Disadvantages of Outsourcing Software Development

IDC predicts that by 2023, over 500M cloud-native digital apps & web services will be developed and deployed, and by 2024, over half of all IT spending will go toward digital transformation and investments in innovative technologies.

McKinsey analysts recommend that businesses should focus on building digital ecosystems to remain competitive. At the same time SAP warns organizations it’s no longer enough to offer great products and services, advising companies to instead focus on “sliding into adjacencies” that can extend end-user journeys.

Developing the applications and infrastructure to accommodate those ecosystems and adjacencies is a lot for one company to handle on their own–even with the right tools and talent in-house.

We’ve discussed some of the advantages outsourcing software provides companies struggling to meet new demands. However, the flipside to those advantages is that software outsourcing can also work against core business objectives and put your company at risk if you’re not careful.

Below, we’ll answer the question, “what are the key challenges in offshore outsourcing?” by looking at top risks.

Disadvantages of Outsourcing Software Development Infographic

Collaboration Issues

Working with a company in another country means working around differences in language, culture, and time zones. One or a combination of all can cause miscommunication and frustration on both sides.

By extension, collaboration issues can lead to poor performance and the need for rework. In turn, it means sinking more resources into cleanup jobs and pushing back deadlines.

In our recent State of Global Software Outsourcing report, we surveyed 250+ IT decision-makers about their perceptions of the global outsourcing market.

Participants reported experiencing the following challenges while working with offshore teams. Each obstacle has a direct impact on effective collaboration.

  • Difficulty communicating effectively–52%
  • Not meeting deadlines on time–31%
  • Not being able to communicate effectively–29%
  • Failure to communicate obstacles or issues that prevented projects from moving forward–20%
  • Not understanding the full scope of the project–16%

While combating the collaboration challenges of outsourcing isn’t easy, many companies do manage to pull it off.

However, the challenge there is that working within limited overlapping work hours will inevitably lead to one team working late nights or early mornings to enable real-time collaboration.
If odd-hours become a regular thing, it could present the risk of errors caused by lack of sleep or
burnout.

Decreased Code Quality

Another potential disadvantage of outsourcing software development is the potential for decreased code quality.

According to a recent internal survey, respondents were all over the place when asked about their perception of code quality from offshore providers.

33% reported having neutral feelings on the matter, 24% believe that offshore teams generally deliver “high-quality” code, while another 11% believe that vendors typically provide “very high quality” code.

Only 6% of respondents perceive code quality as “extremely low,” while 15% perceive it as “low.”

Code Quality of Offshore Software Development Resources

The idea that offshore companies offer a low-quality end-product is more of a stereotype than anything.

Still, quality issues are a very real risk for companies looking to outsource software development projects for a few key reasons.

For one, language, cultural, and time zone incompatibility can cause instructions to be misinterpreted–meaning, you may end up with a very different end-product than what you initially had in mind.

Second, maintaining quality standards when offshoring development projects requires clients to clearly communicate expectations, set quality benchmarks, and meet regularly to discuss the progress and direction of the project.

As you evaluate potential vendors, you’ll want to choose a partner who can provide co-located quality assurance and development teams and who you find out what steps they can take to ensure that your vision is executed according to your specifications.

Public Perception of Outsourcing US Jobs

Outsourcing has always been synonymous with “cost-cutting,” “cheap labor,” and “questionable labor practices.” While outsourcing has come a long way, there’s still a stigma attached to shipping US jobs overseas—particularly during moments where unemployment rates are high.

While outsourcing software development to skilled workers who earn a competitive salary isn’t the same as shipping manufacturing jobs overseas or relying on sweatshop labor to support the fast-fashion industry, the general public may not be aware that outsourcing can be a legitimate strategic move.

That image problem represents one of the biggest challenges of outsourcing: maintaining a positive brand perception while exploring strategic external partnerships. If this stands to be a real issue for your brand, you may want to work the “outsourcing conversation” into your marketing materials (think educational blog posts or social media campaigns).

If you’re working with an outsourced team on an ongoing basis, consider featuring members on your website or include them in employee advocacy campaigns.

IP Theft

Another potential disadvantage of outsourcing is the risk of IP theft.

