As a phenomenon, IT outsourcing started in the 1990s to enable companies to cut costs and increase the availability of efficient resources. In the past few years, rapid changes brought about by the global pandemic have made organizations realize that outsourcing IT services allows them greater flexibility and access to top-quality talent from across the world.
According to Statista, in the year 2019, the global market size of outsourced services in the IT industry was $92.5 billion. The IT-Outsourcing market is expected to register a CAGR of 4.5% during the period between 2021–2026, primarily in the Asia-Pacific region.
India is the leading global destination for IT-outsourced services. The current contribution of the Indian IT industry to the country’s GDP is around 7.7% and this is expected to increase to 10% by 2025, which amounts to approximately $350 billion.
Despite its many advantages, IT outsourcing comes with its share of problems. Some of the top issues and their solutions are -
1. Incorrect choice of vendor/ team
It requires a lot of diligent planning and assessment to select an experienced IT outsourcing vendor who understands your business processes and/ or performance standards. In the initial stages, the outsourcing vendor will not be familiar with the parent organization’s workflow, best practices, and business processes. The parent organization must be prepared to withstand sudden changes in the vendor’s personnel or organization and build new partnerships if required.
The best solution is to conduct an in-depth assessment of the vendor’s expertise and background. Ideally, this assessment needs to include the CTO and a team of in-house experts capable of providing a comprehensive view of their requirements and expectations.
2. Uncertainty in Business / Technology
Emerging technologies are consistently driving the existing systems towards extinction in the IT industry. The main job of a CTO is to maintain pace with the latest tech developments without going blindly after every new idea. For every new and upcoming tech idea, the CTO should analyze whether or not to pursue it. In the race for popular technology, a bad decision can be disastrous for the CTO.
The lack of a clear understanding of the differences in technologies and solutions often leads to poor decisions. To minimize this risk, it is critical to identify what to outsource. For example, suppose outsourcing is done with the intention of minimizing costs or converting fixed costs to variable costs. In that case, the parent company is likely to lose some crucial competencies or capabilities, which an in-house team could best handle.
Outsourcing decisions must deliver cost-effective solutions, but the organization must retain in-house talent to define requirements and assess results accurately.
3. Defective cost-estimate or Hidden costs
When cost-reduction is the primary aim for outsourcing, early cash flow benefits and long-term cost savings are expected. However, the parent organization may not foresee future cost escalations due to unexpected reasons like technological discontinuities.
Most companies also underestimate the initial setup costs, like redeployment and relocation costs, and the costs related to running parallel operations until the new setup is up and running.
Accurate cost estimation is one of the most challenging issues with outsourcing. The solution to this lies in clearly defining project requirements. Explain your budget limitations to the vendor to minimize future misunderstandings.
4. Security and Compatibility
The data security and compliance requirements in the IT industry are constantly changing. A CTO must ensure that the company’s products are operating smoothly and are compliant with international security regulations and policies.
Since data security has the highest priority, managers must ensure confidentiality and integrity of information assets. Yet, they need to maintain transparency, coordination and easy data access between the vendor teams.
Take the example of Cloud computing services — they share their resources with other vendors. This helps to cut costs and makes IT scalable, but it also means that other companies use some of the same servers and devices, thus creating security concerns. Also, the compatibility of IT services is another big concern, especially if a company maintains some of its IT services in-house but outsources a significant chunk.
The solution to this lies in creating a seamless knowledge transfer plan. In the case of the cloud-computing service provider, the vendor may outsource some of the services covered in the contract to a third-party service provider. The third-party vendor needs to understand and accept the deliverables. The involved parties must clearly understand the agreement and other legal documentation.
While most IT businesses are well-aware of the first type of provider, sometimes they fail to consider the security concerns involved if their provider outsources to a third party. All these issues need to be understood and clarified through a contract.
5. Poor communication or Cultural differences
More than lack of technical ability, poor communication has emerged as the biggest reason for disputes between outsourcing partners. Communication is the backbone that supports the association between two parties in a contract and minimizes risks due to delayed delivery or poor output quality. Communication failure could be due to cultural diversities, language barriers, and time-zone differences, especially in overseas contracts. To reduce miscommunication, the CTO or in-house project manager in charge of the outsourced contractors could take help from a good mediator for overcoming language or cultural differences.
When it comes to communicating with offshore teams, both teams need to understand and appreciate their differences and select a mutually agreeable time for setting up meetings.
The five risks described here are not universal because they do not affect all outsourcing decisions. Most of these issues can be avoided or reduced by implementing the necessary suggestions and by carefully selecting the outsourcing team.
As corporate knowledge about IT outsourcing increases each year, the strategy of “smart sourcing” is fast becoming the norm. The usual reasons for outsourcing IT services — cost reduction, greater business focus, and subcontracting of the legacy systems — are still relevant and reasonable goals for most big IT companies.
Like other businesses, if you too are looking to develop IT Solutions, Mindfire Solutions can be your partner of choice. We have gained significant experience over the years working with a diverse clientele. We have a team of highly skilled and certified software professionals, who have developed many custom solutions for our global clients over the years.
