How to avoid outsourcing failures: 5 examples to learn from

by Liam Martin
Outsourcing failures

Outsourcing failures, although unfortunate, are valuable points of reference for business owners to understand the risks of outsourcing.

They provide a detailed perspective on why outsourcing can fail and what businesses can do to avoid making a wrong outsourcing decision.

In this article, we’ll explore five major outsourcing failure examples. We’ll also cover the seven common reasons behind these failures and seven essential actions you can take to avoid them.

Let’s begin.

Table of Contents

5 noteworthy examples of outsourcing failures

Here are five case studies of outsourcing failures that businesses new to outsourcing can learn from:

1. Hertz and Accenture

Accenture is a world-renowned software outsourcing giant. But the company’s outsourcing arrangement with Hertz, a United States private sector car rental company, is a good lesson on the need for better project management and communication in outsourcing.

Case study

Hertz hired Accenture in 2016 to redesign its website and mobile apps. 

Hertz had set up business plans, defined goals, and developed roadmaps to scale their platforms. But Accenture had ignored the platforms’ scalability requirements and created a product that wasn’t applicable outside North America. The project also had other issues, including delays, data insecurity, and unresponsive design.

Finally, Hertz was left with a defective product. So, they filed a $32 million lawsuit against Accenture in April 2019. 

Key takeaways for businesses

  • Clearly define your expectations of the outsourced project.
  • Formally document the claims made by outsourcing suppliers.
  • Constantly communicate with the outsourcing team throughout the project.

2. Queensland and IBM

The incident between Queensland Health Department, Australia, and IBM (an outsourcing software development company in the United States) sheds light on the risks involved in outsourcing.

Case study

In December 2007, the Queensland government gave an outsourcing contract to IBM to develop a payroll system for the Queensland Health Department. The initial contract proposed a budget of $6 million for the payroll solution to be delivered by July 2008.

However, IBM identified technical challenges during the development process and re-evaluated the costs to be around $27 million. Later, the project faced delays and costs escalated to $1.2 billion.

Finally, the payroll platform never functioned perfectly, leading to paycheck errors for thousands of staff. The Queensland Government tried to sue IBM. But the lawsuit was dismissed due to a waiver that released IBM of any liabilities.

Key takeaways for businesses

  • Determine the outsourcing team’s capabilities rather than simply relying on their brand value.
  • Assess project risks and cost estimates beforehand.
  • Maintain realistic timelines that allow developers to fix issues identified during User Acceptance Testing (UAT).

3. Virgin Australia and Navitaire

Virgin Australia’s reservation and distribution system crashed when Navitaire, an eCommerce outsourcing company for airlines, failed to take the right steps. The fiasco emphasizes the importance of technical expertise in IT outsourcing.

Case study

In September 2010, Virgin Australia’s internet booking, check-in, and reservation system crashed, stranding 50,000 passengers.

Navitaire, the supplier of the SaaS (Software as a Service) system, identified the source of the problem quickly – a failed disk drive. But it was unable to resolve the critical issues promptly.

Instead of switching to a backup drive right away, Navitaire chose to repair the failed drive – causing a 24-hour halt in operations. The blunder caused huge financial and customer losses for Virgin Australia. Both companies eventually reached a mutually-satisfactory but unspecified settlement to deal with the losses.

Key takeaways for businesses

  • Ensure IT outsourcing vendors have the skills and capacity to troubleshoot server issues.
  • Retain in-house development teams to identify and resolve problems alongside third-party experts.
  • Factor in time zone and logistic differences when choosing a vendor.

4. The State of Texas and IBM

IBM was taken off a project with the State of Texas in yet another costly affair. 

Case study

In 2006, the State of Texas hired IBM to consolidate data center operations of 27 state agencies into two data centers. It was a seven-year contract worth $863 million.

But after four years, IBM completed only 12% of the project. And instead of the state saving money on consolidating the IT system, this outsourcing failure resulted in backlogs and increased fees.

Key takeaways for businesses

  • Stay up-to-date with project developments and keep monitoring progress.
  • Create an official contract about the scope of project deliverables with deadlines.
  • Select the best contract model for the operation. You can choose a fixed price model for short-term contracts or a time and material model for long-term partnerships.

