10 common pitfalls of outsourcing (and ways to avoid them)

by Andy Nguyen
pitfalls of outsourcing

Outsourcing is a smart strategy that helps businesses reduce their in-house burden and gain new operational capabilities while reducing their expenses.

However, without adequate planning and monitoring, companies may face pitfalls that can negate the benefits of outsourcing. This becomes even more critical post the Covid 19 pandemic, which has forced business owners to rethink their priorities and strategies.

In this article, we’ll look at 10 common pitfalls of outsourcing that every business owner should be aware of and share ways to avoid them.

Let’s get started.

10 common pitfalls of outsourcing to avoid

While there are numerous benefits to outsourcing, a lack of oversight and planning could hamper your experience and limit its benefits.

According to a 2020 BCG survey of 200 global companies, 68% had to cope with service-provider-related challenges during the Covid pandemic. 

However, the survey also revealed that businesses were keen to continue outsourcing their operations, albeit with more caution and planning.

Here’s an informative guide on outsourcing to help you get started.

Let’s take a look at 12 risk factors companies should watch to ensure a more fruitful outsourcing experience:

1. Outsourcing without a plan

Companies may often make the mistake of outsourcing without analyzing their current and future needs and how a third-party provider could add value to their business.

What follows is a significant loss of time, money, and effort on an outsourcing partnership that fails to meet the expectations of either party.

For example, a small business may onboard an expensive outsourcing provider to handle their accounts and back-office operations, disrupting their operational budget.

Ideally, they should’ve opted for a couple of skilled freelance accountants, who would have done the job for a much lower cost.

Similarly, a company planning to scale in the near future may make the mistake of partnering with an outsourcing firm with limited resources.

So it’s vital that you carefully assess your current and future needs before you even start shopping for outsourcing vendors.

This involves assessing your current service cost and levels and your future goal. Having knowledge of your baseline metrics could help you figure out:

  • If you even need outsourced services.
  • The time and money you’ll save by outsourcing.
  • Your outsourcing budget estimate.
  • The service level you need from the outsourcing company.

2. Outsourcing core competencies

Businesses typically outsource secondary tasks to external vendors to save time and focus on core business functions. 

But at times, companies can make the mistake of outsourcing a core competency. They could do so to scale rapidly, downsize their in-house team, or other reasons.

What they fail to realize is that their brand strength and uniqueness lie in these core competencies. Their domain expertise helped them acquire a customer base, which they could potentially lose if they fail to deliver consistently.

Besides, they’d be moving their revenue-driving business functions and strategies to an outsourced partner, risking their profitability.

So it’s in your best interest to hold the reins of your flagship projects. As for outsourcing, you should look out for a specific task, project, or business function that’s taking up the time of the team members you’d rather have working on the core tasks.

3. Committing without due diligence

It could be a typical response for companies to prioritize cost saving and overlook other important aspects when they receive a lucrative offer.

However, you should strictly refrain from hiring a service provider without thoroughly evaluating their capabilities and doing the required homework.

Failing to do so could result in unfulfilled expectations, financial losses, or land you in legal trouble.

For example, you may enter a long-term partnership with a poorly rated outsourcing firm if you fail to do a thorough background check. Or, you may end up with an outsourced vendor that doesn’t share your business ethos and company culture.

So you should be vigilant and do the due diligence before partnering with an external vendor, just like you’d do when hiring a new employee for your in-house team.

Here are a few pointers on choosing a competent and well-suited, and quality service partner:

  • Develop a vendor evaluation program comprising questionnaires, interviews, mock projects, etc., to test the vendor’s technical expertise and professionalism.
  • Ensure that you put together a cross-functional and balanced evaluation team, preferably with members that have prior experience with vendor selection.
  • Go through the vendor’s portfolio and analyze their past performance through social media reviews. 
  • Enquire their current contractual obligations and assess if they have the necessary resources and workforce for your project needs.
  • Inspect the company’s financial stability, compliance and data security policies, risk handling, business continuity plans, etc. You can ask them for financial statements and audit documents.

Following these practices will minimize many risk factors typically associated with outsourcing.

