It is said that offshore development services will have a significant growth of 20%-25% per year, which does not allow to slow down. Some of the world’s largest enterprises, such as Apple, Ford, Cisco, etc., are also turning to offshore routes for their IT projects because of its potential benefits, which include reduced development costs and faster time-to-market.
While offshoring has been a proven effective strategy for many years, there are also inherent risks in contracting with a company located in another country to conduct day-to-day business operations. So, it is necessary to be aware of the defects to save yourself from possible defects and losses. This article will outline some of the risks associated with offshore outsourcing and how to avoid them.
1. Security and data privacy risk
Security and data privacy issues are usually at the forefront of businesses’ minds when partnering with an offshore company. It is even more important when the service provider processes sensitive customer information, such as personal identity, contact information or credit card numbers. There is a possibility that the offshore company’s data or intellectual property (IP) address may not be secured, and if the security system is prone to errors, there is a high possibility of data loss, theft and leakage, which can result in significant. negative consequences for the client.
While security and regulatory issues are the biggest concerns in offshoring, corporate leaders must choose which projects can and cannot be outsourced. Furthermore, businesses must also take measures to prevent potential misuse or theft of intellectual property.
To leave no room for fear of data leakage, you should sign a non-disclosure agreement (NDA) and security protocols with the overseas team before the partnership is formalized. You can also research the security practices of offshore providers and request their security certifications. Avoid cooperating with questionable ODCs to avoid potential data breaches in the future.
2. Risk of hidden costs
Cost efficiency benefits serve as a driving force behind enterprise decisions to offshore their software development projects. Unfortunately, the full cost of the project is not visible at the time of signing the contract, and often hidden costs emerge later in the development process.
Project cost often includes direct and indirect costs. Open costs include personnel costs, hardware and software fees, and office environment costs. Direct costs are particularly obvious to both customers and vendors at the time of contract signing, while indirect costs often come as a surprise to businesses as they arise in the development process. These costs include communication fees, project management costs, variable costs associated with outsourced content, and unforeseen changes in the project that require rapid changes.
In reality, these costs are particularly difficult to calculate in advance. Thus, the actual cost at the end of the project is often higher than the forecast. As a result, most businesses are now looking at flat rates to avoid additional fees.
It is very important to carefully evaluate the offshore vendor and their capabilities before signing a contract. This includes understanding their pricing structure, ability to provide high quality service, and track record of completing tasks on time and within budget.
Start by shortlisting potential offshore development businesses. Once you have selected at least 5 suitable companies, compare them. It is worth considering the scope of their services, the benefits they provide, their areas of expertise and especially their pricing models. ODCs typically offer these pricing models:
- Fixed price project. suitable for simple projects with little or no additional tasks outside the predetermined scope.
- Capability Model and Dedicated Team Model. provide a more flexible way to calculate your project costs.
Explore more. Offshore Software Development – Benefits, Costs, Best Practices and More
When contracting with ODCs, it is also necessary to develop a comprehensive written contract that clearly defines the parties’ responsibilities, payments, etc.
3. Performance Risk
While offshore software development is profitable for businesses, it also contains many challenges, including poor communication, cultural differences, poor progress tracking, etc., can lead to poor performance. Misunderstandings due to language and location barriers also lead to unnecessary project delays.
In addition, the low costs offered by the partner also bring the possible risks of poor quality of work. Cheaper is not always better, and frequently, vendors who offer low prices lack the necessary skill sets, which ultimately results in subpar results and delayed timelines. Despite all assurances and good intentions, there is no guarantee that the seller will meet your expectations.
While cost reduction happens to be a significant benefit of outsourcing, it should not be the primary focus of clients looking for offshore service providers. You should focus more on intellectual capital than low cost. In fact, some providers that charge more frequently have experienced and skilled talent in their dedicated teams who are committed to delivering high-quality tasks on time.
When collaborating with overseas teams, you must clearly explain your corporation’s vision, processes, and expected outcomes to them. Furthermore, you should provide the vendor with a product requirements document so that they can have a clear understanding of your expectations and provide an appropriate solution.
4. Risk of government regulation
Different countries have different laws and regulations regarding IT outsourcing, which can lead to legal conflict when entering into customer-vendor relationships across borders. With the growing trend of offshoring key technical processes, the legal issues related to them are also increasing.
As there are no established legal regulations on outsourcing worldwide, it is very important that clients carefully research and discuss all applicable laws and legal issues of an outsourced project with their offshore service provider before entering into a contract.
To overcome this risk, businesses should thoroughly research the regulatory environment of prominent offshore countries and understand the laws and regulations that apply to their project. As organizations in different industries may have to face different degrees of government oversight, they should ensure that the offshore vendor is sensitive to industry-specific requirements and has the ability to:
- comply with government regulations,
- provide sufficient “transparency” by demonstrating that it is compliant and therefore accountable in an audit.
In addition, the customer must include clauses in the contract that clearly define the seller’s obligations to comply with the customer’s government regulations and the consequences of non-compliance.
5. Organizational structure and management risks
The organizational structure of the workplace may vary by region. For example, while the work process in the US is simple and smooth, in other countries, especially in Asia, hierarchical structures are maintained. This differentiation affects how people process and think, which can limit employees’ creativity, soft skills, and independent thinking.
In addition, attention should also be paid to issues related to governance. With an offshore corporation, the vendor is located in another country, making it difficult to monitor and manage employees in practice. This lack of effective control is reflected in compromised performance.
Before starting an outsourcing partnership with an overseas team, it’s important that your internal team is informed and engaged. Communicate any organizational structure or management changes that will occur as a result of the outsourcing project and provide your team with information about the extended team and ensure that all employees understand and accept this change.
In addition, effective communication is paramount to a successful offshore project; For an effective client-vendor relationship, you need to constantly communicate and discuss your updates on projects, ideas and goals to ensure everyone is on the same page.
Since managing an overseas team of IT engineers is a particularly difficult task, it is worth considering bringing in a manager to take full responsibility for the team. The lead will be responsible for communicating with the entire team, providing necessary project instructions and guidance, and tracking the development process to ensure time-to-market for the product.
There are always obstacles and risks on the way to effective outsourcing. Despite the anxiety that may come with the potential risks associated with offshore software development, if managed intelligently, the benefits of outsourcing will undoubtedly outweigh the risks.
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KMS Solutions is committed to providing superior software products and services, and it was ranked #9 on Clutch’s 100 Fastest Growing B2B Vendors list with a growth rate of 260.35%.
With 1,600+ technology talent in its IT delivery centers spread across Vietnam and India, KMS Solutions offers a wide range of services from platform modernization, automation testing and digital platform and application development to data and analytics. Contact us to learn more about KMS outsourcing services.