Mistakes Companies Do When Outsourcing

June 15, 2018 - 25 minutes read

Choosing an outsourcing partner is not an easy task, and companies new to the process tend to make the same mistakes. While these do go away with experience, we feel it’s better to stay way from reinventing the wheel. So we’ve put together a primer on what (not) to do when kicking off a new outsourcing partnership. Let’s take a look:

There are 10 big mistakes we’ve decided to focus on. Surely, there are others, but if these are avoided, then everything should be fine. Ish. Here is our top ten:

  1. Neglect the importance of cultural differences
  2. Alignment of financial risks
  3. Clear communication flow
  4. Believing that an outsourced team comes fully prepared
  5. Clear targets and SLAs
  6. Exit strategy
  7. Value of human interaction
  8. Focus on a transition period
  9. Slow on payments
  10. Outsourcing too much or not enough

 

1. Neglect the importance of cultural differences

 

Those who work or live around people from other cultures understand the importance of learning about the differences that surround them. What is often neglected, however, is the equal importance of knowing one’s own culture, values, and beliefs in order to relate more effectively across cultural lines.

Institutional culture is loosely understood to be the shared assumptions, meanings, beliefs, understandings and ideas held within an organization, school or team – with a focus on values and judgements, rather than procedures and practices.

Awareness of our own culture is important, because it can keep us from projecting our values onto others. Projection, in this sense, means the tendency to think other people are doing something for the same reasons we would. This can happen when we are unaware of the values that drive us and unable to distinguish them from those held by other cultures.

So if knowing one’s own culture is not automatic, how can we achieve this knowledge? The answer lies in exposure and observation. First, be around other cultures. The next step is impossible without the opportunity to interact with those who are different from you. Second, when around people from different cultures, watch for three things: moments of tension, misunderstanding, and points of conflict.

When one of these happens, don’t panic. Observe yourself and your culture. What did you do just before the tension, misunderstanding, or upset feelings arose? That act is part of your culture and was probably a factor in the moment’s dynamic. What you did was not necessarily wrong, but be aware it grew out of your culturally conditioned values and behaviors.

 

2. Alignment of financial risks

 

Outsourcing creates risks. The main risk is the financial risk of the vendor – mainly in fixed price engagements, caused by wrong estimations made by the vendor or unexpected events. Many organizations prefer to leave all risk with the vendor.
Problems with these vendors may delay access to revenue or, in the worst cases, result in lost revenue for your organization. It’s important to identify and segment these types of vendors to design the most appropriate diligence and oversight activities, and to also integrate with your operational risk planning as it relates to contingencies.

Rather than building alignment around systems or attempting to bolt disparate functions together, a fresh approach is emerging. The starting point is a top-down vision for the functions based on what capabilities are required now and in the future, what outcomes it should achieve and what process and organisational steps would enable it to get there.
Risk and Finance functions have different views on what is required to achieve the ideal future state, with 40% of finance appearing to be more willing to make more significant organisational changes than risk respondents. Future models vary from optimising existing structures, to considering shared services/ utility models and joint finance and risk teams.
The more obvious areas to enable alignment such as controls, process documentation and operating model modification have so far made minimal progress. It is unlikely that we’ll ever see completely integrated Risk and Finance functions: they have genuine differences in objectives and views of the world.

Best solution: Create a hybrid pricing plan to share the financial risks. For example: instead of a fixed-price model, use hybrid pricing with lower rates, if the vendor exceeds the pre-defined budget. This way, the vendor will be incentivized to meet the budget (assuming the over-budget rates are not profitable), and you will have the incentive to meet the budget as well.

 

3. Clear communication flow

 

Not communicating, or not communicating clearly enough is the key problem facing outsourcing relationships today. A study of 305 buyers and providers in North America, Europe, Asia and India, by the Outsourcing Center, concluded that 25% of the reasons for outsourced project failures are due to poor communication.

Any communication is not successful unless it is interactive. A one way communication will never lead to constructive output. It is more important to have a interactive communication when the medium of communication is via email.

Every message or email needs to be responded and within time. It is often observed that if a person sends an email requesting for some information, it is not responded till the information is available. This keeps the sender anticipating the situation and at times may derive a wrong conclusion.

Hence, it is necessary to respond even if the information is not available and may need to more time to gather the details. The receiver will appreciate the fast and timely response and you will be perceived as more dependable.
It’s hard to meet with providers personally if they are based offshore. However, they must be at least willing to conduct conference calls with you to interact and hold open discussions.Doing so will enable you to gauge the communication skills, attitudes, and work culture of the people you’ll be working with. Be wary of providers who only prefer to communicate via email and are unwilling to actually talk.

 

4. Believing that an outsourced team comes fully prepared

 

Lower operational and labor costs are among the primary reasons why companies choose to outsource. When properly executed it has a defining impact on a company’s revenue recognition and can deliver significant savings

How can you prepare for outsourcing a software project to ensure effective communication and quality code?
Let’s assume you’ve found a good software house, providing you with a seasoned team. They can start quickly, build a robust, well-engineered system and make it operational very fast by adding features with impressive speed.

