Outsourcing is a popular business strategy where companies hire third-party services to accomplish processes like customer support, payroll management, software development, etc.
Although this strategy can help you increase cost savings and productivity, there are a few problems with outsourcing that you must address, such as security risks, cultural barriers, miscommunication, etc.
Most importantly, how do you tackle these issues?
In this article, we’ll cover nine outsourcing issues and their solutions. We’ll also discuss some FAQs regarding outsourcing benefits and processes you can outsource.
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9 Key Problems with Outsourcing and Their Solutions
Here are nine common problems with outsourcing and what you can do about them:
1. Choosing the Wrong Outsourcing Model
You should choose outsourcing models according to the requirements, budget, scope, and deadlines of the outsourced project. The wrong outsourcing model can negatively affect your product or service quality.
For example, in a fixed-priced outsourcing model, the price, time, and resources are fixed at the time of contract. This model is helpful while outsourcing processes like customer service but not much for development processes like software development.
The requirements of development processes keep changing, such as materials, time, resources, etc. And the inflexibility of the fixed-price model may not accommodate these changes well. As a result, it would either cost you more or compromise the product quality.
Understand the outsourcing models well to choose according to your outsourcing project requirements. The three models are:
- Fixed price model: You can provide a set of requirements along with the deadline and budget. Due to the inflexibility, outsourcing vendors typically drop a few features to meet the deadline, or you may have to pay more to accommodate your needs. This model is ideal for short-term projects with preset limitations.
- Time and material model: In this model, you only have to pay for time and materials costs, helping you avoid hidden costs. This model is suitable for long-term partnerships.
- Dedicated development team: This model involves hiring experts or a skilled development team to fill the knowledge gap in your parent company. It’s more cost-efficient than having an in-house team. Here, you’ll have more control over your outsourced team.
2. Uncertainty about the Vendor
If you’re unsure about the background, skills, and experience of the outsourcing, it can cause serious outsourcing problems, such as:
- Increased costs.
- Workflow disruption.
- Decreased productivity.
Firms sometimes choose a small outsourcing vendor that costs less, but they may not have the right resources to help the company scale higher. On the other hand, an enterprising outside vendor may have a less personal outsourcing relationship with the firm, charging a lot more than these firms can afford.
Don’t base your choice on vendors’ prices. The cheapest vendor may still cost you more due to unscalability, lack of resources, and poor service quality.
So your vendor choice should depend on the outsourcing project requirements rather than the quoted price. As a business owner, it’s essential to assess your company first and then choose an appropriate vendor to support as well as promote business growth.
3. Language and Cultural Differences
Offshore outsourcing is when you outsource your business processes to a third-party vendor in a foreign country. In such cases, language and cultural differences can become an outsourcing issue, affecting communication, decision-making, as well as service quality.
Outsourced employees may not relate to your corporate culture or understand certain words used locally in the parent company’s country. In such cases, both parties may find it challenging to understand and convey instructions.
For example, American companies outsourcing customer support to Mexico may find accent and language differences affecting client communication.
Moreover, the outsourced countries’ festivals and cultural holidays may not always match your company’s work schedules. Ignoring these cultural elements will disrupt your working hours, causing unnecessary confusion and delays.
If you outsource services like customer support, where the outsourcing team needs to talk to your clients, ensure that they undergo language training like accent naturalization.
Consider the outsourcing company’s local festivals and cultural events when scheduling work schedules. You can also hold diversity training for your on-site and outsourced teams so that all stakeholders can better understand each other.
This will make them feel more included, cultivating a sense of loyalty towards the parent company.
4. Ambiguous Costs
Firms often outsource business processes to increase profit, however, outsourcing could be problematic for companies who underestimate their budget. If you don’t define your budget and project scope clearly, you may have to bear unexpected expenses like additional software, new employees, extended timelines, etc.
As a result, outsourcing will cost you more than completing the job in-house. For example, the Queensland health department outsourced its payroll management to IBM for $6 million. But by the end of the project, the total amounted to USD 1.2 billion, costing 16,000% more due to inaccurate cost estimation and budgeting.