4. Not setting clear expectations and goals

Companies have certain expectations from their outsourcing service provider. One of the major reasons a vendor fails to meet these expectations is that the company didn’t communicate them well enough.

Consider an apparel brand outsourcing its app development to an IT provider. The firm may have a specific design language preference for its app that resonates with its brand identity. 

Now, if the company doesn’t communicate these preferences to the vendor upfront, the chances are that they’ll end up unsatisfied with the final product.

You can easily avoid such scenarios by ensuring that the vendor is on the same page as you. Having sight of your expectations in advance will help the vendor plan their workflows better, increasing the chances of success.

What can you do to communicate your expectations and goals better?

Here’re a few tips:

  • Share your business principles and work culture details with the outsourcing firm during the initial talks.
  • Chart a strategic project roadmap with clear milestones and timelines and share it with your vendor.
  • Define and convey your process standards, performance tracking KPIs, and course correction strategies.
  • Ensure that all these details are well-documented and accessible to the vendor.
  • Make sure that the vendor understands these goals and expectations before they begin the project.

These steps will lend greater visibility to the project, ensuring that both parties are aligned on the business process, timelines, budget, and the final outcomes.

5. Not having a fool-proof service agreement

A common outsourcing pitfall companies fall into is not having a comprehensive service contract with their vendor. While mutual trust between both parties is important for outsourcing success, that alone shouldn’t be the foundation of the partnership. 

Let’s say a company outsources its software development projects without paying much heed to the services included in the service plan. Imagine their shock when they receive an invoice that’s much more than what they agreed to. 

The company erred by ‘assuming’ that these services are covered in the contract and are left with no legal grounds to contest these hidden costs.

You should be well-prepared to face unexpected delays, creative differences, unethical practices, and other operational issues when outsourcing.

A detailed and well-documented outsourcing agreement will help you safeguard your business interests throughout the contract duration. Based on your requirement, you can choose an outsourcing contract type, such as:

  • Time and material outsourcing contract: A flexible contract for long-term projects where time and material costs can’t be determined in advance.
  • Fixed price outsourcing contract: A contract between a company with well-defined service requirements and budget, either accepting a bid from the vendor or choosing one of their fixed price solutions.
  • Dedicated team outsourcing contract: In this type of contract, a company hires a dedicated team of experts to work on their project.

Now, let’s glance over things that should be explicitly covered in an outsourcing service agreement:

  • The time frame for the validity of the contract.
  • Detailed project scope.
  • Service level requirements.
  • Performance KPIs with baseline values.
  • Service delivery model.
  • Every cost associated with the project.
  • Roles and responsibilities of all stakeholders.
  • Security and compliance measures.
  • Contract re-evaluation and exit terms.

6. Not developing an implementation strategy

Outsourcing can be a challenging task to execute well, given the associated risk factors. Well, you’d be adding to these risks by not having an outsourcing execution plan in place.

Your outsourcing partner is an extension of your brand. So it’s imperative that both the companies have thorough internal integration to work as a single business unit. You need an execution plan to keep your outsourcing vendor in sync and ensure a smooth and uninterrupted workflow.

Without a well-laid-out plan, the labor cost benefit and competitive advantage of outsourcing are negated by overhead expenses due to frequent delays, quality issues, communication gaps, etc.

Besides project and service details, your execution plan should have strategies for:

  • Compliance with tax and employment laws, especially if you are outsourcing to a different country (nearshore or offshore outsourcing.)
  • Staff training (if you have a dedicated outsourced team.)
  • Effective communication between the two teams.
  • Sourcing and managing shared resources.
  • Managing supply chain (for manufacturing outsourcing.)
  • Managing invoices and accounts.
  • Ensuring business continuity in case of disruptive events or early contract termination.

7. Inadequate communication

A major cause why companies don’t derive the desired outsourcing success is the silo approach.

A lack of communication and transparency could keep your vendor guessing and send them off track. It could also affect their morale in the long term, leading to reduced performance and even premature contract termination.

The communication aspect becomes even more important when you outsource to an offshore location with a significant time zone difference and language barrier.

