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How to Deal with Hidden Risks of Offshore Outsourcing
Offshoring development services are indicated to grow remarkably by 20%-25% per annum, with little indication of slowing down. Some of the large enterprises around the globe, such as Apple, Ford, Cisco, etc., also resort to offshoring routes for their IT projects because of its potential benefits, comprising a reduction in development costs and time-to-market acceleration.
While offshoring has been a proven effective strategy for many years, there are also inherent risks in contracting with a company in another country to accomplish daily business operations. Thus, it is essential to be aware of the drawbacks in order to save yourself from potential disadvantages and losses. This article will indicate some risks associated with offshore outsourcing and how to avoid them.
Differences between Offshoring and Outsourcing
Outsourcing entails the act of delegating a specific aspect of a company's operations to a third-party corporation. Offshoring may share the same elements as outsourcing, but offshoring specifically refers to the transfer of business operations to a different country to reap advantages like cost reduction or tax benefits.
Here are some key differences between outsourcing and offshoring:
- Scope: Offshoring includes setting up new branches or facilities in another country. It often involves direct control and ownership of operations in the offshore location. On the other hand, outsourcing focuses on specific tasks or functions that are contracted out to an external service provider.
- Quality Control: With offshoring, the company retains direct control over its operations in the offshore location, managing and overseeing the activities performed there. In outsourcing, the control and management of the delegated tasks are handed over to the external provider.
- Cost and Resource Allocation: Offshoring is often driven by cost considerations, aiming to reduce expenses or benefit from favourable tax regulations. Outsourcing can also help reduce costs but is primarily focused on optimizing resource allocation and efficiency.
1. Security and Data Privacy Risk
Security and data privacy issues are usually fronts of mind for enterprises when collaborating with an offshore firm. It is even more critical when the service provider handles sensitive customer information, such as personal identity, contact details, or credit card numbers. There is a possibility that the offshore company's data or intellectual property (IP) address may not be secured, and if the security system is error-prone, there is a high likelihood of data loss, theft, and leakage, which could result in significant negative consequences for the client.
How to Deal?
While security and regulatory issues pose the greatest concerns in offshoring, corporate executives must choose which projects can and cannot be outsourced. Moreover, enterprises also should have measures in place to prevent possible misuse or theft of intellectual property.
To leave no room for fear of data leakage, you should sign a non-disclosure agreement (NDA) and security protocols with a dedicated software development team before officially forming the partnership. Also, you can research the security practices of offshore suppliers and request their security certifications. Stay away from collaborating with doubted ODCs to avoid possible data infringements in the future.
2. Hidden Cost Risk
The advantages of cost-effectiveness serve as the driving force behind enterprises’ decisions to offshore their software development projects. Unfortunately, not the complete cost of the project is visible at the time of the agreement, and often hidden expenses emerge later in the development process.
Project cost often includes explicit and implicit costs. Explicit expenses incorporate headcount costs, hardware and software charges, and office environment expenditures. Explicit costs are particularly apparent to both clients and vendors at the time of the agreement, while implicit expenses often come as a surprise to enterprises by occurring in the midst of the development process. These costs comprise communication charges, project management outlays, variable costs associated with outsourcing content and unpredictable changes in the project that require prompt modifications.
In fact, these expenses are especially difficult to estimate in advance; thus, towards the end of the project, the actual cost is often higher than what has been forecasted. As a result, most enterprises are now considering fixed rates to avoid extra charges.
- How to Deal?
It is crucial to carefully evaluate the offshore vendor and their capabilities before signing a contract. This includes understanding their pricing structure, ability to deliver high-quality service and track records for completing tasks on time and within budget.
Begin by shortlisting potential offshoring development businesses; once you’ve chosen at least 5 suitable companies, make a comparison between them. It’s worth considering analysing their range of services, the perks they provide, their expertise domains, and especially, their pricing models. ODCs normally offer these pricing models:
- Fixed-priced project: suitable for simple projects with little or no additional tasks occurring outside the pre-determined scope.
- Capacity model and Dedicated software development team model: provide a more flexible way to calculate your project’s costs.