To avoid such an outsourcing challenge, specify project requirements to make accurate cost estimates and protect yourself from financial surprises.
Ask your outsourcing firm questions regarding wages, skills required, resources cost, etc. It’ll allow you to choose an appropriate price model to follow, helping you avoid unexpected expenses. Moreover, convey your budgeting limits so you can pick an outsourcing team that’s willing to work within those limits.
5. Loss of Control
Whether you outsource a single project or an entire department, you can’t expect to exercise the same control that you have over an in-house team.
Problems arise when the outsourcing company isn’t driven by the same goals and standards as your parent company. If left unsupervised, some outsourcing vendors can compromise on quality to increase profitability, affecting your service quality.
Additionally, the less control you have, the longer it’ll take you to implement changes regarding your company’s products and services in your outsourced team. This again affects your business’ flexibility and productivity.
Look for a reliable service provider who you can trust and lets you exert some control over your outsourced process.
The level of control depends on the location and the ease of communication between the outsourced team and the outsourcing company.
For example, you’ll have less control if you’re outsourcing to a foreign country. To counter this issue, you can schedule regular calls or meetings and demand reports to establish proper communication protocols with the outsourcing company.
Moreover, many project management tools like Time Doctor can help you track every working hour, offer detailed reporting, and monitor productivity easily. These features help you make informed decisions about your employees and company.
6. Poor Knowledge Transfer
Poor knowledge transfer can result in two ways:
- For the parent company: Your outsourced project details may be unclear and confusing if your outsourcing vendor hasn’t maintained your project’s systematic documentation. This will negatively affect your project when you terminate that vendor and move to a new one or take it over yourself.
- For the outsourcing partner: If you don’t provide a proper project framework or documentation, the outsourcing vendor may misunderstand project requirements and fail to meet your productivity standards.
Make detailed documentation of the product or service you’re planning to outsource. Here are a few things you can include in product documentation:
- Product vision statement.
- Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis.
- User prototype research.
- Product roadmap.
This information will help the outsourcing vendors understand the firms’ expectations and cater to your needs accordingly. Arrange routine calls and meetings via tools like Slack, Zoom, Teams, etc., with the outsourcing providers to clear any doubts they have and avoid confusion.
Additionally, ensure that your outsourcing providers also maintain your project’s careful documentation with tools like Trello, Asana, etc.
7. Lack of Expertise in the Outsourcing Tasks
When you don’t have enough knowledge about the work you’re outsourcing, you may find it difficult to assess the outsourcing service’s results. You may also hire the wrong outsourcing service by misjudging their work, affecting deliverables and quality standards.
If you don’t have the necessary knowledge of an outsourced service such as software development process or programming, hire an in-house expert. They can help you set performance standards or metrics to judge the outsourcing agency’s work quality.
If you can’t afford an additional employee or an expert freelancer, ensure you hire a trustworthy and experienced vendor who’ll walk you through the work process and results.
Here’s how you can find one:
- Evaluate potential vendors’ expertise and the specific skill-sets.
- Avoid vendors whose service-level agreements are unclear.
- Look into their client testimonials and reviews on vendors’ homesites or sites like Clutch.
Looking for an outsourcing agency?
Check out the article and choose from the top 17 outsourcing companies in the world.
8. Unfair Negotiations
An ideal outsourcing negotiation is where both parties balance the risks and benefits equally. But often, the outsourcing agencies’ primary goal during negotiations is to make maximum profits with minimum risk and responsibilities.
If you’re new to the table without proper research and experience, you could end up with an outsourcing contract with no performance metrics, timelines, quality checks, etc. — leaving you nothing to hold your outsourcing partner accountable for.
You can start by setting a completion date for your negotiations instead of dragging the talks for days. But if any issue needs careful deliberation, take your time until you achieve a favorable decision.
To leverage negotiations to your advantage, take the lead and prioritize your issues instead of letting the outsourcer do so. Remember never to start transitioning your services before you sign your outsourcing contract. This will give the outsourcer more power in the negotiation process.
