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The Risks of IT Outsourcing: How to Minimise Them
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Toluwani Folayan
May 26, 2023
Meet Mary, a startup owner who loves to create distinctive, handmade knitted dresses. Her online store, "Cozy Crafts", has a devoted following because of its unique designs and top-notch customer support. However, as demand for her products soars, Mary realises the need to upgrade her IT infrastructure to handle the growing volume of orders and ensure a seamless shopping experience.
In an effort to find a more affordable alternative, Mary chooses to contract out her IT operations to a reputable external company. Entrusting her business's digital backbone to experts seems wise because it will improve performance, enhance security, and give her time to focus on her craft.
However, excitement quickly leads to disappointment as unanticipated risks cause the outsourcing partnership to fall apart. Mary's worst fears become a reality when her website experiences frequent downtime, leaving customers unable to browse or make purchases. The outsourced IT team struggles to respond promptly, impacting Cozy Crafts' revenue and damaging its reputation for reliability.
To make matters worse, Mary discovers that the outsourced provider's servers were the target of a hack that exposed private customer data, including payment information. She begins to get anxious as she deals with the fallout, which includes angry clients, possible legal action, and a severe setback to her business plans.
This all-too-real scenario shows the serious dangers of IT outsourcing that business owners like Mary often encounter. However, there is still hope. This challenge could have been avoided if only Mary read this article.
This article will discuss the risks associated with IT outsourcing and provide the ten best tips and strategies for minimising the risk of IT Outsourcing. By adopting these tips and strategies, you can safeguard your operations, protect customer trust, and steer clear of the potential risks that outsourcing can present.
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Outline
What is IT Outsourcing?
10 Risks of IT Outsourcing and How to Minimise Them
What is IT Outsourcing?
IT outsourcing is a business approach in which a firm contracts a third-party organisation or person to manage specific areas of its technological wants and needs.
This could apply to solutions like software development, help desk assistance, infrastructure, network upkeep, or data centre management. By outsourcing these duties, companies can cut expenses, gain access to advanced expertise, and concentrate on their primary business operations.
IT outsourcing is gaining popularity as technology develops, enabling businesses to access global talent pools and maintain competitiveness in the digital era. So, if you are new to IT outsourcing, you absolutely need to jump on the bandwagon. Lucky for you, this article contains everything you need to know about IT outsourcing, especially if you are new to this approach.
Learn everything you need about What is (Information Technology) IT Outsourcing?
10 Risks of IT Outsourcing and Best Strategies on How to Minimise Them
1. Lack of Control
One reason most business owners often feel reluctant to outsource their IT services is that IT Outsourcing often gives complete control to the third-party provider. And if such control is mismanaged, it could affect the overall output or quality of the product or service.
Additionally, since IT outsourcing leads to losing control of some critical processes, it could reduce flexibility in making critical changes.
How to Minimise This Risk
You can minimise this risk by balancing outsourced and in-house operations. By this, we mean retaining control over core functions while you outsource your non-core activities.
For example, if you outsource customer support, ensure that you have a team in-house to handle escalations and maintain direct customer relationships.
Another strategy is to create a well-detailed plan for how operations will be carried out. This is where project management comes into play. You can use an agile methodology which breaks your project into phases, that way; you can track KPIs and metrics or set timelines before they get to a stage where it would be difficult to make changes.
2. Quality and Performance Concerns
There is a chance of running into performance and work quality issues when a firm outsources its IT operations to an external service provider, especially if expectations and standards are not well-defined.
For instance, imagine a business that entrusts a different service provider while maintaining its customer relationship management (CRM) system. The business anticipates that the outsourced CRM system will work effectively, dependably, and mutually with its existing processes.
However, if the service provider falls short of the company's expectations, the outsourcing arrangement could result in quality problems. For example, the CRM system could have usability issues due to functional flaws such as inaccurate data processing or system faults. These quality problems may result in ineffective customer service, which might frustrate clients and result in reduced revenue prospects and bad publicity for the business.
How to Minimise This Risk
You can avoid this problem by creating contracts and Service-Level Agreements (SLAs) with detailed performance metrics and quality requirements. You can also conduct regular audits and performance reviews at different stages of operations. For instance, if you outsource software development, you can define your coding standards, conduct code reviews, and perform regular testing to ensure the desired quality and performance.
