Risks of Outsourcing


We all know that when a department or a function of the company has its costs outweighing the benefits if done in-house, we outsource.

But, is this always good for the company?

In this article, we would look at the risks of outsourcing and also a few tips on how to overcome them, but first let us understand why we outsource –


Why we outsource
Outsourcing may be cost-effective, convenient and even increase productivity for businesses because managers can now focus on the money-making aspect of the company better once valuable resources are freed up. Companies also tend to outsource when they know other companies specialize in certain aspects and can provide and manage a certain service better than the companies do, thus they’re better off just buying from them. Small companies may benefit from outsourcing as it allows them to have a more streamlined structure and strategy of their business. However, outsourcing may bring about certain problems for the company as well. Below are some of issues that may occur if the company decides to outsource.


Risks of Outsourcing 

Loss of control
When outsourcing, the company loses control over processes and may be limited to the outsourced company’s level of expertise. Loss of control in outsourcing can also result in the company suffering high costs with an end product that is not up to the expectations and done behind schedule.

Also, the company runs the risk of the outsourcer being less committed and having different objectives towards the project as compared to internal staffs, which are closely aligned to the organization’s goals and culture.

However, this may be solved by having explicit service level agreements (SLAs) between companies and providers and maintaining constant communication. SLAs allow you to set boundaries of the outsourced project regarding the functions and services that required and identifies the standards that they must meet. “A well-drafted SLA accurately sets expectations for both parties and provides guidance for measuring performance to the defined targets.” (Source: Slaw.ca) Also, Once the communication channel is chosen, do ensure that both parties utilize it adequately to understand each other’s needs. You can also request for updates and meeting regularly to ensure that their goals are aligned with your company’s.


“Sharing” knowledge & information
Not everybody reciprocates the respect and trust you give to them. When you outsource to companies, you have to provide confidential company information and intellectual property and you put yourself at risk of them using your knowledge and skills to imitate your product and services. A few steps for you to take to find a reliable company to outsource to can be analyzed with (C.A.N):

  1. Check if the company is open to sign up for NDA (Non-Disclosure Agreement),
  2. Ask if the company any previous experience in working with sensitive data
  3. aNd if they completed projects in financial, medical or government industries.

One has to deal with the information you give out when you outsource to external parties. What may seem as a less important data to you, if put in the wrong hands can make you suffer huge losses and lose control in processes. Thus, once you’ve lost that it will be very hard to retrieve it back,  

Hidden Cost
One of the main reasons why people outsource is to save costs, but vendors may expect you to pay for other work done that was not mentioned in the initial contract. Hence, you might be paying more than the initial fee and the whole thing becomes cost-inefficient.

To avoid this, you should analyze carefully how the company estimates their costs, the types of contract the outsourcing company accept (e.g Fixed Price or Time & Materials pricing?) and check for the absence of VATs and miscellaneous fees before signing anything. Some companies may underestimate other costs such as setup costs, relocation costs, and longer-than-expected handoff or parallel running costs. On the other hand, others may underestimate management costs – which is the time and resources used.  

Another tip to avoid paying for these hidden costs is to ensure that you define project requirements as clear as possible as it will help decrease the time needed to clarify problems and reduce the chances of redoing.

Loss of Organizational learning
Organizations will miss the opportunity to learn how to manage their processes by actually doing it if this is taken away from them by outsourcing and they would not be able to appreciate the learning process resulting in them being overly-reliant on outsourced companies.

Particularly, the capability of IT because the learning and using of IT is experiential. Often, management will only realize the value of IT applications by using them for their daily processes and then seeing further opportunities for development after. For example, airline reservation systems first began as automation initiatives to save clerical costs before they were seen as stock optimization systems and electronic distribution channels. Thus, the strategic scope of systems often emerges as users learn what is possible and how it can help the business. (Source: MITSloan)

Limited Customization and Enhancements
Nowadays, many companies limit the number of changes to be made to the final product. At the beginning of an outsourcing agreement, any company would have laid all their requirements without considering that they will need any changes in the future. However, technology advances over time and your system may be outdated before you know it. Hence it is important to state this terms in the original contract early, if not you will face additional fees for further renegotiating or altering the contract.

Furthermore, your business might change due to market forces or new laws and regulations enforced which will change demands on your outsourcers too. When the demands of your company and the provisions in the outsourcing agreement diverge, there are implicit and explicit costs to consider which concerns satisfying discrepancies, which you may have to consider outsourcing to a different company or to do it in-house instead.


Outsourcing your projects may seem like a tricky thing to do, but once you manage your risks and have the right management techniques to handle the agreement, you will be able to reap the benefits which may increase the productivity of your business too. Always remember to weigh the pros and cons, or even seek expert advice before you pick up that pen to sign anything!


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