What is Outsourcing?
Outsourcing is the business activity of getting an external party to perform certain one-off project or ongoing operational activities or create goods that were done in-house by the company’s own employees and staff. Outsourcing is usually undertaken by companies as a cost-saving method.
What is meant by Offshore Outsourcing?
Offshore Outsourcing is just outsourcing to another country preferably a neighboring country with similar culture, time zone and language.
What is the difference between outsourcing and offshore outsourcing?
The main difference between outsourcing and offshore outsourcing is the location of the company or provider that is being hired. Outsourcing can refer to the hiring of a third-party provider within the same country, while offshore outsourcing specifically refers to the hiring of a provider in a different country.
Why Offshore Outsourcing over Outsourcing?
One of the biggest reasons why companies choose offshore outsourcing over outsourcing is having bigger cost savings. Outsourcing is usually done when you do not need a fulltime employee, you need probably 1/4 of the time only.
We recommend people to outsource first before they are offshoring it. This simple idea will greatly reduce the success of it.
History of Offshore Outsourcing
The concept of offshore outsourcing, or the practice of hiring a company or provider in a different country to handle business processes and tasks, has a long history. Outsourcing has been used as a way for companies to access lower labor costs, access new markets, and gain access to specialized expertise.
One of the earliest forms of outsourcing was the practice of companies in developed countries outsourcing manufacturing to countries with lower labor costs. This trend began in the mid-20th century and accelerated in the latter part of the century as transportation and communication costs decreased.
In the late 20th and early 21st centuries, the outsourcing trend expanded to include a wider range of services such as customer service, software development, and data processing. The growth of the internet and improvements in communication and collaboration technologies made it easier for companies to outsource these types of tasks to remote locations.
Today, it is a common practice for companies around the world, with a wide range of countries participating in the global outsourcing market. However, it remains a controversial topic, with some arguing that it can lead to job losses and other negative impacts in developed countries.
What are the several types of outsourcing?
1) By the Job Scope
- Project-based outsourcing: This type of outsourcing involves transferring a specific project or set of tasks to a third-party vendor on a temporary basis.
- Functional outsourcing: This type of outsourcing involves transferring a specific function or department, such as HR or marketing, to a third-party vendor.
- Manufacturing outsourcing: This type of outsourcing involves transferring the production of goods or components to a third-party vendor.
- Business process outsourcing (BPO): This type of outsourcing involves transferring non-core business processes, such as customer service or payroll, to a third-party vendor.
- Information technology outsourcing (ITO): This type of outsourcing involves transferring the management and maintenance of an organization’s IT systems and infrastructure to a third-party vendor.
- Knowledge process outsourcing (KPO): This type of outsourcing involves transferring the management of specialized knowledge-based processes, such as research and development or legal research, to a third-party vendor.
2) By the Destination of Work Performed
- Onshore outsourcing: This type of outsourcing involves transferring work to a vendor within the same country.
- Nearshore outsourcing: This type of outsourcing involves transferring work to a vendor in a nearby country, usually within the same region.
- Offshore outsourcing: This type of outsourcing involves transferring work to a vendor in a distant country, often in a different region or continent.
3) Performed by
- Horizontal outsourcing: This type of outsourcing involves transferring work to a vendor that operates in the same industry as the company.
- Vertical outsourcing: This type of outsourcing involves transferring work to a vendor that operates in a different industry but provides complementary services or products.
Top 10 Risks of Offshore Outsourcing
#1: Lack of Experience with Outsourcing
When you first start working with someone or at something, it might be overwhelming. You are not familiar with best practices, common concepts, the workflow. To convey your vision to another group of people, especially someone you have never worked with before, is a difficult task that should not be underestimated.
Solution: choose an experienced vendor.
An experienced vendor will walk you through the process, help you avoid the bottlenecks, and mitigate possible risks. They will help you define requirements, go through the discovery stage, and find the best people for the job. But at the end of the day, it is essential to remember that outsourcing is risky, and if it’s a risk you are willing to take, the right provider will be there to support you at every step.
#2: Lack of Expertise with The Outsourced Task
Solution: fill the knowledge gap.
The most important part of avoiding this pitfall is setting clear performance standards for the project. You may want to hire someone in-house who would define requirements for tasks and monitor the vendor’s work more accurately. If you can’t afford another worker on your staff, be sure to find a vendor who will be knowledgeable and trustworthy enough to help you understand the workflow and results.
#3: Poor Cost Estimate
Although we did say that outsourcing will save you a good portion of your budget, it may go south if not thoroughly planned. And you can’t estimate costs without establishing precise requirements, timelines, resources, etc. This brings us to one of the most challenging issues with outsourcing – calculating an accurate cost estimation.
