Top 20 Risks Associated with Offshore Outsourcing

by Eban Escott, Jan 14, 2019

Outsourcing your software is a concept immediately thought of by businesses as a huge money-saver. It is a practice used by different companies in an attempt to reduce costs, by transferring portions of work to international suppliers rather than completing it internally. This means businesses start to consider offshore outsourcing to software companies in countries like China and India, due to their lower wages and running costs. This was what the now liquidated software company Appster attempted, when it outsourced its software development to India. While offshore vendors often make claims suggesting they are 80% cheaper per hour, outsourcing software has many hidden and costly risks that can add up to a more costly bill than anticipated.

You may be surprised to find out that some figures suggest the final sum up will leave your expenditure 65% higher than estimated.

In any good business management strategy it is important to complete a thorough risk assessment to identify and mitigate potential dangers. Just like creating software within the borders of Australia, outsourcing your software from offshore also involves risks. However it is important to recognise that when weighing up the benefits between the two, we are not comparing oranges to oranges.

The differences in legal frameworks as well as business structures mean that perhaps we are not able to as readily recognise the potential risks overseas software outsourcing may have on our budget. My goal is to make you aware of these subtle ninjas and help you reduce the chance of being smacked in the face with a financial hit. To help you start your risk management, here is a list of 20 risks associated with offshore outsourcing.

1. Lack of a risk assessment and risk assessment plans.

2. Failure to evaluate local laws protecting your intellectual property

3. Outsourcing without previous experience

4. Not clearly defining the requirements of the project and deliverables

5. Not considering communication channels

6. Not spending enough time and resources on the due diligence of vendors

7. Inaccurate costing and timeframes

8. Not establishing processes to deal with changing requirements

9. Failure to set milestones and clear deliverables

10. Using poorly planned payments upon deliveries at milestones

11. Not understanding the timeframes working across timezones

12. Inadequate developing of a prototype

13. Not considering a handover and ongoing maintainability

14. Lack of a feedback loop to influence outcomes

15. Poor use of key performance indicators to manage the project

16. Underestimating the effort to have all legal agreements in place

17. Not considering the geopolitical risk

18. Lack of incentives for provider to give continuous improvement

19. Not training the provider on critical elements of the company product line or on service expectations

20. Using poorly developed and documented service or product specifications

These are only some of the obvious 20 to consider. There are even more additional factors that mean perhaps outsourcing your software is not as cost effective for your business as you may have initially anticipated. In fact over 76% of customers reported that the project administration and vendor management costs of offshore software development were far higher than expected. While the aim of your business is to "increase revenue, decrease cost and increase customer satisfaction", without consideration and proper management strategies these risks may pose a threat to this goal.

We also should not forget that there are some great perks to completing software development projects within Australia. Increasing customer satisfaction is about a great user experience (UX) with a value proposition to back it up. Recently Australia has been listed as the most globally creative country according to this publication that was reviewed by a world economic forum. While offshoring software development carries a variety of risks, there is a trend for business process outsourcing.

In summary, there are a lot of risks to consider. If you are diligent and can mitigate these risks you could have a successful offshoring project. However, considering there is no firm evidence that offshoring increasing revenue or decrease costs, developing your software locally will automatically help mitigate a lot of these risks. Not only will you will be within the same legal system but also the same timezone, potentially putting you in an easier position to manage your project. Furthermore, to increase your customer satisfaction you need a great UX and Australia is a great place to make this happen.