Because different countries have different IP laws, do some research before choosing a partner. Check IP rules and regulations by country though the Country IPR Toolkits site or the International IP Index to learn what kinds of protections are in place for covering brand assets.

Your best bet is to work with a company that follows US IP laws and offers protections in the event of a violation. Outsourcing companies headquartered in the US operate under US law, regardless of where they conduct their business, while companies based in Mexico have a trade agreement in place offering similar protections.

That said, strong IP laws don’t cancel out all potential risks. Often, companies don’t yet have patents, copyrights, or trademarks in place when they’re at the stage where they’re looking to outsource development projects. It’s also worth pointing out that, according to the US Patent & Trademark Office, many software applications don’t even qualify for patents in the first place.

Before engaging with an external provider, come up with an IP strategy to outline contract and non-disclosure agreement (NDA) terms as well as determine what portions of your project should be considered classified and kept in-house.

Loss of Control

One of the biggest risks of outsourcing is that you can lose control over how work is performed, managed, or worse, the data and insights linked to outsourced projects.

In some instances (think software projects with embedded AI or a machine learning component), sharing data offers companies a higher-quality end-product and may be essential for organizations that lack the ability to train advanced AI models to make the right decisions.

Unfortunately, giving away access to your data presents several potentially damaging disadvantages. For one, it increases your dependency on a particular supplier.

Suppose the project relies on data generated by the supplier’s IT infrastructure, those insights may be owned by either the outsourcing company or the manufacturer of the hardware they use.

In that situation, the organization must rely on the manufacturer for updates and upgrades and will put themselves at a disadvantage if they want to build out that application in-house or using another outsourcing company.

Another thing to consider is that the data and algorithms you share could be used to develop solutions for competitors.

Companies must be selective about which datasets they share and ensure that the terms of their contract spell out that they’ll retain control over their data, even after the contract ends. Additionally, organizations should avoid deals that may prevent them from adopting certain technologies or partnering with new vendors.

As you start the vendor selection process, keep an eye out for contracts requiring you to use niche software or proprietary technology. Open technology standards are essential for maintaining control over projects and maintaining the flexibility to scale solutions and explore additional strategic partnerships.

Data Privacy Issues

Companies already face challenges associated with a changing regulatory environment, emerging technologies, and a massive influx of big data.

Prioritizing privacy and transparency around how consumer data is being used and protected is critical not only for avoiding steep penalties but also crucial for building trust with customers.

One of the big risks of outsourcing to a third-party provider means trusting them with at least some confidential information, particularly if you operate in a tightly-regulated space like e.g., healthcare or financial services.

Companies need to consider how they vet potential contractors, what they share, how they set expectations, and what protections are in place should something go wrong. Additionally, make sure that you have control over your entire data ecosystem before engaging a new vendor.

Under these circumstances, you can grant limited access permissions to external teams, preventing them from looking through files that aren’t relevant to the project and protecting your system in the event that your provider’s system becomes compromised.

Risk Sharing

While there’s an upside to sharing risks with external partners, linking a major business initiative to another organization’s financial stability could also threaten your bottom line.

Watch out for companies with a lack of resources, high-turnover, or unskilled workers. Make sure to find out the following information before committing to a vendor:

  • Can they provide references, case studies, and testimonials?
  • Can you check out any projects they’ve done in the past?
  • Are they financially stable?
  • What’s their typical process for engaging clients?
  • What tools do they use?
  • What experience do developers have?

If everything checks out, the next step is to make sure that the terms and conditions of your contract prevent you from taking a financial hit should your partner not meet their end of the bargain.

Final Thoughts

It’s important to understand and weigh the risks, challenges, and possible disadvantages of outsourcing software development before committing to the wrong vendor. Strategic planning, due diligence, and communication are the first steps toward finding a perfect-fit provider that brings real value to the business.

Tiempo Development helps businesses avoid the big risks of outsourcing. Our nearshore business model and English-speaking teams enable seamless collaboration throughout the workday and support Agile best practices. We’re also headquartered in the US, which means we offer the same IP protections you’ll find onshore.

To learn more about our approach and the services we provide, contact an expert today.