Primary reasons behind failures of outsourcing arrangements

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outsourcing failures
Joe Valentine, J.D., M.B.A.

Primary reasons behind failures of outsourcing arrangements – Joe Valentine, J.D., M.B.A.

Outsourcing is a business tool that is used commonly in the information technology and other sectors, to leverage differences in labor and other costs in different countries, to reduce the overall cost of performing all or part of the work required to complete a project, or develop and test a product. Like any other tool, it can be very successful if the process is designed, implemented and managed properly by the right people. However, there are various pitfalls which need to be correctly diagnosed and avoided or mitigated to avoid failure.

Some of the common reasons for failure are as follows:

Communication gaps: The customer has certain expectations from the project or product which are expressed to the development company who outsources the work to an offshore company. The customer may not do a very good job of communicating his requirements or his requirements may change over time. The development company’s project manager may have an inadequate understanding of client requirements and he passes on insufficient or inaccurate information to the offshore company. The PM at the offshore company understands only part of what is communicated to him and he communicates even less to his developers for whom English is not a native language. The end result is the people who actually do the development work may understand less than half the client requirements resulting in unacceptably poor results due to the lack of proper communication.

Unrealistic expectations on the part of the client: Clients often have unrealistically high expectations with inadequate budget and aggressive time frames. Sales and marketing people are incentivized by completing sales quotas and may not have the requisite technical expertise or may over promise to the customer resulting in a gap between client expectations and reality.

Failure to reach a win-win situation for both parties that is so essential for business: Some clients negotiate hard for the lowest possible cost which can force the vendor to cut corners to deliver the project in the given budget. When this happens, quality may suffer resulting in unacceptable results.

Over promising and under delivering by the vendor: This is related to point 2 above. Sales personnel often over promise but fail to deliver the promised specifications. This is due to a mismatch between what is promised to the client compared to what is feasible in the given budget and time as well as the inherent limitations of the platforms used to develop and deliver the product.

Inadequate or incorrect criteria for vendor selection or faulty vendor selection: The development company often puts out a project to bid by multiple offshore vendors. Since profit is the primary motive for doing business, the quoted cost is often of primary importance in selecting a vendor. But choosing an offshore development company on the basis of cost alone is fraught with peril due to the presence of hidden costs caused by project delays, poor quality, inadequate testing, poor design, poor interface etc.

Lack of expertise on the part of vendor: Offshore vendors also tend to over promise and under deliver in an effort to obtain orders at all costs. Bugs and errors can lead to excessive resources and time spent on debugging or re-design or rework. Not only does this tend to increase the cost of development but the client also loses sales revenue on their part due to the non-availability of a finished product or project.

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