Deconstructing Risks of Software Development Outsourcing

This article is your guide to understand the key concepts and deconstructing the risks of software development outsourcing once and for all.

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Deconstructing Risks of Software Development Outsourcing

Do you want to outsource software development services but have doubts and questions about the business model? Don’t let them influence your decision. This article is your guide to understand the key concepts of outsourcing and deconstructing the risks of outsourcing software development once and for all.

Let’s start with a little overview!

Despite the economic downturn caused by the COVID-19 pandemic, the global IT outsourcing market is expected to grow at a CAGR of 2.6%. Amid the COVID-19 crisis, the global market for IT Outsourcing estimated at US$342.9 Billion in the year 2020, is projected to reach a revised size of US$410.2 Billion by 2027. And for the same period US market is estimated to reach $92.7 billion while China is forecast to grow at 4.9% CAGR.

The model of contracting third parties to provide custom software development services has been proving its viability for years and isn’t going anywhere.

Especially with all these statistics at hand, we can be sure of the outsourcing model’s vitality. Let’s make this more interesting by dissecting the reasons behind this drive and understand why companies are more interested in outsourcing, the common fears, challenges associated with it, and how to address the omnipresent outsourcing risks.

But before that let’s simplify what is software outsourcing and what are its types.

What is Software Outsourcing?

In its simplest form, Software outsourcing refers to the practice of hiring an external software development company to carry out all software development tasks.

In the tech world, software outsourcing is also referred to as hiring a dedicated team or individual experts to carry out specific tasks in different domains including but not limited to software engineering, app development, UI/UX design, Quality Assurance (QA), and Software Project Management.

What are the Different Types of Software Outsourcing?

There are three types of outsourcing based on where software development service providers are located:

Offshore Outsourcing

Offshore outsourcing is handing over software project operations to a development agency in a distant location without a heavy focus on remote team management.

There are many challenges involved in offshore outsourcing like the difference in time zones, cultural features, and transparency issues. But the collaboration tools (Slack, Jira) make it seamless.

Offshoring software development helps expand the existing pool of software professionals that are not available locally. Lower development costs with the same or higher software quality is another prominent feature of offshore software development.

Nearshore Outsourcing

This type of software outsourcing implies cooperation with external service providers from neighboring countries. Nearshore outsourcing is normally associated with higher rates per developer. However, it provides benefits like minimal cultural and time zone differences.

Onshore or Domestic Outsourcing

As the names suggest, domestic/onshore outsourcing is associated with handing over tasks to a company in the same country as your business. Domestic outsourcing is more expensive than offshore and nearshores outsourcing. Regardless of the cost factor, seamless communication and transparent internal processes are the benefits of onshoring. 

Now that we have briefly discussed outsourcing along with different types, let’s move on to the most searched question: Why do businesses outsource?

Why Businesses Outsource at all?

For a long time, cost reduction has been seen as the only reason for outsourcing software development. But with ever-changing customer expectations, disruptive technologies, and volatile markets, every company is forced to become flexible or fall behind its competition. And the outsourcing model provides this flexibility and market advantage with its sophisticated mechanisms of change management.


According to a 2020 global outsourcing survey by Deloitte: flexibility, agility, speed to market, and access to tools & processes are seen as the major reasons for outsourcing along with the cost.

Other reasons to go for outsourcing include reducing the burden of HR administration, Robotic Process Automation, and transformation to the cloud. 

However, there is a flip side to everything, and software development outsourcing is no exception. There are risks associated with outsourcing software development.

But companies that choose to outsource have to learn to trust their contracts, which by the way doesn’t come too easily. There are multiple risks of outsourcing, which can originate on both vendor’s and the customer’s sides.

Although perceived as risks, they can be effectively addressed and mitigated.

Let’s explore how to mitigate the risks of outsourcing software development in more detail. 

How to Effectively Address the Risks of Software Development Outsourcing?

There’s no doubt that risks associated with outsourcing can turn right decisions into wrong ones, but if addressed properly these challenges can easily be mitigated. Here are some common risks associated with outsourcing along with effective solutions:

Risk 1: Remote and Distributed Teams

This is surprising, but the key feature of outsourcing i.e. remoteness is viewed as the number 1 challenge. Typically, the client is left with little to no control over the project management and execution on the vendor’s side in between the deliverables. But there are ways to resolve this issue.

When you outsource software development to a third-party vendor, make sure to have frequent chats and face-to-face communication/video calls to build mutual understanding.

During these initial meetings emphasize finding comfortable ways of sharing controls and responsibilities between the team and the project stakeholders.

It is always helpful when the client takes part in selecting and interviewing team members before the project starts. This helps to get acquainted with the people and check if there’s professional chemistry. 

In short, you need to make communication seamless and timely. And since outsourcing is almost 100% remote, you can use tools like Slack to make communication seamless.

Risk 2: Team Motivation

It’s a known fact that both in-house and outsourced teams can develop fatigue and show less motivation in long-term projects. As we know, every project has a different management perspective and not all of them are about developing ground-breaking products.

One of the solutions is to introduce a culture of dynamic cooperation, where the developers are encouraged to have a voice in shaping the products on grounds of innovation. 

Companies need to adopt diverse approaches for encouraging their vendors to innovate.

Risk 3: Domain Expertise

One of the major challenges of outsourcing is the lack of domain-specific knowledge within the outsourcing team. For instance, creating an artificial intelligence application for a telecom provider might be an arduous task for your average software developer.

Especially, if the team has no previous experience of similar projects, you will either have to allocate extra time on knowledge transfer and team allocation.

However, there are ways to go about challenges like these. The first one is to hire only those vendors who can showcase their portfolio of similar or related work.

Another way is to include a discovery phase at the initial stage of your software development life cycle to get the team on the same page regarding the project requirements and your expectations.

Risk 4: Security and Compliance of Data Practices

If we go a decade back, this wasn’t considered as the major issue while outsourcing. But with ever-increasing data security compliances, this has emerged as one of the basic considerations when outsourcing software development. 

Outsourcing operations that deal with sensitive data, places an increased responsibility on both vendor and client since regulatory scrutiny is extended to vendor relationships. And therefore it is fully acceptable for you as a client to require proof of secure software development practices. 

It is also important to ensure transparency and compliance with all practices adopted down the supply chain, too.

Is Outsourcing Still Risky?

Looking closer at the risks highlighted above, it’s clear that these risks only emerge when there is a lack of proper communication and trust between vendor and client.

So, if you see a problem when outsourcing, it is likely because of ineffective communication. And you can easily mitigate it by paying attention to the clarity of partnership terms, strengthening project management guidelines, and streamlining communication throughout the project.

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