The increased dependency of businesses on IT has resulted in a skyrocketing development and maintenance expenditure. So businesses explore outsourcing IT assets, leases, and personnel to third-party providers that offer cost reductions without sacrificing market share.
As part of the largest outsourcing deal in the United States, DuPont hired Computer Science Corp. and Andersen Consulting for $4 billion over a decade.
Heavy IT users like CPAs in public practice and industry are becoming more involved in designing, controlling, and operating information systems.
Before recommending a vendor to their organizations or clients, they must answer many key questions. Will a vendor truly help them save money?
Smaller businesses may also outsource IT support operations like help desks and training divisions. What are the potential dangers? Let’s take a look!
What is Outsourcing?
The practice of outsourcing is to enlist a third party (foreign or local) to manage parts of your business that are usually handled by in-house staff. IT outsourcing refers to contracting with outside vendors to perform various IT functions. Vendors include IT professionals, consulting firms, employee leasing companies, full-service providers, and CPA firms.
However, under such agreements, the hired service provider retains control of their team and technology to offer the essential services on-site or remote.
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What are the major types of outsourcing?
There are three different forms of outsourcing:
- Onshore Outsourcing: refers to using a service provider based in your nation.
- Nearshore Outsourcing: a service provider from a neighboring country
- Offshore Outsourcing: refers to using a service provider located far away, often even on another continent.
What are the potential downfalls of outsourcing IT services?
IT outsourcing is not a one-size-fits-all solution for all IT Issues; in some circumstances, it may cause more problems than it solves. CPAs should carefully examine the potential risks and rewards when counseling clients or contemplating outsourcing for their businesses.
Costs that are hidden
Is it possible to save money? Because of economies of scale, many managers believe that outsourcing providers are intrinsically more efficient. (The economies-of-scale hypothesis states that large firms may attain lower average costs than small firms due to mass manufacturing and labor specialization efficiencies.)
However, this paradigm may not always be applicable in the outsourcing world. Small businesses, for example, may be able to save money by using outdated technology, paying below-market salaries, and adhering to strict controls and processes.
Switching has a significant price tag. IT suppliers have been reorganizing, with mergers and acquisitions becoming routine.
Fewer suppliers are expected to survive in the future, making it more difficult to shop for the best deal. You may also be confronted with unexpected expenditures (hidden costs) throughout the development project phase, such as:
- Modifications to hardware or software,
- Transfer or redeployment,
- After-hours work time,
- Debugging, etc.
The solution to this risk
- The first step is to identify the requirements for an outsourced project explicitly. Identifying the requirements will guarantee that the business process runs well and that mistakes are avoided.
- Additionally, you should also pay attention to all the details and estimates your outsourcing partner provides.
- Finally, use employee productivity management software to clock each outsourced employee’s work hours precisely.
You’ll be able to monitor how long your jobs took and even track extra hours so you can pay the vendor appropriately. Additionally, you may also produce payrolls using a good payroll administration tool.
Less Contol over the Workforce
- Managing a remote workforce is more challenging than it appears. Managers must regularly check in on outcomes, offer regular feedback, recognize employee effort, and communicate effectively.
- Unmet deadlines, disgruntled clients, and eventually frustrated staff result from a poorly managed and uninspired remote workforce.
- Control is being lost. Many IT outsourcing critics believe your outsourcing partner provides no outside vendor that can match an in-house function’s responsiveness or service levels because the outsider is not subject to your outsourcing partner providing management direction and control.
- Employee morale suffers as a result. Layoffs or the transfer of existing staff to the IT vendor are common outsourcing outcomes. Morale can plummet due to such changes, and even the most competent employees may be concerned about their job security.
Furthermore, there are issues with outside providers regarding data confidentiality, strategic uses, and disaster recovery plans.
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How Can This Outsourcing Risk Be Managed?
You can work with an outsourced company with a well-established system for integrating distant teams. This outsourcing strategy guarantees that a vendor has the necessary knowledge and abilities to keep a successful outsourcing partnership going.
Unresponsive support staff
- Another disadvantage of employing an outsourced IT firm is the length of time to get help and fix issues. Because an in-house IT team is often on-site, seeking help or developing remedies for a system failure is quicker.
- Many outsourced IT businesses provide remote desktop assistance, which may aid in the troubleshooting of practically any issue, but this is only useful when the support personnel responds.
How can this issue be fixed?
Make sure any outsourced IT business you employ is dedicated to promptly resolving issues, has real people answering the phone, and has IT engineers accessible for more complex issues in a timely way.
Lack of communication
Grant Thornton’s International Business Report reveals that 88 percent of respondents believe communication is the most important factor in outsourcing success. Providers may operate in a different time zone than your company. If you choose a short-term partnership, the contractor will have little opportunity to know your demands and conform to your communication style. Any reputable IT company should still reply within 24 hours at the most.
If you engage a remote workforce from the Philippines for IT outsourcing, for example, you’ll either have to arrive early to meet their working hours, or they’ll have to work late to be there during your working hours.
As a result, you’d have to interact by email or messaging, which can make software outsourcing less effective. It is more challenging to converse during video conferencing, regardless of the sort of technology you use.
How to mitigate this risk?
Insist on personal communication or online meetings at all times. Examine the team’s English and their comprehension of your requirement collection process. Find out whether the software contractor has worked in your time zone before.
While the 2-4 hours change is no big deal, IT outsourcing organizations must make major adjustments if the time gap is 8+ hours. They may, for example, implement the code at night and then report on it in the morning.