A global study on 305 buyers and service providers revealed that 25% of outsourcing project failures happen due to inadequate communication.

To prevent this, you need a well-implemented communication policy that lays out protocols and guidelines for your internal and outsourced teams.

Here are a few practices to minimize the communication gap with your outsourcing company or freelancer and have a healthy outsourcing relationship:

  • Ensure that your in-house and outsourced staff have overlapping work hours each day for collaboration.
  • Ask your vendor to sync their holiday calendar with yours.
  • Keep your project files on the cloud, so your teams don’t waste time on file transfers.
  • Have dedicated communication channels for specific workflows such as feedback, project discussion, etc.
  • Embrace the right technology to improve overall communication, such as instant messaging, video and audio conferencing, project management apps, real time chat translation, etc.

8. Neglecting data security measures

Besides the loss of control, a significant disadvantage of outsourcing is that you need to share confidential company data and intellectual property with an external entity. 

For example, with BPO or call center outsourcing, you’d be giving the vendor access to sensitive customer service data.

Any data breach could not only affect your brand image and bottom line but also land you in legal trouble. So neglecting the security preparedness at the vendor site is certainly a pitfall you’d want to avoid.

While there’s no way around sharing this data with the vendor, you can certainly take measures to protect it.

Here are a few pointers to help you with that:

  • Verify that your vendor has coherent data privacy and intellectual property (IP) protection policy.
  • Ensure the vendor uses systems compliant with data privacy standards like PCI-DSS, GDPR, etc.
  • Get your vendor to sign a non-disclosure agreement (NDA).

9. Lack of monitoring

Many companies think of outsourcing as a one-pill-fix solution, where all they need to do is delegate and pay for the services. But it’s far from that.

To tap into the many advantages of outsourcing, you should constantly monitor the proceedings and watch out for potential bottlenecks. It’ll help you keep the operational cost in check and guide the outsourcing partner if they are off-track.

It all begins by actively measuring the relevant performance KPIs and evaluating if your provider is delivering as per your expectations. 

For example, if you outsource customer support, you can track KPIs like Customer Satisfaction (CSAT), Customer Effort Score (CES), etc.

You should also update your service guidelines regularly to keep up with the changes in technology and the market.

Thankfully, there are some great technology solutions out there to help you track the progress of your outsourced projects and teams.

For instance, tools like Time Doctor can help you monitor if your outsourced remote worker or team is working productively irrespective of their location.

What’s Time Doctor?

time doctor - better for the organization

Time Doctor is a popular productivity tracking tool that can help you track and improve the efficiency of an in-house or a remote employee.

Large enterprises, such as Verizon and Ericsson, as well as small businesses like Thrive Market, successfully use Time Doctor to keep their teams highly productive.

Let’s glance over some of the key Time Doctor features:

The tool can help you evaluate the performance of your outsourced team in real-time. All you need to do is ask your outsourced team to use Time Doctor to track the time they spent working on your projects. 

10. Ignoring the impact on your in-house team

It’s likely that your in-house team members have reservations and doubts about their roles and accountabilities with an outsourced business process. 

Overlooking how your internal team feels about outsourcing could be a costly mistake. Over time, it can lead to growing dissatisfaction and a high turnover rate.

So you should actively seek feedback from your in-house team and make an effort to address their concerns about your outsourcing initiative.

You can also take steps to facilitate better teamwork between your internal and outsourced teams. For example, if you outsource to an offshore company, you can organize sessions to educate both teams on each other’s culture and language.

Here’s a collection of 30 insightful outsourcing articles to help you master the strategy. 

Wrapping up

Outsourcing can be a fantastic strategy to scale affordably and gain a competitive advantage, especially for a small business owner or a startup. 

However, businesses need to clearly understand the pros and cons of outsourcing before they decide.

With all its lucrative benefits, outsourcing has a few cons or risk factors that can hamper your overall experience. The good part is that you can avoid these pitfalls with proactive planning.

The detailed coverage of these common pitfalls in the article will help you identify them. And don’t forget to use the smart tips and best practices to mitigate the risk factors and ensure a smooth outsourcing process.

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