Why Offshore Outsourcing Fails?

July 5, 2008

Offshore outsourcing projects can fail for various reasons. In this blog we will explore some of the common reasons for the offshore outsource failure and explore various ways to avoid it.

Unclear Scope of Project
Companies should specify the project scope and goals clearly to the offshore vendor. Though it is a simple step, often organizations fail to articulate it to the offshore vendor. Without properly defining the goals and making sure the offshore vendor understands it, your offshore project will fail. Now a days companies are putting the goals like reducing cost, increased operational efficiency, increased customer sanctification, etc in the outsource contract and bind the offshore vendor to the goals.

Cross-Cultural Differences
People from different cultures have different ways of viewing the same problem and often this is a cause for misunderstanding in offshore project. In fact, majority of businesses offshore IT and BPO projects quote cultural differences to be the one among the primary problems they faced in their projects. Often the company is unable to understand the work philosophy of the offshore service provider and this leads to inability to work together in harmony. To address the cultural issues you must:

  • Study and understand it during the offshore vendor evaluation process and make sure that it fits with their own corporate culture.
  • Visit the offshore vendor’s location and meet their team in their corporate setup to see how they work
  • Execute a prototype project with the offshore team to understand how they collaborate with your team in solving and escalating the issues.

Offshore Outsource Failure

Communication Problems
Offshore service providers are located in a different time zone from the client may cause problems in communicating in real time. In addition, there is often a chance of misunderstanding e-mails or understanding messages but slow responses from offshore providers. This will slow-down the project and may ultimately reduce the productivity of the team members. Communication issues are the chief reason for the failure of many offshore projects. In fact, research studies show that 10% of offshore-outsourced projects are delayed because of communication problems.

Cost Vs. Value
Most of the companies specify, “Reducing Cost” is the primary motivation for their offshore outsourcing decision. Cost should not be the only motivation to offshore projects. With cost being the only reason for outsourcing, it is not clear if the service provider will indeed be able to justify to the project. Instead you should identify the value you are getting from the offshore outsource projects. By focusing on the value like increased customer satisfaction, improved operational efficiency you can succeed in your offshore outsourcing projects. In addition, with the escalating cost of IT and BPO salaries in countries like India you should not consider cost as the only criteria for your offshore decision. Often outsourcing to the lowest bidder may not be the right choice and you may have to spend more money in the future to correct the inferior quality of work supplied by the service provider.

Offshore outsourcing Cost
In any, outsource project you should always consider Total Cost Management (TCM) in the beginning stage of the offshore outsourcing initiative. The TCM allows you to focus on all aspects of offshore outsourcing cost like offshore vendor selection, onshore-offshore project management, process integration, dispute resolutions, travel, legal, etc. There are so many hidden cost you may have to incur in your outsource projects. So do not consider only the cost you are paying to the offshore vendor.

Retention of Key Personnel
Frequent turnover of key personnel in the offshore vendor’s team leads to increase in time and effort required to transfer knowledge and train new employees. This is specifically true in all most all the offshore providers based in India where the employee retention rate is less than 90%. You should plan this in advance, discuss with your offshore vendor and put it in your outsource contract to legally bind the offshore vendor to be responsible for retention of key employees and have plans for smooth knowledge transfer in case the key employees leave the outsource firm.

Noncompliance with Government Regulations
In any outsourcing initiative, government rules and laws of both countries need to be kept in mind. Specifically it is important for you to understand Statement on Auditing Standards (SAS-70), US Patriot Act and the Sarbanes-Oxley Act and identify the feasibility of outsourcing to offshore locations. Some types of work cannot be outsourced to offshore locations at all due to legal restrictions. You need to do proper due diligence before you consider offshore locations

Early Warnings
Any time your work with outside vendors in a project, early problems and issues will occur, offshore vendors are no different. Without understanding and addressing to fix the issues, both you and the offshore vendor may find it difficult and discourage to work through them and this may finally lead to the failure of the offshore project. It should be your responsibility to make sure the issues are escalated properly both by your team and the team in offshore locations.

Overemphasis On Process
Several offshore vendors haveCMM level 5 certifications and they may deliver your projects with highest quality with full documentation. Nevertheless, good process and quality control alone cannot guarantee success for you. Hiring offshore vendor without proper domain expertise, practical working knowledge, and in depth knowledge about industry best practices you cannot expect success from your offshore projects.

While offshore outsourcing is a powerful way to reduce cost, improve quality, increase efficiency, and refocus on core business, offshore outsourcing initiatives often fall short of management’s expectations due to the reasons mentioned above. However, this does not mean you shouldn’t pursue offshore outsourcing, with proper early planning you can have greater success in your offshore outsourcing projects.


4 Responses to “Why Offshore Outsourcing Fails?”

  1. CSFs for an offsite software development project | Outsource Portfolio on December 28th, 2008 3:44 pm

    […] an offshore project fails, its very easy to lay all the blame on the offsite development team. Often, offshore success is […]

  2. Managing Global Software Teams | Outsource Portfolio on June 12th, 2009 6:39 pm

    […] benefits to companies but if not managed properly creates several problems and ultimately the outsource initiative fails to bring the benefits to the organization. Though there are several problems occur in managing […]

  3. juliaap01 on May 5th, 2010 12:46 am

    Offshore outsourcing fails for several reasons. The main reason is clients sending the work without understanding the value they’ll get out of the engagements. Cost saving alone can’t be the reason to offshore.

  4. IT Outsourcing on September 6th, 2010 5:05 am

    Cultural barrier, trust and misunderstanding might be some of the causes why offshore fails. But, this dilemma can be resolved if the client had perfectly delivered all requirements and goals that his/her organization had set.

    In choosing the right offshore outsourcing solution provider, intensive screening and legal agreements is a must to reduce risk and future failures.

    The concept of Offshore Outsourcing is not a complete end-to-end solution in one’s company. It may work in some companies, and others, not. It may vary in the organization’s business model.

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