3. Language or Communication barriers
Language and communication barriers are risks in IT outsourcing because they can result in misunderstandings, delays, and project failures. For example, unclear requirements due to language barriers can lead to a product that does not meet expectations. Language barriers also affect the clarity of documentation and obstruct effective communication channels, resulting in errors and inefficiencies.
How to Minimise This Risk
Set expectations, create clear communication channels, and promote room for transparent and open dialogue.
You can also use project management software such as Jira, Zoho Projects, or Teamwork, depending on your type of operations, to bridge the gap, especially if you outsource development to a team in a different time zone.
4. Data Security and Privacy Breaches
Outsourcing can put confidential information at risk of security lapses, damaging reputation and potential legal repercussions, just as you read in the analogy we gave at the beginning of the article.
Inadequate security measures can also lead to unauthorised access and cyberattacks while mishandling of personal information can result in financial losses and reputational damage.
How to Minimise This Risk
Implement strong security measures like encryption, access controls, and regular security audits. You must also clearly define data security requirements in contracts and SLAs. For example, if you outsource payroll processing, ensure that the provider follows industry-standard security protocols to protect employee data.
In addition to this, ensure every member of the outsourcing team signs a non-disclosure agreement (NDAs) to prevent cases of privacy breaches or a software provider running off with your code.
5. Geopolitical and Legal Risks
IT outsourcing can be affected by changes in laws, geopolitical instability, changes in laws, or regulatory compliance issues in the outsourcing location. For instance, political turmoil in a nation could cause communication and infrastructure to be disrupted or even cause outsourcing contracts to be terminated. Hence, businesses may encounter difficulties ensuring uninterrupted service delivery when outsourcing to a provider based in a geopolitically unstable area.
Also, laws governing intellectual property, privacy, and data protection vary by jurisdiction. So if a business decides to partner with an external vendor in another nation to process client data, it must verify that its regulations and those of the outsourced location are followed because infractions of these rules may lead to fines, legal action, or damage to reputation.
How to Minimise This Risk
The geopolitical and legal risks associated with IT outsourcing can be minimised by conducting a thorough risk assessment, selecting secure and compliant locations, and creating explicit contracts. These tactics aid organisations in decision-making, risk reduction, and outsourced process security.
Also, it is best to opt for select nations with an established legal system, stringent data protection laws, and a history of upholding intellectual property rights.
6. Dependence on a Single Provider
Relying on a single outsourcing provider can create dependency and vulnerability to disruptions, especially if the provider fails to deliver.
It leads to a lack of redundancy because the business increases its vulnerability to service interruptions and technical difficulties by relying entirely on one source, adversely affecting its operations if the provider encounters any problems, such as network outages or system breakdowns.
If situations like this occur, transitioning to a different provider is possible. However, switching to another vendor or bringing the services in-house is often tricky and time-consuming because this will result in additional delays and add to expenses.
How to Minimise This Risk
Companies can use a multi-vendor method to hire numerous vendors for various services or projects to reduce the risk of relying on a single source in IT outsourcing. By doing this, the outsourcing portfolio is diversified and dependency on a single source is diminished.
Developing a thorough vendor management strategy that includes frequent performance reviews, transparent communication lines, and clearly stated contractual obligations is also essential in minimising this risk.
Additionally, businesses should set up backup choices and contingency plans in case of problems or interruptions with a specific provider.
7. Vendor Lock-in
Vendor lock-in is when a business gets overly dependent on a single IT outsourcing vendor and encounters major obstacles when switching to a different provider or bringing the services back in-house. It is a difficulty that could reduce versatility, prevent innovation, and increase expenses.
Vendor lock-in can also result from tightly integrated systems or proprietary technologies that challenge swapping vendors without major interruptions. For instance, systems that are incompatible with one another can make data migration difficult and demand time-consuming reconfiguration or customisation tasks.
Switching providers can also be difficult if you have financial or contractual commitments to your existing vendor.
How to Minimise This Risk
Carefully examine vendor contracts to ensure some clauses protect you from vendor lock-in. This may involve negotiating flexible terms, such as shorter contract durations or provisions for transitioning to another provider.
