June 20, 2023
There’s no end of horror stories about outsourcing projects gone wrong. Knowing the key points of failure will help you avoid the same pitfalls.
Have you heard the story about J.P. Morgan firing IBM as its IT outsourcing partner halfway through a $5 billion, seven-year deal? What about UK broadcaster BSkyB’s eye-watering $400 million settlement payout after it took its outsourcing partner EDS to court alleging “fraudulent misrepresentations?”
The carcasses of broken deals litter the outsourcing industry - and that’s just those that fell apart between reputable Fortune 500 companies.
We’ve heard firsthand tales of much worse. We’ve even been asked to clean up in the wake of some crazy scenarios - outsourcing companies holding code to ransom during disputes, going bust because they offered wafer-thin margins to get the deal, or even disappearing off the face of the planet just as the client’s go-live date looms.
The software outsourcing industry has really tidied up its game in recent years, but here’s the reality: around a quarter of outsourcing relationships fail within two years. Some explode spectacularly; others end in amicable separation. Either way, the results are unnecessary costs, delayed product roadmaps, and frustration for everyone involved.
Success or failure - three things can make all the difference
An in-depth 2016 study of 30 Dutch IT outsourcing projects gives us very useful insights into the factors that determine early success or failure in outsourcing projects.
Success, it turns out, boils down to three things - working according to the transition plan agreed upon between an outsourcing partner and its client, the ability of the outsourcing partner to manage demand from its clients, and the effectiveness of communication within the outsourcing partner (not between the partner and its client).
It suggests that whether a software outsourcing project fails or succeeds is heavily dependent on the competence, capabilities, and management processes possessed by the outsourcing partner. That’s why Accelerance has spent so much time doing due diligence on 8,000 software outsourcing firms globally, choosing to work only with the top 1% that meet our strict criteria.
Here are 10 other reasons software outsourcing projects can go off the rails - and ways to avoid that happening.
- Poor Communication: Inadequate or ineffective communication between the client and the outsourcing vendor can lead to misunderstandings, delays, and, ultimately, project failure. Communication gaps can arise due to language barriers, cultural differences, or lack of a well-defined communication process.
Solution: Establish communication workflows with key accountable individuals before the project kicks off. Ask past clients about the partner’s communication skills. - Unclear Requirements: Insufficient or ambiguous project requirements can significantly hinder the progress of an outsourcing project. When the client's expectations are not clearly defined, it can result in misunderstandings, scope creep, and frequent changes, leading to delays, cost overruns, and unsatisfactory outcomes.
Solution: Thoroughly define your requirements before you approach a software outsourcing partner and ensure they are well documented, including in the contract. - Lack of Project Management: Inadequate project management practices can contribute to project failure. If there is a lack of proper planning, monitoring, and control, it becomes challenging to track progress, manage risks, and ensure timely delivery. The absence of a dedicated project manager or weak project governance can exacerbate these issues.
Solution: Invest in your own in-house project management capability and only work with a partner that has the same capability in place. - Quality Issues: Poor quality deliverables can arise due to a lack of robust quality assurance processes, inadequate testing, or substandard development practices. When the outsourced team fails to adhere to quality standards or doesn't have the necessary expertise, it can result in software that is riddled with bugs, performance issues, and security vulnerabilities.
Solution: Budget for sufficient quality assurance (QA) to be carried out on an ongoing basis and escalate issues relating to poor quality work so they can be quickly addressed. - Cultural and Time Zone Differences: Working across different cultures and time zones can present challenges in terms of collaboration, coordination, and alignment of work. Misaligned work hours, holidays, and cultural disparities can impact communication, decision-making, and responsiveness, leading to delays and reduced productivity.
Solution: Get to know your partner’s team - visit them if possible and mutually agree on a mode of working that suits everyone concerned. Big time zone differences (e.g., US-Asia) will require flexibility on both sides in terms of scheduling meetings. - Unrealistic Expectations: Setting unrealistic expectations regarding project timelines, budget, or scope can set the project up for failure. If the outsourcing vendor agrees to unrealistic demands without proper assessment or negotiation, it can result in compromised quality, missed deadlines, and budget overruns.
Solution: Agree upfront what realistic outcomes are and establish measurable KPIs to monitor progress towards them. If a partner is struggling to deliver, renegotiate these. - Lack of Vendor Evaluation: Choosing the wrong outsourcing vendor without conducting a thorough evaluation can lead to project failure. Insufficient assessment of the vendor's capabilities, experience, past performance, and technical expertise can result in inadequate skill sets, unreliable resources, and subpar project outcomes.
Solution: Do adequate due diligence upfront and work with an advisor like Accelerance that has a tried and tested approach to vetting and choosing outsourcing partners. - Contractual Issues: Poorly defined or ambiguous contracts can cause project failures. Contracts lacking clear deliverables, milestones, payment terms, and dispute resolution mechanisms can lead to disagreements, legal disputes, and project termination.
Solution: Seek legal advice in the process of drafting outsourcing contracts. - Intellectual Property Concerns: Inadequate protection of intellectual property rights can pose significant risks in outsourcing projects. If the vendor does not have appropriate measures in place to safeguard confidential information or if the legal agreements are not robust enough, it can result in unauthorized use, leakage, or misuse of intellectual property.
Solution: Scope out the software outsourcing partners' data security and privacy protocols as well as the relevant laws that apply in the partner’s home country where your data may be hosted. - Lack of Alignment with Business Goals: If the outsourced project does not align with the client's overall business goals or strategic objectives, it can lead to a mismatch in expectations, lack of commitment, and ultimately project failure.
Solution: Be realistic about what you can achieve as a business, and make sure that your outsourcing partner can sustainably do their job to help you get there.
A successful outsourcing project requires proactive management, effective collaboration, regular monitoring, and clear communication between the client and the outsourcing vendor. But it starts with choosing the right partner.
Download our guide Due Diligence In A Disrupted World, or get in touch with our team to ensure your software outsourcing initiatives result in success.