Solution: set clear project requirements
If you are having trouble defining the exact set of requirements for the project, find an experienced firm or individual freelance workers who can help you with this task. Ask as many questions as you can think of to determine how the pricing model works to avoid unexpected charges. Explain your budget limitations to the vendor to minimize misunderstandings in the future.
#4: Choosing the Right Vendor
Among other problems of outsourcing, you might face difficulty looking for a vendor of the right size. A small outsourcing company will leave you no room for growth as it will not easily scale up or down. An enterprise-sized outsourcing firm might take a less personal approach and charge you too much for your project.
Solution: find the middle ground.
Take a step back and objectively assess your company: its size, number of employees, growth potential, revenue, brand awareness, etc. Do not go for a large outsourcing company if you are still in the startup phase. The money you would spend on it would be enough to cover a paycheck of an in-house specialist. At the same time, don’t choose the cheapest vendor on the market since it poses a greater risk of getting poor results.
#5: Lack of Cultural Context
If you have never worked in a culturally diverse and dedicated development team, you might not realize it, but the cultural context and the national differences matter. Although diversity is proved to drive innovation and financial results in the long-term, in the beginning, it might lead to miscommunications and misunderstandings. On top of that, since you will be reaching out to the global market, you might have to get used to working with people from different time zones.
Solution: don’t underestimate the significance of cultural differences.
This solution to the outsourcing problem goes in both ways: you could organize diversity awareness training programs for your staff as well as convey your values and norms to freelancers. Additionally, be sure to build clear communication channels and organize regular calls to bring everyone on the same page.
#6: Contractual and Legal Processes
Unlike the in-house hiring process, the outsourcing legal process is not as standardized and depends a lot on the vendor’s location. From country to country, you might need to sign various additional papers that are not part of your location’s legal process. The outsourcing issues begin after the contracts have been signed and the work has started – small misunderstandings in the agreement might lead to serious outcomes that poison the entire dynamic between you and your vendor.
Solution: be scrupulous and exhaustive when it comes to legal.
Be sure to prepare an NDA for the outsourcing company to sign as well as other regulation documents if needed. Discuss every possible part of the process, including situations where your vendor fails to perform or messes up something, and do not forget to cover the security issues. Your contract should entail clauses about compensation, working conditions, freelancer’s responsibilities, ownership information, and other relevant things.
#7: Poor Knowledge Transfer
Poor knowledge transfer delves into two outsourcing problems: the first one is from your perspective, the other is from the vendor’s point of view.
You might experience a negative outcome when dealing with the project results after the relationship with the vendor has been terminated. If they did not keep clear documentation, you might stumble upon some features or scripts unclear to you. On the other hand, if the vendor inherits an ongoing project from you with no transparent knowledge transfer procedure, they might fail to meet your expectations.
Solution: keep clear and extensive documentation.
Make sure to create a detailed knowledge transfer plan: the features, technology, code logic. Your vendor should be able to grasp the project just by going through your documented regulations. If it is not enough, organize calls or meetings, if possible, with the outsourcing company, your DevOps specialists, QA automation engineers, and developers to discuss hidden pitfalls and answer all the questions your vendor might have.
#8: Poor Team Management and Communication
It might sound like a broken record, but communication is the key to success. You might think that you are being understood the way you planned, but people come from different backgrounds, educations, experiences and will have their own perceptions. If you do not wish to be misinterpreted and agree that an adequate communication level will smooth many rough edges, here are our solutions to outsourcing jobs.
Solution: implement continuous communication.
Make sure to make communication an important part of the workflow – integrate calls, feedback loops, and other communication techniques into your project schedule. If possible, you can also visit each other’s offices to have in-person meetings that facilitate better understanding and increase the level of empathy. Finally, use project management tools like JIRA and Trello to be in-sync with each other and create a shared GitHub board to share technical processes.
#9: Finding a Trustworthy Vendor
One of the most common reasons for outsourcing gone wrong is partnering up with an unsuitable agency. We have mentioned several times the importance of tracking a trustworthy vendor. But what does it really mean? How do you tell one from another?
Solution: do your due diligence.
Sometimes the information you will find online is highly inconsistent where one website will have solely positive reviews and another a bunch of negative comments. Check reliable resources like Clutch, TopDevelopers, DesignRush, and visit vendors’ homepages to read about their cases and experience.
