choosing the cheapest outsourcing providers.
However, the focus should be on getting the most business value possible from this partnership. Fast, cheap service will often only cause more problems in the long run.
Clients often fail to define their project’s objective and desired outcomes. Without an unclear understanding, clients change their orders frequently, causing delays and cost overruns.
Set your goals transparent and realistic. With this, the outsourcing company understands your outlook and works with you keeping hands in hands.
Reason 8: Unable To Explain The Process To The Client
Connecting with your clients during outsourcing is extremely important. Making sure clients understand the process will help them relax and let the company handle things.
You should focus on the outcomes of the targeted project. Also, try to involve the outsource development team in the planning phase so that things are clear to them. Hiring a trustworthy outsourcing partner helps you develop a detailed roadmap with their expert skills and experience.
Reason 9: Project Estimation
Some outsourcing companies set unrealistic deadlines and estimations for software projects when bidding for a project and writing a proposal to win the client’s trust.
On the other hand, some clients accept their conditions because they are unfamiliar with the software development process. They try to cut costs and time, but in the end, they come up with the unsatisfactory product.
Be real to your committed deadlines and budget estimates, and avoid those who set unattainable goals. Before making any outsourcing decision on unrealistic rates, it’s better to know global outsourcing rates.
Reason 10: Trust that all matters
Joining hands to a trusty outsource software development is crucial. If you’ve picked an outsourcing partner that meets all your requirements but you still try to micro-manage the project or develop arguments with developers.
A trusty outsourcing partner can leverage their knowledge and experience while developing a detailed roadmap.
If you don’t understand why something is being done, just ask. The development team will explain everything to you. Instead of telling your team what to do, use their expertise and experience to lift your business!
According to the IBM study, merely about 27% of companies outsource work to reduce costs, whereas 36% are innovators and 37% are growth-lovers. So, it’s good to use outsourcing as one of the tools to optimize business.
7+ Quick Tips To Avoid Outsourcing Failures
We’ve put together a helpful list featuring ten tips on how you can avoid IT outsourcing failures.
Tip1: Have a clear and consistent outsourcing objectives
Before diving into outsourcing your software needs, you need to determine the reason you're outsourcing. The outsourcing roadmap gives you a crystal clear picture of what you want to achieve and how you should achieve it.
For this, you need to define your objectives for outsourcing, and this can be anything from reducing operational costs to developing a new software product.
Tip2: Determine the goal of your Outsourced Project
The next step is to figure out the goal of your project. Initialize determining the exact project requirements you want to outsource. Also, identify your long, and short-term needs so that you can have an exact list of expectations and responsibilities to communicate to your offshore team.
This ensures that your project remains organized and clear on all the tasks.
Tip3: Ensure that you select the Right Vendor
Choosing the right outsourcing partner is one of the most critical decisions you have to make when outsourcing your software development. The outsourcing partner you select needs to be a service provider aligned with your business culture and project objectives.
Check their portfolios, client reviews, and expertise. After research, you should make a good decision.
Tip4: Prepare yourself for possible outcomes
Outsourcing often fails due to conflicts between in-house and outsourced teams. This may be due to cultural differences, gaps in communication, and negative perceptions about the outsourced company. Also, keep your internal team in the loop at all times while communicating with the client and other teams.
Tip5: More Focus On Value
One of the benefits of outsourcing is to save costs. But it shouldn’t be the only reason for choosing software outsourcing. Instead of focusing on lesser costs, the business should shift its focus to value.
The vendor’s expertise, work rate, work quality, customer reviews, and experience should have major priority over the low costs.
Tip6: Prepare a clear and detailed written contract
A formal, written contract always works in your favor when it comes to working with outsourcing teams. Unclear or unwritten facts in the contract may lead to the outsourcing failures.
This is why it is important to write a formal and clearly stated contract that defines the offshore service provider’s responsibilities.
The contract should cover the details such as required working hours, hourly rates, and other details regarding the project’s future. Also, an exit plan to be prepared in case of a refund policy.
