Software development outsourcing has become a go-to option for building teams. The main factors driving the IT outsourcing market are the demand for cost-effective software development and staying up to date with the rapidly emerging technologies. As per a Deloitte survey, 76% of executives “indicated their IT services were delivered via third-party models.”

Many organizations have leveraged software development outsourcing and have seen positive unit economics. But on the flip side, there are potential risks of software development outsourcing landscape. You cannot start smoothly without any fear of mistrust and things going south.

Now you must be thinking about where to start. How to navigate the potential risks associated with outsourcing software development and what mistakes to avoid while outsourcing software development that work for you? Don’t burden yourself.

In this article, we’ll explore the top risks of outsourcing software development and guide you with solutions on how to mitigate them, how to solve problems of outsourcing and how to avoid software development outsourcing mistakes.

Let’s move further to solve the problems with outsourcing software development with solutions to overcome the risks involved in outsourcing.

Outsourcing Software Development means when you choose to outsource software development services, you’re essentially entrusting either specific components or the entire software development process to a remote or offshore outsourced team. This decision can bring significant advantages to your business.

Benefits of Software Development Outsourcing are:

• Access to a Larger Talent Pool: Leverage a diverse range of skills and expertise.
• Saves Time: Efficiently allocate tasks and accelerate project timelines.
• Fast Delivery: Expedite the development process for quicker results.
• Reduces Cost: Cut down expenses while maintaining quality.
• Increases Productivity: Enhance overall project efficiency.

Explore different IT Outsourcing models for software development.

Offshore Outsourcing Model

offshore outsourcing means entrusting your software development to a different country or city, where the combination of lower labor costs and high-level expertise becomes a valuable asset.

Businesses strategically adopt this approach to effectively cut their costs by enlisting the services of software development partners or third-party teams to fulfill their software development requirements.

Benefits of Offshore Outsourcing

The advantages of offshore outsourcing are clear:

1. Cost-Efficiency: Lower labor costs lead to significant savings.
2. Access to Expertise: Skilled specialists enhance the quality of your software.
3. Focus on Core Business: With software development outsourced, you can direct your attention towards vital business activities

Nearshore outsourcing model

When a company decides to outsource its software development to a neighboring or nearby location, it’s known as nearshore outsourcing.

In simple terms, businesses team up with external software development experts who are nearby. This setup offers some great advantages.

Advantages of Nearshore Outsourcing

1. Closer to Home: You work with teams who are not too far away geographically, making it easier to communicate and collaborate.
2. Lower Costs: It can save you money since labor expenses might be more affordable in your neighboring area.
3. More Talent Around: You have a bigger pool of skilled people to choose from who share a similar culture, which can be a big plus.

Hybrid Outsourcing Model

Hybrid outsourcing is a unique way of getting your software development done. It combines both on-site and offshore developers. This special blend gives you the best of both worlds – flexibility and control over your business. Think of it as one of a supercharged software development outsourcing model that combines the strengths of different approaches.

Advantages of Hybrid Outsourcing:

1. Cost Savings: You can benefit from lower labor costs, making it cost-effective.
2. Boosted Efficiency: It increases your overall effectiveness, making things run smoother.
3. On-Demand Scaling: You have the freedom to adjust your workforce as needed, giving you the ability to grow when you want to.

When you decide to hand over your entire software development tasks to an external third party, there are potential risks associated with outsourcing you should be aware of.

Let’s explore outsourcing risks and mitigation, what are these software outsourcing risks are and learn how to steer clear of the issues and problems in software outsourcing.

Not Finding the right developer

One of the common risks of outsourcing software development is not finding the right developer. Now you must be thinking about how one cannot find the right developer when the skillset of the developer matches your requirement. So, here’s the thing.

Organizations usually hire developers based on the languages and technologies they know but do not assess the type of projects they’ve worked on before.

For instance, you are developing a fintech app and the person hired knows the tech stack required for the project but has not worked on this type of project before. So, your project is going to be his first project.

Hence trial and error methods will come into play. In this scenario, you can’t expect the quality as you would from an experienced developer.

Solution:

• Do thorough vetting with a comprehensive background check
• Start with a small pilot project to better understand the team’s capabilities

Misunderstanding related to the goal and vision of the project

Another outsourcing risk is misaligned vision. This means there is no clear understanding between the client and the outsourcing company related to the vision and goal of the project.

If they are not on the same page, there’s no moving forward. This can happen due to several reasons:

• Unclear project scope
• Little to no understanding of the client’s business and processes
• Clash due to differences in work ethics
• Communication gap
• Outsourcing company not taking the client along

Solution:

• Clear and regular communication can help both parties stay aligned with the vision
• Detail documentation covering every aspect of the project

Cultural conflict becoming a hurdle in productivity and progress

One of the biggest risks of outsourcing a software development project, especially working with an offshore software development team can pose challenges like cultural conflict.