Secondly, look for standardised, compatible options that simplify integrating them with different vendors if necessary.
Finally, establish a clear exit strategy. This entails developing transition plans, documenting system configurations and dependencies, and routinely evaluating how outsourcing agreements correspond with long-term corporate objectives.
8. Lack of Scalability and Flexibility
The lack of scalability and flexibility is a risk associated with IT outsourcing. When outsourcing IT services, companies may face limitations in scaling up or down based on their changing business needs. This can hinder their ability to respond quickly to market demands or fluctuations.
For example, suppose a company experiences rapid growth and needs to expand its infrastructure or increase support resources. In that case, an outsourcing arrangement that lacks scalability and flexibility may not be able to accommodate the increased workload effectively.
As a result, the company may face performance issues, decreased service quality, or delays in meeting customer demands. Similarly, if a company needs to downsize or adjust its operations due to market shifts, an outsourcing provider that cannot flexibly adjust resources or adapt to changing requirements may lead to inefficiencies and higher costs.
How to Minimise This Risk
Companies can use the following tactics to reduce the risk of IT outsourcing lacking scalability and flexibility. First, carefully evaluate potential outsourcing providers' scalability and flexibility capacities during selection. Your aim should be to choose contractors with a track record of adapting resources to fit changing business needs.
Second, include explicit and well-defined clauses addressing scalability requirements in outsourcing contracts, such as the capacity to scale up or down services in response to demand.
Finally, establish regular lines of communication and performance evaluations with the outsourced provider to guarantee continued alignment with corporate goals and the capacity to make quick adjustments.
9. Unexpected and hidden costs
Unexpected or hidden costs are a problem for IT outsourcing because they can seriously affect the financial feasibility of a contract. Simply put, during the outsourcing process, unanticipated costs that were not previously planned for can arise, leading to budget overruns and financial strain.
For example, let's consider a scenario where a company decides to outsource its software development. The first contract covers the development price; however, unexpected costs, such as additional payments for software licenses, maintenance obligations, or modification demands, suddenly arise.
These unforeseen expenses can disrupt the budget, potentially causing financial stress and affecting the overall success of the outsourcing project.
How to Minimise This Risk
Conduct a comprehensive analysis and do thorough research before signing an outsourcing contract. This entails carefully analysing the project's specifications, potential cost drivers, and any potential hidden expenses that might emerge. For instance, the business should consider issues like license fees, advancing maintenance costs, and additional customisation fees while outsourcing software development.
Also, have a precise and comprehensive contract outlining all costs and potential unforeseen circumstances. This must cover plans for controlling and dealing with any unanticipated expenses that might occur throughout the outsourcing agreement.
10. Difficulty in finding the Perfect Provider
The challenge of selecting the ideal vendor poses a risk to IT outsourcing because it can result in bad business relationships, potential inefficiencies, and diminished service levels.
How to Minimise This Risk
Look out for outsourcing providers that have the following requirements:
- A strong track record or a good reputation in the industry
- A provider with positive testimonials and reviews
- A company with proven expertise in the specific IT service required
- A robust security measure and compliance with data protection regulations to ensure the safety and confidentiality of sensitive information
- A company that shows excellent communication and responsiveness
- A company with a transparent, fair pricing model and a well-defined service level agreement (SLA).
If you require a software outsourcing partner, check out wazobia.tech.
Wazobia Technologies is a Software Development Agency that provides intelligent solutions in most modern software technologies, such as DevOps, Cloud, and more. In addition, all our operations are scalable and sustainable, so you can continuously add features and upgrade as required.
You also do not need to worry about costs because each project is tailored to fit the specific needs of each business and meet any budget.
Conclusion
Outsourcing IT comes with risks in addition to growth and cost reduction prospects. However, these risks can be mitigated by following the strategies explained above.
Remember always establish clear objectives and expectations, vet and choose trustworthy providers, create strong contracts and SLAs, place a priority on communication and transparency, implement strong security measures, conduct routine risk assessments, foster collaborative partnerships, effectively monitor performance, maintain in-house expertise, and prepare for contingencies if you want to reduce these outsourcing risks.
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