5. Royal Bank of Scotland and their IT vendor

The technical issues faced by the Royal Bank of Scotland (RBS) while working with an undisclosed IT vendor led to hefty fines for RBS. This situation, while not completely an outsourcing failure, shows how provider partnership and competency are essential for business success.

Case study

A botched software update in 2012 affected RBS’s payment processing and banking system. It paralyzed the system for weeks – denying millions of customers access to their accounts.

Among the affected were banking entities in the greater RBS Group, including NatWest and Ulster Bank. Moreover, around 30,000 social welfare recipients didn’t receive their money.

At the time, union leaders speculated that the issue was due to outsourcing IT services to India. But it was later uncovered that the update was corrupted by RBS technical staff, and the banks were served a £42 million fine by the Financial Conduct Authority (FCA) in 2014.

But could a better outsourcing relationship have prevented such a fiasco?

Key takeaways for businesses

  • Hire an outsourcing service provider with the competency and drive to carry out or guide you through vital processes, like system updates and data backups. 
  • Create a clear protocol for emergency procedures to be executed in case of system failures.
  • Carry out risk assessments to uncover critical vulnerabilities in online systems, like using outdated software or hardware.

Explore a detailed perspective on the risks of outsourcing in this article.

Now that we’ve analyzed some of the biggest outsourcing fails, let’s review the main reasons behind these blunders.

7 common reasons for outsourcing failures

Here are the typical reasons behind outsourcing mishaps:

1. Unclear expectations and risk assessments

Unclear expectations are a common cause of negative outsourcing outcomes and skyrocketing costs. Coupled with ineffective risk assessments, it can lead to severe business failures.

That’s why businesses should set a clear goal and create a precise agreement with outsourcing vendors about product expectations. This ensures that you both are on the same page for product development and costs.

Moreover, it’s essential to conduct risk assessments for projects before taking them live. This helps businesses prevent product issues and safeguard themselves from failures on the vendor’s side. For example, evaluating potential lapses in your outsourced cybersecurity and coming up with contingencies to protect customer data.

Also, check out this article to know what you should mention in your outsourcing agreement.

2. Lack of technical expertise

Hiring an outsourcing provider that lacks the necessary expertise can lead to wasting money and effort on unnecessary processes.

For example, outsourcing your software development to an outsourcing team that can’t troubleshoot errors may lead to prolonged development time. In the end, it may not even result in a fool-proof finished product and may require you to hire some in-house technical experts as special measures.

On the other hand, choosing an outsourcing partner based on their technical skills can help you save resources on building large in-house development teams.

3. Tight deadlines

Unrealistic deadlines can lead to rushed and flawed work. Moreover, it can mean skipping certain important steps and creating low-quality products. 

That’s not to say deadlines aren’t important, but that it’s vital to differentiate between excessive and sufficient time. 

On the other hand, realistic deadlines and effective scheduling can contribute to great project management and outsourcing results. 

So, a good practice for businesses working with an outsourced partner is to keep some buffer time to address project issues. For example, you could increase your timelines by at least two-fold the original allocation. 

4. Lack of control

Outsourcing tasks means clients mostly lose control over the team executing them. For example, software outsourcing means you don’t control how tasks are delegated to developers. And in most cases, you’ll have a direct communication channel only with the project manager rather than the developers.

This lack of control can impact the quality and performance standards of your products and services. It also removes the scope for improving the outsourcing strategy as per your needs. 

So, businesses should choose outsourcing services providers who allow them to maintain some control over the operations of the outsourced team.

5. Poor communication 

Infrequent and ineffective communication can lead to issues like inappropriate prioritization of tasks. And seemingly small communication problems may snowball into large-scale product failure.

On the other hand, good communication can further a clear understanding of expectations and objectives. It helps avoid project failure, especially when managing a large team.

So, to prevent poor communication, clients can set up communication channels for different purposes, like team-building and software development. To do so, they can utilize collaboration tools like Slack, ClickUp, and Zoom to communicate virtually and visualize project progress.

6. Prioritizing cost

While choosing an outsourcing partner, it’s tempting to choose the bidder offering the best cost savings for the project. But prioritizing cost doesn’t always ensure overall profitability from your outsourced project.

