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.
However, there are numerous outsourcing risks and challenges that businesses often overlook.
The problem is that outsourcing is often handled incorrectly, leading to offshoring mistakes and outsourcing pitfalls.
In today’s article, we’re going to go over a few of the best examples of outsourcing failures that you can learn from.
We’ll also delve into some outsourcing lessons learned and give you tips on how you can avoid falling victim to similar failures, ensuring better outsourcing governance.
7 of The Biggest Modern Outsourcing Failures
IBM and Indiana
One of our first failure examples, which serves as a cautionary tale about the hidden costs of outsourcing, 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 as part of its outsourcing strategy.
They were hoping to transform it, reduce costs, fix violations, and introduce a new service delivery model. The goal of the operation, which was worth roughly $1.6 billion, was to allow the system’s users to access and make claims online or over the phone.
Despite having the best intentions and following what they believed were outsourcing best practices, the outsourced final product was chalked full of errors.
Applicants placed frequent claims of long wait times, highlighting outsourcing quality issues. The vendor company needed extra support and, unfortunately, did not get it, leading to vendor management mistakes.
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, in a bid to outsource service level agreements (SLAs), 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, aiming to improve information flow and performance.
This project was seen as a way to improve staff flexibility through outsourcing, but as we’ll see, it faced its own set of outsourcing challenges.
This project, however, was one of many to fall victim to outsourcing pitfalls and challenges. 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, highlighting the outsourcing quality issues.
Also, the information was not being updated correctly. This led to confusion among the staff as to how to use the new system, emphasizing the communication barriers in outsourcing.
IBM and Texas
The state of Texas, in its bid to improve staff flexibility and reduce costs, was looking to consolidate its data center operations. To complete the task, they chose IBM. 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, a significant outsourcing strategy.
However, 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 outsourcing service level agreements (SLAs) required.
Through this outsourcing misstep, 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, with its history of outsourcing failures, 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, a clear indication of the hidden costs of outsourcing.
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, showcasing the outsourcing drawbacks.
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 outsourcing pitfall ultimately led to thousands of passengers stuck on the ground and numerous flights being canceled.
Queensland Health and IBM
The health department of Queensland, in an attempt to improve its focus through technology, 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, a clear case of outsourcing due diligence gone wrong.
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 at $1.2 billion and never even worked properly, marking another significant outsourcing failure.
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 missteps, they did disclose how terrible the situation was, shedding light on the risks of outsourcing.
The bank system required updates and had one planned for June of 2012. It did not go well. This outsourcing pitfall left millions of customers with no access to their hard-earned money, emphasizing the outsourcing challenges that can arise.
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, a clear case of outsourcing drawbacks.
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, leading to offshoring mistakes.
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, to avoid outsourcing pitfalls.
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, ensuring proper outsourcing governance.
This ensures that you know what you’re getting and that your contractor knows what they are expected to provide, minimizing the chances of outsourcing missteps.
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, aiming to improve staff flexibility.
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, leading to outsourcing quality issues.
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, avoiding the hidden costs of outsourcing.
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, ensuring you don’t fall victim to common outsourcing pitfalls.
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 outsourcing 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, highlighting the potential outsourcing pitfalls related to technical expertise.
Clients sometimes withhold information because the information seems apparent or obvious – this is one of the biggest outsourcing 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, leading to mismatching expectations.
Don’t be afraid to share details with your teams – even those that you feel are blatantly obvious or simply common sense. Communication barriers in outsourcing can be a significant hindrance.
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, ensuring a better outsourcing strategy and governance.
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, ensuring you avoid offshoring mistakes.
Outsourcing most definitely serves as a way to cut costs and lower expenses. 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, focusing on outsourcing ROI.
This being said, it’s important to focus on value over price, avoiding the hidden costs of outsourcing.
Use 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, ensuring proper outsourcing governance.
Software development agreements that are drafted properly can be used as roadmaps for developers to follow, emphasizing the importance of clear service level agreements (SLAs).
They also safeguard you from the effect of losses should things go wrong, providing a layer of risk management.
FAQs about outsourcing failures
Why do companies even bother with outsourcing if there are so many failures?
Well, here’s the thing. Outsourcing can be highly advantageous when done right. It offers cost savings, access to global talent, and flexibility. But like anything, there’s a learning curve. Companies hear about the benefits, dive in, and sometimes, they trip up. It’s all about the approach, strategy, and, of course, learning from outsourcing mistakes.
What’s the biggest reason for outsourcing failures?
Honestly? Mismatching expectations. Companies often think they’ve communicated their needs clearly, but there’s a gap. It’s like expecting a steak and getting a burger. Both are good, but if you’re craving steak, that burger won’t cut it. Proper communication and setting clear service level agreements can make all the difference.
How much do these failures typically cost companies?
Oh boy, this varies. But in some extreme cases, we’re talking millions or even billions. It’s not just about the direct costs. Think about the hidden costs of outsourcing, like lost business, reputation damage, and the time spent fixing errors. It’s a domino effect, and the costs can pile up if not managed right.
Can you pinpoint a common trait among companies that face these failures?
Lack of due diligence. Many companies jump into outsourcing without doing their homework. They don’t research the vendor, don’t set clear outsourcing strategies, or ignore cultural differences. It’s like going on a road trip without a map. You’re bound to get lost.
Is poor communication really that big of a deal?
Absolutely! Communication barriers in outsourcing are like cracks in a foundation. Small at first, but they can lead to significant issues down the line. If both parties aren’t on the same page, the project can derail quickly. It’s essential to establish clear communication channels and check-ins.
How can companies avoid these pitfalls?
It’s all about preparation and understanding. Know what you want, set clear goals, and choose a vendor that aligns with your needs. And remember, it’s a partnership. Viewing it as a mere transaction is one of the biggest outsourcing pitfalls. Mutual respect and understanding go a long way.
Do companies learn from these mistakes or repeat them?
Most do learn, but some, unfortunately, fall into the same traps. It’s human nature, I guess. We sometimes need a few hard knocks to truly get the lesson. But with the right approach and learning from outsourcing lessons learned, companies can navigate the outsourcing world more effectively.
Are there industries more prone to outsourcing failures?
Not necessarily. While IT and software development see a lot of buzz around outsourcing failures, any industry can face challenges if they don’t approach outsourcing correctly. It’s less about the industry and more about the approach and outsourcing governance.
What role does culture play in these failures?
Huge! Cultural differences in outsourcing can lead to misunderstandings, different work ethics, and communication breakdowns. It’s essential to understand and respect the vendor’s culture and find common ground. It’s like blending two recipes. Done right, it’s delicious. Done wrong, it’s a mess.
Are there any silver linings to these failures?
Definitely. Failures are learning opportunities. They offer insights into what went wrong and how to improve. Many companies come out stronger after an outsourcing misstep, having learned valuable lessons. It’s all about perspective and the willingness to adapt and grow.
When you’re diving into the digital world, outsourcing failures can feel like a splash of cold water. It’s like picking the perfect color palette for a website, only to realize it doesn’t resonate with the audience. Ouch!
- Think of it this way: outsourcing is a bit like choosing the right typography for your site.
- You want it to be efficient, readable, and fit the brand.
- But sometimes, even with the best intentions, things don’t align.
Mismatching expectations, communication slip-ups, or not understanding the cultural nuances can throw a wrench in the works. But hey, every designer knows that sometimes you’ve got to tweak the layout a few times before it’s just right.
If you enjoyed reading this article on outsourcing failures, you should check out this one about nearshoring.