Risks of Outsourcing Software Development

Risks of Outsourcing Software Development

08 December 2021 • 10 min read

Any technology project may require additional assistance from third parties. It goes about outsourcing, the practice of contracting out functions and tasks. Yet, IT outsourcing risks frequently prevent companies from hiring outsourced specialists. This article will outline the main risks of otsourcing software development and benefits of hiring a remote team for your project.

In 2021, spending on IT services will reach $1.2 trillion worldwide. It will demonstrate a growth rate of 11.2 percent from the previous year. Outsourcing gets bigger, and it’s time to confess: perhaps, you also need to hire some outsource specialists to cover your business needs.

Many small businesses and startups prefer outsourcing to any other form of employment. The matter is that a company saves costs due to the possibility of hiring a foreign team — there’s no need to pay for tenancy and equipment. Moreover, specialists from Eastern Europe, like Poland and Ukraine, have lower hourly rates than Western Europe or the US.

It may seem that outsourcing may become a helping tool for everyone. However, you need to consider several risks of software development outsourcing before you start looking for an outsource provider. The associated perils are various, starting from losing control over the vendor to lack of expertise.

According to Deloitte 2021 Global Shared Services and Outsourcing Survey Report, different companies need third-party assistance in different spheres:

deloitte global shared services and outsourcing survey report 2021

Informational technology (54%), finance (44%), and payroll (32%) take the leading positions. Why is the IT industry in such demand? The matter is that software development is a rather young industry (compared to legal or finance, therefore, the number of specialists is lower). Besides, software development has the same principles in different countries. A US company can hire an outsource developer from Poland and get the same code.

The IT outsourcing market keeps growing. You need to know all the advantages and risks of outsourcing IT services to decide whether to work with in-house developers or hire IT vendors.

Benefits of IT Outsourcing

Since outsourcing has become a big part of our working activity, more and more companies are starting to pay attention to this process. Moreover, companies invest in research and studies to understand the benefits of IT outsourcing in numbers.

Deloitte 2021 Global Shared Services and Outsourcing Survey Report presents these numbers to give us a clear understanding that IT outsourcing is global expertise. It becomes best practice for small and medium businesses, as well as enterprises. According to this survey, 88% of respondents noticed cost reduction, 78% stated that standardization and process efficiency improved, and 63% confessed that business value increased.

Yet, the benefits of outsourcing are not limited to these points. Here are more of them:

Outsourcing helps to focus on key priorities

Imagine the situation: you need to fix problems with your domain, but the team has many tasks with higher priority. Outsource specialists could help you solve the domain issues, while the in-house team could stay focused on their tasks.

Indeed, for many small and medium-sized companies, focusing on core activities is the only chance to grow. However, if an employee cannot work on the key tasks, the results won’t be achieved fast.

Outsourcing helps to deliver better results

Outsourcing reveals a new world, full of opportunities and specialists with various expertise in different spheres. For example, you can hire outsourced staff that will help you develop your payment system. Or you can find someone who will take control over the development of a new service.

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Outsourcing is cost-efficient

As we have already mentioned, outsourcing helps to save money. You can hire developers from other countries (typically, with a lower hourly rate), or you can hire developers to close only one project.

Read also: Best Countries to Outsource Software Development

Outsource has a better reach

For a big enterprise, relocation of the specialist is not a big problem. However, small and medium businesses can hardly afford to hire talents from different states or countries and help them relocate. Outsourcing is different. You can hire a dedicated team online, and you don’t even need to buy equipment for them or take care of their working space.

Risks of Outsourcing Software Development

Despite all benefits, the risks of outsourcing software development are also numerous. Still, it does not mean that you should avoid outsourcing by all means. In the following blocks, we will provide you with detailed information you may need to work with the outsourced team on a long-term basis successfully.

Hidden And Uncertain Costs

If you check the hourly rate of different outsourced specialists, you will be surprised: different developers will ask for different payments for the same job. Expertise, country of residence, and even self-esteem — all these factors impact the hourly rate.

However, a basic hourly rate is not the most dangerous thing when it comes to IT outsourcing. Software outsourcing risks are also connected with hidden and uncertain costs. For example, you’ve agreed on $100 for the services a specialist will provide you. You haven’t discussed the number of iterations available for free. The job was delivered after four iterations, but the price was $150. The vendor said that only two interactions are free, all next iterations are paid depending on the hourly rate.

This situation happens more frequently than you can imagine. However, there’s a chance to prevent it:

  • always sign a detailed agreement before you start to work with a new contractor
  • in agreement, indicate information about the hourly rate and price of all additional services
  • add information about free interaction or the number of free edits

Quality Drawbacks

The low quality of the delivered job is one of the biggest software development outsourcing risks. The situation gets even more dangerous if you cannot check the quality of the delivered job beforehand (for example, before the release). So what can you do to prevent this situation? Here are the solutions:

  • always check the quality of the delivered job before the release or launch
  • if you are not sure you can check the job on your own, hire QA to test it
  • develop and use delivery methodologies and tracking systems that will help you to make a better assessment of the delivered projects

Communication Borders

We’re sure you know that a well-written and clear assignment is a key to well-written code. However, when you are working with outsourced developers, communication borders may become a problem.