Tip7: Establish a good communication model
Ineffective communication is one of the leading causes of outsourcing project failure. Communication is vital, especially when dealing with an outsourcing team that operates in a different time zone.
Also, you need to build a good communication model by establishing a strong communication channel with the outsourced team.
You can utilize tools like video conferencing and instant messaging platforms. You will also need to schedule regular meetings, conferences and have follow-up conversations to ensure that all details should be addressed.
Tip8: Build healthy working relationships with your outsourcing team
It is just as important to build healthy working relationships with your outsourcing software provider as it is to complete your IT project. Always make an effort to establish mutual trust and respect between your business and your outsourcing team.
Understand your team members and show real interest in them. A healthy and long-term relationship would benefit your project , as well as your business in the future.
The global market for BPO (Business Process Outsourcing), according to Global Industry Analysts Inc., is estimated to reach $262.2 billion by 2022.
Unsuccessful Outsourcing Stories Of Big Companies
Let us look at some unsuccessful case studies, and see what we can learn from these.
The State Of Texas And IBM
The State of Texas wanted to consolidate data center operations. For that task, they chose IBM as their outsourcing provider. In the first two years of the project, IBM had to consolidate data center operations for 27 state agencies into two data centers.
But unfortunately, in these two years, they were able to migrate only five agencies’ systems. Also, the vendor wasn’t performing the nightly backups required under a contract.
With this, the State of Texas lost $863 mn on the original deal. Moreover, IBM couldn’t finish the project on a predefined deadline which led to causing subsequent financial loss. At last, the costs were growing, and finally, Xerox and Capgemini replaced IBM on a $1.1 bn deal.
Royal Bank Of Scotland And Their IT Vendor
Royal Bank of Scotland didn’t disclose the details about their software outsourcing provider in front of the public. The bank’s system required updates, and they planned one of the updates for June 2012.
With this, millions of bank customers don’t have access to their own money. As a consequence, commercial and non-commercial customers were unable to withdraw funds, view their balances, or perform transactions.
Even the bank itself couldn’t do it. The failed software update crippled the whole banking system.
The fact that customers were unable to make payments or receive money had a tremendous impact on local businesses. However, the bank didn’t reveal what company was responsible for this disaster.
Virgin Airlines and Navitaire
Navitaire outsources services such as internet booking, reservation, check-in, and boarding system for Virgin Airlines. All these applications broke down two times in three months. According to their deal, Navitaire was obliged to resolve that kind of critical system failure in the minimum time.
It took them nearly 24 hours to complete. At that time, all Virgin Airline flights were grounded, and over 50,000 passengers were irritated. It was a huge financial loss for Virgin Airlines. Navitaire’s inability to solve the problem caused disappointment among customers and huge financial losses.
Major Reasons Behind These Failures Are:
- Inappropriate assessment of skills
- Clients didn’t protect their interests carefully enough
- Smaller companies also can cope with significant challenges.
- Poor project management and no transparency
- Clients chose vendors too hastily
Lessons To Be Learned From Failed Businesses
- Never Outsource your core business
- Outsource only when your business is ready and it’s 100% necessary
- Never outsource from the start
- There should be no space for lack of commitment
- Always start with a collaborative mindset
- Communication at each stage is a must
Clients don’t need classic vendor management. They want vendor management that can understand technology, understand the start-up ecosystem, help find solutions for the business, and manage internal stakeholders.” Senior Vice President, Large IT outsourcing service provider
Outsourcing can be the one-stop solution for all businesses to stand ahead in this competitive global world. Finding the right outsourcing partner with the high expertise and flexibility to adapt to the changes provides you an ever-changing competitive advantage.
Rushing into the outsourcing decision without clear goals can result in misaligned expectations, miscommunication, and increased management overhead. So, to avoid putting your project at risk consider the factors affecting your product outsourcing and make the right outsourcing decision.
In my opinion, the main reason for the failure of outsourced software development is not bad project management. It's not having a clear definition of success.
If you want to extend your business with a good number of experienced professionals, please feel free to contact us. We are here to help you with all your software development queries.