When signing an agreement with ODCs, you also need to devise a comprehensive written contract that clearly defines the parties’ duties, payments, etc.
3. Performance Risk
Although offshoring software development is lucrative to enterprises, it also contains many challenges, including poor communication, cultural differences, loose progress tracking, etc., that may result in low performance. Misunderstanding because of the language and location barriers also leads to the unnecessary delay of the project.
Besides, low costs offered by the partner also bring the potential risks of poor work quality along. Cheaper is not always better, and regularly, the vendors that offer cheap rates lack the necessary skill sets, which eventually reflects in subpar results and delayed timelines. Notwithstanding all assurances and good intentions, there is no guarantee that the vendor will meet your expectations.
How to Deal?
Although cost reduction happens to be a significant advantage of outsourcing, it should not be the primary focus of customers seeking offshore service providers. You should place a greater emphasis on intellectual capital than on low cost. As a matter of fact, some suppliers who charge more often have experienced and skilful talents in their dedicated software development teams that are committed to delivering high-quality tasks in a timely manner.
When collaborating with dedicated software development teams, you should overtly explain your corporation’s vision, processes, and expected outcomes to them. Moreover, you should provide a product requirement document to the vendor so that they can have a clear idea about your expectations and deliver the proper solution.
4. Government Regulation Risk
Different countries have varying laws and regulations on IT outsourcing, which may result in legal collide when engaging in a client-vendor relationship across borders. With a growing trend of offshoring key technical processes, the legal issues pertaining to them are also on the rise.
Since there are no established worldwide legal regulations regarding outsourcing, it is crucial for clients to carefully review and discuss all applicable laws and legal matters of the outsourced project with their offshore service provider before entering into a contract.
- How to Deal?
To overcome this risk, businesses should thoroughly research the regulatory environment of the prominent offshore countries and understand the laws and regulations that apply to their project. Since organisations in different industries may have to face various degrees of government oversight, they must ensure that the offshore vendor is sensitive to industry-specific requirements and have the ability to:
- comply with government regulations,
- provide sufficient “transparency”, showing that it does comply and is thus accountable during audits.
Additionally, the client should include clauses in the contract that clearly define the vendor's obligations to comply with the client's government regulations and the consequences of non-compliance.
5. Organisational Structure and Management Risks
The organisational structure of the workplace can be different by region; for example, although the working process in the US is straightforward and flat, hierarchical structures are followed in other nations, particularly in Asia. This distinction has an impact on how people process and think, which may limit employees' creativity, soft skills, and independent thinking.
Besides, issues related to management is also needed to pay attention to. With the offshore corporation, the vendor is located in another country which makes it practically difficult to monitor and manage the employees. This lack of effective supervision reflects in the compromised output.
How to Deal?
Before starting an outsourcing partnership with a dedicated software development team, it's important to keep your in-house team informed and involved. Communicate any changes in the organizational structure or management that will occur as a result of the outsourcing project, and provide your team with information about the extended team and ensures that all employees understand and accept this shift.
Besides, effective communication is primary to a successful offshored project; for a productive client-vendor relationship, you should constantly communicate and discuss your updates on the projects, ideas, and goals to ensure everyone is on the same page.
As managing a dedicated software development team is particularly a challenging task, hiring a manager to fully take responsibility for the team is worth considering. The manager will be in charge of communicating with the whole team, providing the necessary instructions and guidelines about the project, and tracking the development process to ensure the product’s time-to-market.
Obstacles and risks always exist on the way to productive outsourcing. Despite the distress that potential risks associated with offshoring software development may bring, if smartly managed, the benefits of outsourcing will surely exceed the risks.
Started by finding an IT service provider that offers different IT offshoring services, has a proven track record, and is rated highly on famous directories such as Clutch and Goodfirms.
KMS Solutions is committed to delivering excellent software products and services and has earned it the 9th spot on Clutch’s Top 100 Fastest-Growth B2B Providers, with a growth rate of 260.35%.
With 1,600+ tech talents within its IT delivery centres scattered across Vietnam and India, KMS Solutions offers a wide array of services, ranging from platform modernization, automation testing, and digital platform & app development to data and analytics.
Contact us to explore KMS’s outsourcing services more.