Why have we added this aspect to the list of the biggest risks of hiring outsourcing firms to build software? Imagine the situation that you’ve hired a high-skilled developer from China who has a very bad command of English. Even though they may be an expert in software development, you will hardly explain your requirements.

To avoid communication boards, we offer the following solutions:

  • choose developers who speak English. It’s better to conduct an interview to make sure that you understand each other
  • write the assignment in simple words, avoid complicated constructions
  • add more references to visualize the result you want to get

Knowledge Transfer

One of the basic principles of outsourcing risk management states that it’s important to ensure knowledge transfer. It works in the following way: the company needs to provide an outsourced specialist with all the details and information needed to deliver the job. And vise versa, the outsourced specialist must deliver the code that other developers can easily use.

So how to achieve this? Here’s an answer:

  • make sure that you work with outsourced specialists who don’t capture information manually but use software tools. In this way, it will be easier for you to transfer all information about the project
  • choose specialists who use innovation roadmaps for knowledge transfer. In this way, you will be sure that a specialist does not support the approach of code owning (which means that the one who writes the code owns it)

Weak Management

To minimize software development risk, you need a strong project manager. Don’t try to save costs by asking someone from your team to manage outsourced specialists. An outsourced team needs even better management than in-house teams. If you want your team to work as a whole, hire a project manager who will take all processes under control.


Yet, hiring a project manager to fix weak management is not the only solution: software development agencies frequently offer a team that already has a project manager. This approach is extremely beneficial: as a rule, such teams have been working together for some time, and the manager perfectly knows how to distribute tasks to have the best results.

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Privacy and Security Concerns

Outsourcing security risks is what you can never ignore. In the current trends in outsourcing and addressing third party risk Survey by Deloitte, the respondents have indicated the main risks they associate with private and security when working with outsourcers. 62% of respondents have concerns about data security, followed by performance/ resilience (45%) and providers’ compliance with laws and regulations (39 percent).

outsourcing security risks

Are there any ways you can reduce risks with the security aspects? Of course, they are:

  • always sign up NDA agreement with the vendor
  • choose agencies or contractors who have already worked with sensitive data
  • discuss your security standards before you start to work together and make sure that both parties agree on them

Viability of Service Provider

One of the biggest fears of offshore outsourcing risks is when the vendor cannot deliver the discussed services. The reasons for that may be different like the quality is too low, the tasks are never delivered on time. Or, for example, you decide to work with the agency. But in a month, the agency decides to suspend their work. No one is safe from these situations, but there are things you can do to prevent them:

  • include detailed information on penalties and cancelation fees in your agreement
  • develop an operational contingency plan to make sure that you still will work on the tasks and processes no matter what happens to outsources
  • regularly revise operational contingency plan to be sure that you can still follow it

Negative Impact on Your Company Culture

Among the most unexpected outsourcing security risks, this one takes the leading position. Every business, even the smallest company of 2-3 employees, has its corporate culture. The bigger the company, the more individuals are involved in the culture. They all have certain expectations and some rules that are equally applicable to everyone.

When starting to work with outsourcers, make sure that your company culture won’t hurt from that. To achieve this, follow these recommendations:

  • the rules may be equal for everyone. For example, suppose in-house specialists may comply with deadlines. In that case, outsourcer specialists should also comply with them
  • never discuss rates of outsourced specialists with the team members
  • make outsourcing part of your corporate culture

Lack of Domain Expertise

Every company has its expertise. It may be based on the industry research, peculiarities of working with the target audience, etc. Domain expertise is the most valuable thing as it helps to achieve settled goals faster. At the same time, the standard remains high. One of the IT outsourcing risks is the lack of domain expertise, which may become crucial for hiring in-house specialists rather than outsourcing talents.

If you have concerns about this point, check the following suggestions:

  • don’t be afraid to share your domain expertise with the outsource specialists. Sign NDA with new talents to protect sensitive data
  • work with outsourcers who already have experience in working your industry

Intellectual Property

This point is very similar to privacy and security concerns. Remember that your intellectual property will be safe if you stick to these rules:

  • always sign NDA with outsources
  • work with outsources who have experience in working with sensitive data
  • protect your intellectual property by the law

Sum Up

Although IT outsourcing risks are high, the benefits are also great. Outsource team will help you to cover the most daunting or complicated tasks. Yet, it’s important to work with experts ready to play according to your rules and respect your intellectual property and security.

We at Softermii believe that working with an outsourced agency starts with a discussion. If only both parties are absolutely satisfied with the services, offshore development rates, and projects to be done, the agreement is signed. We will sign an NDA for your project to ensure that your information will be protected. Also, we will indicate in our agreement all information about cancelation fees as we want you to be sure that you won’t lose money whatever happens.

If you have any hesitations, questions, or want to discuss the terms of working with our team, we will give you all the answers. We’re sure: outsourcing is a great way to cover your IT business needs, and we’re ready to help you with that!

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