9 Risks and Challenges of Outsourcing | How to Mitigate Them

Outsourcing is relying on an external vendor to handle business functions that were previously performed internally. It requires careful management but can provide strategic advantages. It allows you to access skills and efficiencies you may lack in-house and focus more resources on your core competencies. But it may also come with some risks and challenges that you have to be aware of and know how to mitigate them. 

1. Loss of Control

One of the biggest potential cons of outsourcing is the loss of control and oversight that comes with handing work over to an external vendor. Once signed, the contract and relationship require ongoing management and monitoring to ensure the vendor is meeting expectations.

It’s critical to build in quality assurance provisions, clear metrics and performance requirements, and the ability to regularly review progress. Retain control over key decisions, protect any sensitive data, and make sure you have long-term flexibility built into the contract. Hire an experienced project manager to oversee the vendor relationship. With the right oversight model, you can outsource tasks while still maintaining control over outcomes.

2. Hidden Costs 

On the surface, outsourcing can seem like a cost-saving move, but there are often hidden costs that add up. Travel for onsite visits, fees for changes in scope, communications tools, and the resources needed to manage the relationship all add overhead that can eat into the expected savings.

Build in buffers for changes in scope work and carefully calculate the total cost, not just the contractor fees. Also, factor in costs to transition work back in-house if needed. Make sure the contract has built-in off-ramps if you decide to change course. Don’t assume outsourcing is always cheaper—do the math.

3. Communication Challenges

When working across different languages, time zones, and cultures, communication issues often crop up that can hamper project success. Subtle nuances may be lost in translation. Distance and time lags can slow problem resolution. Misaligned expectations and assumptions can create confusion and delays.

Invest time upfront to build relationships and fully vet potential communication issues. Document requirements meticulously. Schedule frequent check-ins via phone and web conference to address issues promptly. Use project management tools to assign tasks, share documents, and track progress. Build in some onsite time if possible. Clear, consistent communication is key.

4. Lack of Flexibility

Signing a long-term outsourcing contract often means you lose some flexibility to change plans, scale resources, or adjust the scope on the fly. You’re locked into an agreement even if strategic priorities shift. Contracts should build in appropriate flexibility—review clauses let you reassess longer contracts periodically.

Build contingency plans for both scaling up and down activity levels as needed. Don’t over-commit to lengthy, rigid contracts for non-core functions. Make sure you understand the provider’s capacity to adapt to your changing needs over time before signing.

5. Knowledge Transfer Risks 

As the outsourcing provider handles more of the operational work, your own staff loses skills and institutional knowledge gained from doing the work in-house over time. This makes it tougher to bring processes back in-house if needed. 

Mandate knowledge sharing and documentation requirements in the contract—require the vendor to train your staff. Schedule rotations of your staff to work onsite with the vendor. Document processes thoroughly. Retain some in-house staff working in parallel to avoid total loss of skills.

6. Security Risks

Handing data and infrastructure over to a third-party vendor increases security risks, especially if you are sharing sensitive customer or company data. Your vendor selection process must thoroughly vet their data security capabilities and controls. 

Maintain financial data, intellectual property, and customer data in-house if possible. Build security requirements into contracts, enforce needed controls, and get independent audits of their security. Monitor potential data breaches closely. Know where your data resides and how it is accessed at all times.

7. Quality Issues  

You are handing over critical business functions to an unknown third party—so vendor selection is key to minimizing quality risk. Poor workmanship, missed deadlines, lack of innovation, and other shortfalls can hurt customer satisfaction and revenue.

Check references thoroughly and get guarantees on service levels and quality. Build in performance clauses with penalties for missed deadlines or standards. Audit quality periodically and monitor customer satisfaction closely. Maintain regular communication and give feedback quickly. Moving critical functions like customer service or product design overseas does raise the risk bar. Still, in the collaboration of game art and development companies, there are multiple methods to ensure outsourced art meets expectations, like reference art, pipeline integration, milestone reviews, etc.

8. Customer Service Risks

Outsourced call centers and IT help desks—especially overseas—may provide poorer customer service outsourcing that damages your brand. Language barriers, lack of context/understanding, high turnover and inability to modify approaches can lead to frustrating experiences for customers.

Listen to call recordings and mystery shop outsourced call center reps to audit quality. Monitor customer satisfaction survey results closely for dips. Build training on your products and culture into the contract. Maintain staffing of some call center reps in-house to monitor programs. Keep outsourced reps focused on tier-one support issues to minimize risk.

9. Employee Morale 

Outsourcing may threaten employees who perceive their jobs could be eliminated, hurting morale, retention and engagement. Layoffs or reassignments may be required as staffing needs change. Savvy change management and communication can help mitigate the damage. 

Communicate reasons for outsourcing clearly—explain it allows refocus on more strategic work. Reassure employees and involve them in the vendor selection process if possible. Transfer talent internally if great new opportunities arise. Offer to retrain to retain talent long-term even if jobs shift. Handle layoffs humanely if unavoidable.

The Bottom Line

Outsourcing can provide tremendous strategic and cost benefits but also exposes you to substantial risk if not managed proactively. Do your due diligence in assessing options, and follow best practices for vendor selection, contract terms, security controls, and ongoing management. Mitigate the common pitfalls upfront, and outsourcing can become a valuable strategic tool for your organization.

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