So, instead of focusing on just cost reduction, businesses should consider the accomplishments, qualifications, and experience of the outsourcing team. You should also look for an outsourcing provider that matches your business’s values and culture.

Explore more reasons for outsourcing or offshoring other than cost saving in this article. 

7. Not viewing the venture as a partnership

When businesses view an outsourcing service as a short-term collaboration, they treat it like a transactional relationship. Both parties contribute as little as needed to complete their end of the bargain, eliminating the potential to build trust in the outsourcing venture.

So ideally, a service provider should be like an outsourced partner that offers benefits for long-term success. Moreover, viewing the venture as a partnership builds the possibility of maintaining equal responsibility and a stronger professional relationship during the project lifecycle.

So what can businesses do to prevent these common mistakes?

7 easy ways to avoid outsourcing failures

Safely navigating through the risks and failures of outsourcing can help you save time and money

So, here are some ways to avoid outsourcing failures:

1. Determine your outsourcing goals

Identifying a clear goal is essential for maintaining a profitable outsourcing relationship.

It’ll help you choose the most suitable vendor for your business and lay down the architecture for successful project completion. Additionally, it helps the outsourcing vendor utilize the best outsourcing strategy to deliver satisfactory outcomes.

2. Choose the right outsourcing vendor

A suitable outsourcing vendor plays an important role in enabling long-term growth and success.

You can shortlist potential outsourcing vendors based on factors like expertise, experience, values, and cost. It’s also helpful to compare their achievements and customer feedback.

Ultimately, you’re trusting these vendors to help you achieve your business objectives. So, it’s best to thoroughly vet the outsourcing team before finalizing a contract. 

Discover the biggest outsourcing companies in the world in this guide.

3. Prioritize value

While cost reduction does offer a competitive advantage, value is more important as it impacts the quality of your product. So, outsourcing initiatives shouldn’t be viewed as a way to reduce operating costs. Instead, it should be approached as a means to make your operations more efficient.

Moreover, outsourcing already offers benefits for cost reduction. So, it’s helpful to prioritize metrics like value and resource availability.

4. Draft a written agreement

Always get a written, legally binding agreement when contracting services to third-party providers. This agreement will serve as the roadmap for your outsourcing project and business relationship.

A good agreement should cover the project scope, work expectations, individual responsibilities, and deliverables. It’ll safeguard your business from losses if things go wrong.

5. Pay attention to long-term costs

Additional and hidden costs can creep up on you while outsourcing services. So, it’s best to get an estimate of the possible costs and liabilities. An example of such issues is drive failure in cloud systems.

It’s important to discuss what special measures will be taken in these cases and who will bear the additional costs.

6. Account for cultural and productivity differences

If you’re outsourcing to an overseas country (offshoring) like China or Ukraine, you’re likely to face cultural and productivity differences. These differences between you and the offshore team can lead to misunderstandings and unmet expectations. 

So, it’s important to take note of these differences and try to bridge the gap as much as possible. You can do this by organizing programs that teach both the in-house team and offshore team about each other’s culture and work ethic. Doing so could help address collaboration and communication problems.

You can also use an employee productivity tool to ensure a fixed standard of work productivity for the outsourcing team – Time Doctor. It helps improve operational efficiency and team management for large businesses and startups.

Check out this overview with all of Time Doctor’s amazing features.

7. Maintain some control over management

Maintaining some control over the outsourcing team, by approving priorities and setting guidelines, will help you streamline your outsourcing project operations. It’ll also help you support the outsourcing teams’ needs and address their issues to prevent bottlenecks.

Moreover, it helps you tailor the outsourcing service as per your business needs and prevent out-of-scope developments.

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Wrapping up

Creating an efficient outsourcing process will help optimize operations and reduce costs. It’s beneficial for both public services and private companies in various sectors, including custom software development, automobile manufacturing, and financial services.

But it’s helpful to know the possible outsourcing risks before doing so. It’s also important to know that outsourcing failure isn’t a warning against outsourcing but rather a reference to help businesses prevent outsourcing mishaps.

So, refer to the lessons mentioned in this article to streamline your outsourcing operations. And most importantly, don’t let the worry of failure hold you back from capitalizing on a good opportunity for success.

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