For Instance, if you are a company from the US working with an offshore team from India, you will feel a striking difference in the culture and work ethics. Like:

• Difference in communication style
• Different accents and dialects of English can cause misunderstandings even
• Punctuality and Time management can cause conflict. For example, Clients from the US expect punctuality and precision while Indians are a bit relaxed when it comes to deadlines and time management. They are more process-oriented unlike the Americans
• Difference in addressing conflicts and resolving them.
• Values like Individualism and collectivism may also cause problem
• Clash in work ethics.

Solution:

• Cultural training beforehand can develop a better understanding and collaboration between the teams
• Inclusivity and Diversity is the key

Management issues in outsourcing

Management issues are typical problems of outsourcing. There’s no substitute for in-house project management. By management issues we mean

1. Inefficient task distribution
2. No proper accountability process in place
3. Task chaos
4. Delay in delivery

This happens because, in software development outsourcing, a project manager from the vendor side usually oversees everything. Now there’s always a chance you get a person who lacks management skills.

Also, distance plays an important role in this matter. When things are out of sight, you cannot expect them to happen as you want them to.

Solution:

• A competent project manager will take care of these issues no matter where the teams are.
• Regular status checks and stands up boost productivity and help with accountability 

Security risks of outsourcing

Hiring an outsourcing partner means sharing the private data of your company. This can pose data security and privacy risks as you are sharing sensitive data and code. You can also lose intellectual property rights.

For example, A hospital hires a third party to develop and update its application. The developers can access the personal and financial data of the patients. That means you are not only risking your reputation but also the privacy of your patients.

Solution:

• Data encryption and strong cybersecurity practices can save the day
• Comprehensive Legal contracts covering all the data security and confidentiality terms

Poor knowledge of industry

Most of the time, the contractor promises you more than what they have. They overestimate the capabilities of their resources and when they start working on your project, they get stuck. As a result, they start experimenting on your project which is a nightmare.

Also, you may not get the resources that are shown at the start. For example, they show you one candidate in the interview who is an expert with strong domain knowledge and then give you the other who is less competent.

Solution:

• Conduct a knowledge transfer session
• Thorough screening of the candidates at the start

Vendor lacking enough tech infrastructure

This is not the issue working with big and well-known IT outsourcing companies. However, if you hire new or small vendors, they may lack enough tech infrastructure. The reason is:

• They are tight on budget and can’t invest in state-of-the-art infrastructure.
• They just focus on fulfilling clients’ immediate needs
• Not apt enough in the latest technology

Limited access to cutting-edge technologies due to geographic location

Solution:

• Define infrastructure-related requirements from the start
• Do infrastructure assessment

Payment issues

Payment challenges are also some of the potential risks of outsourcing software development. The payment terms are pre-decided yet there are instances when disagreement can be caused as the project progresses. Here are some of the outsourcing issues that clients face while outsourcing software development:

1. Hidden cost
2. Ambiguous payment terms
3. Tax and regulation issues
4. Late payments
5. Economic crisis in the outsourcing region
6. Security of financial transactions

Solution:

• Clear and predefined payment terms in the contract
• Escrow services

Delayed user testing affecting the work

User testing or usability testing is one of the critical phases of software development. This identifies the shortcomings in the software or ensures that the software is aligned with users’ needs.

Now in software development outsourcing, this phase can face delays for the following reasons:

1. Unclear test plans and coordination between the development and testing teams
2. Software bugs
3. Infrastructure issues
4. Complex software
5. Unavailability of the end-users
6. Big changes or modifications needed

Solution:

• Formulate an early and effective user testing plan with clear communication and collaboration with the development and testing team.

Here are some of the potential pitfalls that should be avoided while outsourcing software development. These are some of the critical mistakes that companies make but with slight care, they can save you in the long run:

• Not investing time in doing thorough background research
• Not having a proper product discovery team
• Not giving importance to the onboarding stage but rather making hasty onboarding decisions
• No having set coding standards hence losing control over code quality

These outsourcing mistakes can be avoided if:

Client spare time for checking these factors besides focusing on the cost solely

1. A positive brand image of the vendor
2. Fully trackable history
3. Customer feedback and reviews
4. A vast portfolio and transparent pricing.

• Validating your potential customers’ demand is important. You cannot just assume what they need. So, it is better to avoid limited discovery practices and have a full product discovery team that can take care of these aspects

Don't skip these steps in the onboarding process

1. Introducing requirements
2. sharing knowledge and evaluating skills
3. Have an updated internal knowledge base
4. Issue proper credentials
5. Compile necessary documents
6. Provide access to relevant tools
7. Have an onboarding meeting and help the outsourced team get along with the in-house team

To maintain control over code quality you need to

1. Have tested coding standards.
2. A complete performance and strategic vision that can help in the future.
3. Functional testing and unit testing.

The outsourcing software development outsourcing market is projected to be worth 98 billion in 2024. This proves that the benefits of software development outsourcing are far more than its risks. If businesses take the above-mentioned measures the risks of outsourcing can be minimized, reinforcing growth and success.