Expert knowledge | October 3, 2019

The common risks of outsourcing and how to mitigate them

In recent years, companies across the planet have significantly increased their use and dependence on nearshoring. And while this arrangement presents many rewards to the organizations using them, it also comes with various risks.

In this post, we will highlight the potential risks companies can come across at various stages of the outsourcing lifecycle and the strategies businesses can implement to minimize them.

Main risks at every stage of the outsourcing lifecycle

Outsourcing IT development to nearby countries, while being an excellent strategy, comes with a unique set of issues. Let us examine the significant risks at each stage of the IT outsourcing lifecycle:

  • Strategic Assessment

At this stage, the main concern is that nearshore outsourcing objectives are not aligned with the company’s overall business approach.

  • Business Case Development

Main risks at this point are wrong outsourcing assumptions, in essence, concerning the payback period, expected cost savings, or investment required to support management and governance capabilities.

  • Vendor Selection

One of the potential risks at this stage is failing to come up with a vendor selection criterion that corresponds with your outsourcing goals. Apart from that, not performing due diligence during the selection of the vendor is another typical problem.

  • Contracting

Here risks arise from inadequate or missing contract provisions covering issues such as contingencies, privacy, security, service levels, incentives, vendors, termination, and price protection.

  • Transition, Delivery, and Post-Transition

The transition stage is essential for the outsourcing lifecycle, and you can learn all about it in our previous post. That said, the main challenge at this point is ineffective transition planning, which leads to substandard transfer of knowledge and poor management of change, or worse still, loss of staff.

Best practices for minimizing risk

To mitigate project risks, companies can take advantage of governance groups, executive groups, outsourced business process groups, or in-house groups. These groups will tackle any project-related problems by working smoothly with internal workers and outsourced vendor teams. In turn, this ensures that issues in project management are resolved accordingly.

Away from that, Service-Level Agreement (SLA) negotiation is a sure way of mitigating any risks associated with business value. Case in point, the outsourcing plan should entail particular items to meet the SLA. Moreover, it must specify the people who will be accountable for not attaining the specified SLA on projects.

What about intellectual property (I.P.) risks? Companies can mitigate the I.P. risks of nearshore outsourcing by assessing the capabilities of the service provider and by determining if they comply to various industry security consortiums, for example, ISO 27000, HIPAA, BITS, SANS, and so forth.

The whole security issues should be regulated by an internal Security policy of Vendor. For each project they should deliver fully secured infrastructure and the internal policy should regulate the data security as well as technical and organizational procedures to protect data against loss, destruction or unauthorised disclosure. Vendor also should have fully implemented all GDPR regulations covering processing personal and private data.

In addition to the strategies provided above, signing a Non-Disclosure Agreement also remains an excellent way of minimizing the risks of outsourcing to nearby countries. CEOs and project managers should ensure that a proper NDA is signed early enough to ensure that any sensitive information shared with the service provider is kept confidential. On that note, it is worth mentioning that a binding NDA is one of the advantages companies enjoy when they outsource their projects to JCommerce.

Read more: The best practices in IT nearshoring

Final Word

We have highlighted the principal risks of outsourcing and provided ways they can be mitigated. But all that said, it is essential to note that your overall risk reduces significantly once you pick the right vendor. So, be sure to choose wisely!

Read also: Effective communication in IT outsourcing

Justyna Mikolajczyk

Justyna Mikolajczyk

International Account Manager

Supports and advises European companies which search for IT individuals that fit the remote-working environment and helps customers to boost their software development team’s capabilities.