Some blockages will linger for several days when working remotely. They’ll appear during the team’s workday, last until you have time to read their email the next morning, and then be resolved the next day.
To avoid this, request that the team’s working hours be shifted such that you have at least a couple of hours of overlap. Morning sync-ups can go a long way toward overcoming any stumbling blocks.
Quality compromise
There is less flexibility. The outsourcing vendor delivers the IT services stipulated in the contract on the technology platform it considers acceptable. A company’s ability to switch to new computer platforms may be limited unless clearly stated in the contract.
I’m being held captive. According to reports, Outsourcing makes the user a captive of the vendor; the organization may lose technical employees and get trapped in the vendor’s proprietary software and hardware. The client has more bargaining power in a long-term contract, while the vendor has more bargaining power after Outsourcing has begun.
Subcontractors – Outsourced companies are frequently disappointed to discover that their vendors aren’t working on their projects and that someone else is. Outsourcing vendors looking for hard-to-find technical talents sometimes outsource parts of their computer system work to small, unknown enterprises without their clients’ awareness. Subcontracts can lead to viruses brought in by subcontractors, poor communication, exorbitant expenses, and poor service quality.
How do you overcome this risk?
- Compromising quality is out of the equation; therefore, be sure the software contractor adheres to the same high standards as your organization. Check to see whether they are aware of the role of QA on the project and if they are using code review.
- Find out whether the contractor employs cutting-edge DevOps strategies to accelerate development while maintaining high quality. Continuous integration and delivery, containers, source control systems, build automation tools, and so forth are examples.
- Take a look at the vendor’s tech stack (e.g., frameworks, libraries, testing, and monitoring tools). Have a tech-savvy individual on your team.
Decline in security
When you outsource to a service firm, you are exposing your business assets to an external in some way.
That is why you must be concerned about privacy, intellectual property, and data security. Copyrights, patents, trade secrets, and other issues are all involved.
When a corporation outsources services, the original organization loses some control. This is the essence of outsourcing, but it becomes an issue when the third party turns out to be untrustworthy in some manner.
Even if the third-party organization is trustworthy, errors and failures might happen. This risk is amplified when you hire someone from another nation who does not follow your country’s laws.
For instance, if a member of your outsourced software development team steals your company’s code, it might be quite concerning. How will you pursue legal action across international borders?
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How Can This Outsourcing Risk Be Managed?
According to IBM research, it takes an average of 197 days for a business to identify a data breach. It might take another 69 days to resolve the issue and restore security. This necessitates a prompt response from the organization’s security personnel. The earlier a company can limit a breach, the more likely it will avoid devastating consequences and save its brand.
Also, to safeguard your business from this security risk, draught an unbreakable outsourcing contract or SLAs (service level agreement) with the aid of an international lawyer.
To avoid a data breach, you can even request that the parties involved sign a non-disclosure agreement (NDA) (non-disclosure agreement).
Lack of domain expertise
How can a corporation ensure that a third-party vendor’s skills remain current when outsourcing an IT service? Headhunters frantically phone their network of connections, requesting someone to run a big site that has recently been outsourced.
Even the most daring corporation would attempt to shift some of its IT workers to the vendor in the short term to assure some continuity of service and knowledge. But, then again, would this appeal to the company’s more capable IT workers, who would most likely choose to hire fresh, more dependable employees?
One vendor said, “By replacing outdated systems, we have gained some nice business.”. This danger is heightened because some of the largest outsourcing contracts were launched to convert a reluctant and sluggish IS function.
Suppose cost reduction is the goal of an outsourcing agreement. In that case, the aim is that the existing cost base will be decreased and that further cost reductions will occur over time due to learning and technological advancement. These enhancements might be built into the contract or negotiated during annual reviews.
However, if the suppliers’ abilities do not improve, the cost-cutting potential is reduced, and target setting is inadequate unless more market testing is done. The more outsourced legacy systems, the more the market becomes stuck in the past.
How do you overcome this risk?
There are many factors to consider, including:
- Checking in on the findings regularly.
- Have a good communication system.
- Regularly give feedback.
- Thank them for their efforts.
Questions to ask to see if a vendor has the resources and experience your company or clientele requires
- What is the vendor’s track record?
- Will the vendor’s culture be compatible with that of the organization or its clients?
- Is there any significant litigation or disputes the vendor has experienced?
- Is the vendor in good financial standing?
- What is the vendor’s share of the market?
- Has the vendor made any recent acquisitions or divestitures?
- What is the vendor’s organizational structure?
- What do you mean by industry? By contract value?
- Is there a single worldwide outsourcing company or a web of local companies collaborating?
- Is the vendor familiar with your present or anticipated technology environment?
- Is the vendor capable of providing other services, such as reengineering?
- Is the vendor familiar with organizations in your clients’ or your company’s industry?
- What is the vendor’s experience with staff transitions?
- How many transitions have the vendor completed?
- What states/countries are you talking about?
- Is it common for the vendor to collaborate with another company to supply specific services?
Conclusion
Outsourcing is the most cost-effective option to complete your task. It does, however, come with its own set of hazards.
It shouldn’t stop you from contributing to the success of your company. All you have to do is check in regularly and pay close attention to the specifics, and you’ll be on your way to risk reduction.
Use the suggestions we’ve provided to develop a risk management strategy and avoid situations like these. After that, select the best outsourcing service and concentrate on your core strengths!
Get in touch with us if you want more information about Outsourcing IT Services and would like to talk to us.
Abhinav Sathyamurthy is a professional blogger with over six years of experience covering technical topics such as blockchain, ERP, AI, and other matters.
