Why You Hear About IT Outsourcing Failures and Why It Can Work for You
10 February 2021
When used in an appropriate manner and with a backbone of strategic planning, outsourcing can be highly advantageous. It can help your business improve its focus, promote company growth, improve staff flexibility, provide risk management, and lower expenses among many other things.
The problem is what outsourcing is often handled incorrectly. In today’s article, we’re going to go over a few of the best examples of outsourcing failures that you can learn from and give you tips on how you can avoid falling victim to similar failures.
7 of The Biggest Modern Outsourcing Failures
IBM and Indiana
One of our first failure examples is the one that went down between the state of Indiana and IBM. Indiana was looking to outsource the modernization of its welfare processing system.
They were hoping to transform it, reduce costs, fix violations, and introduce a new service delivery model. The goal of the operation was to allow the system’s users to access and make claims online or over the phone – it was worth roughly $1.6 billion.
Despite having the best intentions, the outsourced final product was chalked full of errors. Applicants placed frequent claims of long wait times. The vendor company needed extra support and, unfortunately, did not get it.
How big of a failure was this? Well, if you do a Google search, you’ll end up with news like this:
Epic and Cambridge University NHS Foundation Trust
Epic was hired by the Cambridge University NHS Foundation Trust to develop an online patient record system. The system was supposed to give staff access to patient records via portable, hand-held devices such as iPads.
The goal was to improve information flow and performance.
This project, however, was one of many to fall victim to outsourcing problems. After the launch of the system, performance dropped 20%. It was known for giving out inaccurate information, which upped the risk of patients not receiving the appropriate necessary care.
Also, the information was not being updated correctly. This led to confusion among the staff as to how to use the new system.
IBM and Texas
The state of Texas was looking to consolidate its data center operations. To complete the task, the chosen IBM and within the first two years of the project, IBM was tasked with consolidating data center operations for 27 state agencies. These agencies were to be divided into two main data centers.
Within the two years that passed, IBM managed to migrate only the agencies of five systems. To make matters worse, IBM was not performing the nightly backups that their signed contract required.
Through this outsourcing failure, Texas lost $863 million.
Cambridge University Hospital NHS Foundation Trust and Medical Software
In this case, the goal was to introduce a new way to record patient information. The UK’s NHS has a record of spending a staggering amount of taxpayers’ money on projects like this – all of which have failed.
The Cambridge hospital hired a US company to create a new system for them. This system was supposed to allow medical staff to access patient records on mobile devices such as iPads. The result of this decision, however, was a 20% drop in productivity.
The hospital was ill-prepared for how big of a challenge implementing a new system would be. The staff was confused and did not have adequate training to use the system, which is a common problem when introducing new systems to public institutions.
Navitaire and Virgin Airlines
The software, once completed, crashed twice within its first three months, and both times, it took the provider almost 24 hours to get the system back up and operating. This ultimately led to thousands of passengers stuck on the ground and numerous flights being canceled.
Queensland Health and IBM
The health department of Queensland hired IBM to develop an application for administering payroll. IBM estimated the cost to be roughly $6 million but soon after placing this estimate, realized that the job was going to be much more work than they had thought.
By year-end, IBM had adjusted its estimate to $27 million and, after dragging on for years, the project ended up costing 16,000% more than it was originally supposed to. In the end, it came in a $1.2 billion and never even worked properly.
IT Vendor and Royal Bank of Scotland
Although the Royal Bank of Scotland didn’t disclose the vendor that they worked with for what is, perhaps, one of their biggest outsourcing failures, they did disclose how terrible the situation was.
The bank system required updates and had one planned for June of 2012. It did not go well. This left millions of customers with no access to their hard-earned money.
Both commercial and non-commercial customers were unable to withdraw funds, perform transactions, or check their balances – and the worst part was that even the bank staff couldn’t do it for them. 30,000 social welfare clients did not receive their money as a result of their failed software update.
Most Common Reasons for Outsourcing Failures
Too Tight of Deadlines
Trying to complete projects with unrealistic deadlines can mean many areas are skipped over, which ultimately results in a low-quality finished product and a host of issues further down the line.
Sometimes there is no choice but to work within a tight deadline. If you can, however, you make sure to schedule adequate time for every project you outsource. Scheduling a bit of extra time is helpful, as well.
You and your contractor should be in agreement on the product that is to be delivered to you. Service level agreements, trouble-shooting solutions, and other variables should be discussed and confirmed before the project starts and before any contracts are signed.
This ensures that you know what you’re getting and that your contractor knows what they are expected to provide.
Lack of Technical Expertise
Software development is usually outsourced as a way for companies to avoid the expensive and often painstakingly stressful process of hiring employees.
This being said, some companies end up hiring teams that lack the technical know-how that their project requires. When this happens, there are tons of complications that can arise.
Only Considering Cost
Instead of choosing the lowest bidder, the one who offers the best upfront discount, or the one who offers savings on secondary projects, opt to go with the provider that will deliver you the best quality.
You’ll want to consider their previous accomplishments, check out their references, and research the team’s certifications, experience, and professionalism. If you don’t know how to do the necessary research to answer these questions, you can hire a consulting firm to help you make your choice.
Problems with Code Quality
It can be hard to determine whether your outsourcing team is adhering to the set quality standards while programming your software. This challenge is amplified when you’re working with a team that is a non-tech team that doesn’t have a lot of experience programming.
Clients sometimes withhold information because the information seems apparent or obvious – this is one of the biggest mistakes that lead to outsourcing failures. If the outsourcing company doesn’t fully understand its goals, the work will come out differently than you’re expecting.
Don’t be afraid to share details with your teams – even those that you feel are blatantly obvious or simply common sense.
Failing to View the Relationship as a Partnership
When you work with a service provider for the long term, they can become a valuable partner. If you view your provider in a way that isolates each task they perform for you, it makes it hard to create a strong relationship. Instead, you need to view your relationship as a partnership.
4 Ways to Avoid IT Outsourcing Failures
Determine Your Outsourcing Goals
It’s a good rule of thumb that if you don’t know where you’re going, you’ll never get there. Once you’ve decided to start an outsourcing venture, you’ll need to decide what parts of your project you want to delegate to other teams. Take some time to think over the skills you have and don’t have.
Outsourcing most definitely serves as a way to cut costs. However, this shouldn’t be the only or primary reason that you choose to hire an outsourced team for your projects. Outsourcing should never be approached as a cheap way to get rid of work – instead, it should be used to optimize your business.
This being said, it’s important to focus on value over price.
Utilize A Software Development Agreement
When it comes to doing anything for your business that requires the assistance of an outside party, you should always get the agreement in writing.
Software development agreements that are drafted properly can be used as roadmaps for developers to follow.
They also safeguard you from the effect of losses should things go wrong.
If you enjoyed reading this article on outsourcing failures, you should check out this one about nearshoring.