#10: Selecting the Appropriate Outsourcing Approach
There are three common outsourcing models:
- Time and material model
- Fixed-price contracts
- Dedicated development teams
Depending on your goals, requirements, scope, duration, budget, and other criteria, you may choose one of the models. How do you choose?
Solution: read our tips below.
The fixed price model requires you, as a client, to provide the full list of requirements for the project, in other words, scope, and set the exact deadline & budget. Unfortunately, due to the inflexibility, outsourcing teams are sometimes forced to drop a few features to make it in time. Or it might shift the opposite way, and you will have to pay extra fees for developers’ work because of unexpected changes.
The time and material model is an approach better suited for long-term partnerships and allows for changes on-the-go. With this model, you pay only for the features that have actually been added and avoid extra costs and poor results.
Dedicated development teams are basically extra workers on your team that fill in a knowledge gap. Instead of completely delegating your project, you will still be in charge and have more short-term experts on your team.
What are potential challenges of Offshore Outsourcing? How to overcome them?
There are several potential challenges of offshore outsourcing:
- Communication barriers: Working with team members in different countries can lead to communication issues. To overcome this challenge, companies can invest in tools and technologies that facilitate clear and effective communication, such as video conferencing and project management software. It is also important to establish clear lines of communication and protocols for addressing any issues that may arise.
- Cultural differences: Different countries and cultures can have different business practices and cultural norms. To overcome this challenge, it is important to be mindful of and respectful of these differences and to provide cultural sensitivity training to team members.
- Time zone differences: Working with team members in different time zones can be challenging, as it can be difficult to coordinate meetings and ensure that tasks are completed in a timely manner. To overcome this challenge, companies can invest in tools that allow for asynchronous communication, such as email and project management software. It may also be necessary to have team members work different shifts to ensure that there is overlap in working hours.
- Quality control: Ensuring that work is completed to the desired level of quality can be a challenge when outsourcing offshore. To overcome this challenge, it is important to clearly communicate expectations and to have systems in place for monitoring and reviewing the quality of work.
- Legal and regulatory issues: Companies outsourcing offshore need to be aware of and comply with local laws and regulations. To overcome this challenge, it is important to work with legal counsel and ensure that all necessary permits and licenses are obtained.
- Financial risks: There are financial risks associated with offshore outsourcing, such as fluctuations in currency exchange rates and the possibility of unexpected costs. To mitigate these risks, companies can use financial instruments such as forward contracts or currency swaps to hedge against exchange rate fluctuations.
- Security risks: There are also security risks associated with outsourcing offshore, such as the risk of data breaches and cyber attacks. To mitigate these risks, companies can implement strong security measures and ensure that their team members are trained in best practices for data security.
- Geopolitical risks: Political instability or conflict in the country where the outsourced work is being completed can pose risks to the project. To mitigate these risks, companies can conduct thorough risk assessments and consider insurance options to protect against unexpected events.
- Customer satisfaction: There is a risk that outsourcing offshore may lead to lower levels of customer satisfaction, due to issues such as communication barriers or cultural differences. To mitigate this risk, it is important to carefully consider the location for outsourcing and to have systems in place for addressing customer concerns and addressing any issues that may arise.
- Loss of control: Outsourcing work offshore can also result in a loss of control for the company. To mitigate this risk, it is important to establish clear lines of communication and protocols for decision-making, and to ensure that the company has visibility into the progress of the work being completed.
- Talent retention: There is a risk that talented team members may be lost as a result of outsourcing, either to the company being outsourced to or to competitors. To mitigate this risk, it is important to have strong retention strategies in place and to continuously invest in the development and training of team members.
- Integration challenges: Integrating the outsourced work with the rest of the company’s operations can be a challenge. To overcome this, it is important to have a clear plan in place for integrating the work and to ensure that there is good communication and coordination between the in-house and outsourced teams.
- Vendor management: Managing the relationship with the outsourcing vendor can also be a challenge. To overcome this, it is important to establish clear expectations and communication channels, and to have processes in place for addressing any issues that may arise.
- Loss of intellectual property: There is a risk that sensitive company information or intellectual property may be shared with the outsourced team, which could lead to potential theft or misuse. To mitigate this risk, it is important to have strong non-disclosure agreements in place and to carefully consider what information should be shared with the outsourced team.
- Difficulties in managing remote teams: Managing remote teams can be more challenging than managing teams in a single location. To overcome this, it is important to have strong systems in place for communication and collaboration, and to provide adequate training and support for team members.
- Loss of company culture: There is a risk that outsourcing work offshore may result in a loss of company culture and values. To mitigate this risk, it is important to clearly communicate the company’s culture and values to the outsourced team and to ensure that these are reflected in the work being completed.