Finally, a good outsourcing contract should have the following:
- Service-level agreements.
- Scope of services.
- Pricing and fees.
- Penalties for under-performance.
- Data security and intellectual property protection directives.
- Rewards and incentives.
- Technical safeguards.
- Termination or exit strategies and compensation.
9. Security Concerns
Outsourcing exposes critical company information, such as product prototypes, business policies, client databases, etc., to third-party agencies. This may result in serious security lapses and data leaks, compromising your competitive advantage.
Firms can ensure security by including Service Level Agreements (SLAs) and Non-Disclosure Agreements (NDAs) in their contracts. It’ll protect firms’ intellectual property, copyrights, patents, product prototypes, etc.
You can also include Data Processing Agreements (DPA), outlining how data should be stored, processed, and transferred. So, you’ll be able to outsource essential services without worrying about leaking important information.
Next, let’s check out common FAQs on outsourcing.
2 FAQs About Outsourcing
Here are the answers to two popular outsourcing questions:
1. What are the Benefits of Outsourcing?
Listed below are some fantastic advantages that make outsourcing a popular choice, such as:
A. Lower Costs
Firms typically outsource their projects to other countries to reduce production costs. For example, a software developer’s average annual salary in Vietnam (USD 9,101) and India ( USD 4,781) is low when compared to the UK (USD 83,323) and the US (USD 86,800).
The governments of low-cost countries like Vietnam support technological development and produce a skilled talent pool. To encourage outsourcing to their country, governments also provide benefits like tax incentives.
As a result of these efforts, companies can outsource to these countries to save infrastructural costs and access skilled labor
B. Increased Efficiency
Most outsourcing companies are niche-based, making them experts in their own fields. As they cater to multiple clients, they’re also more experienced and efficient than your in-house team.
For example, a customer service outsourcing company will only accept customer support services. They’ll have the infrastructure (offices), communication technology, and skilled employees – providing efficient, quality services.
2. What are the Commonly Outsourced Services?
Here are some popularly outsourced processes:
A. Software Development
Software outsourcing is when development companies outsource software development to IT outsourcers. Some of the top outsourced software development processes are:
- Web development.
- IT security services.
- Custom app development.
Curious about software development outsourcing?
Check out the article on outsourcing software development.
B. Customer Service
Customer service is one of the top outsourced processes. Companies can increase their customer satisfaction through:
- Omnichannel communication systems.
- Better customer retention.
- Round-the-clock availability.
By outsourcing these processes, companies are assured of the services and can focus on other core activities like business development, sales, and finance.
Wondering how to outsource customer service?
Check out the article on how to outsource customer service the right way.
C. Human Resources
Outsourcing human resources lets companies access trained employees, powerful automation, and superior technology at low rates. These agencies have more experience and better HR processes to meet your in-house team’s demands.
Commonly outsourced HR processes include:
- Benefits management.
D. Marketing Services
Maintaining a marketing department is expensive and tedious, especially for a startup or small business. So many companies outsource their marketing team to experienced agencies that can deliver results efficiently and cost-effectively.
Some popularly outsourced marketing processes are:
- Content creation.
- Marketing automation.
- Email marketing.
Looking to outsource your marketing department?
Check out the complete guide on outsourcing marketing services.
E. Manufacturing and Production
Most companies outsource their production and manufacturing processes to countries like India, China, Vietnam, etc. These countries offer skilled and low-cost labor, affordable technology, as well as cheap raw materials.
Outsourcing production can include assembling parts or completing product development, or both. This lets companies increase their profitability without compromising on quality.
Outsourcing offers many advantages like skilled labor, superior technology, reduced overhead costs, and more!
To leverage these benefits, you must first understand and solve possible outsourcing issues, such as language differences, time zone gaps, inaccurate cost estimates, etc.
But don’t worry! You can use our guide to solve these outsourcing issues and prepare your company for a smooth transition!
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.