The hard truth is that it doesn’t matter how fast you’re going if you’re on the wrong highway. Many companies focus on speed so much that they ultimately find themselves astray. Even an all-star team with top-notch technical skills won’t guarantee success. They need to work alongside someone who will make sure that the complex mechanism being built won’t be just a mere example of proper engineering, but will also solve real-life problems. A hired team will usually have a difficult time identifying the real pains of your company and finding adequate remedies. They lack the context and connections to the right people at your company.

The best solution to this problem is to extend the team by adding someone from within who already has both the context of the business and the connections. That is the role of a product owner.

 

5. Clear targets and SLAs

 

A service-level agreement (SLA) defines the level of service you expect from a vendor, laying out the metrics by which service is measured, as well as remedies or penalties should agreed-on service levels not be achieved. It is a critical component of any technology vendor contract.

Usually, SLAs are between companies and external suppliers, but they may also be between two departments within a company.

Ideally, SLAs should be aligned to the technology or business objectives of the engagement. Misalignment can have a negative impact on deal pricing, quality of service delivery, and customer experience.

However, SLAs aren’t used as frequently as you’d think. In part, because it takes time and resources to create, then monitor and manage them.

For an SLA to be useful it needs a lot of up front work, requiring service knowledge (what’s realistic – what’s not) and access to site-specific information (baselines, trends etc.)

IT departments need to be able to measure their own response times effectively in order to provide the best possible service. It isn’t as easy as it sounds, either. Measuring SLAs gets complicated quickly as slow-responding customers and third party escalations cause response times to look far worse than they may actually be.

Unfortunately, many measurement and reporting systems can’t accommodate exceptions like these, so the service desk team ends up looking far worse than they are actually performing.

 

6. Exit strategy

 

No matter how successful your business venture may be, the time will come when you will no longer want to continue its operation, or may be forced to end due to changing economic conditions. When this occurs, you’ll need a way to wind up your business activities in the most efficient manner possible. An exit strategy is a way to turn you operation over to another entity or to cease operating altogether.

In a lifestyle company, the intent of the owner is to make as much money as possible for herself without planning for future expansion. All profits go directly into her pocket instead of being put back into the business to help it grow, and expenses are kept to the bare minimum.

These businesses tend to be private and small in scale, and the owner dissolves the operation when it’s no longer profitable or the owner wants to move on to a new venture. A common example of a lifestyle company is a business consulting firm.
The most ideal exit strategy for a business, from the point of view of an investor perhaps is simply to sell off the whole project. A takeover can have a good return on investment, can occur within a comparatively short span of time and involves less confusion. If the organization has been successful and prosperous and the marketplace is right for their product/service then selling an equity spot can provide a great yield.

If a firm does not want to sell off wholly, then they could recapitalize as an exit strategy rather. This would permit them to pay off to their existing set of investors, thus allowing them to get out from their investment, but would allow the organization to remain under its present ownership and thus carry on to function.

If you need an investment from outside, then you need to have an exit strategy in place. Investors do not make cash on your healthy firm unless it sells wholly or even a part of it.

Investors will shy off from ventures that don’t have an exit strategy as this may be an indicator that the entrepreneur is keener in constructing, building and running a lifestyle enterprise instead of building a possible high-growth venture.

 

7. Value of human interaction

 

When managing your business, you’re always looking for better ways to foster solid relationships with clients. Personal connection is the key – you want your customers to see your human side rather than think of your company as a nameless, faceless entity.

The problem is that with a busy schedule, it can be difficult to stay connected with everyone, and it’s hard to really give a personal touch simply by placing the periodic phone call or email.

Mastering the art of paying attention may sound easy but in our culture of multi-tasking, actually sitting and listening to someone without a phone or tablet is considered almost unnatural.

Society is changing where people are interacting less and less. For example, the LinkedIn invitations and encouragement to like and follow on other platforms presents us with a world where we are continually collecting numbers, for the sake of collecting numbers.

Putting technology to one side, the human dimension will always prevail, purely because we understand more when a person connects, delivers, interacts and raises a point of view. The point where things change is when others understand what you believe in, this is when you stand out from the crowd in your marketplace. The old world was once about being popular by fitting in, the new world provides opportunity to stand out.

The sad reality, though, is that traveling to meet with clients is often an implausible idea. It’s an enormous drain on time and money – meeting with one client in person might sap the resources you need to meet with five others over the phone. It’s a very difficult balancing act for companies, and some are really struggling to keep up.

Perhaps the middle ground is video conferencing.

Recent innovations have improved the technology, the news source explained – problems like latency and jittery web connections have become a thing of the past, making video chats more viable now than ever.

It’s not a perfect solution. At the end of the day, your clients will still prefer true in-person interaction, and it’s hard to blame them. The key is to find a compromise – either meet with more clients in person, or find ways to foster relationships more cheaply and efficiently without losing the personal touch.

 

8. Focus on a transition period

 

Transitions are a normal part of any business. Whether it’s a leadership change, a shift in strategy or even something more dramatic, such as the sale of the company, things change, and during these times, employees, whether remote or in-house, can often disconnect from their day-to-day responsibilities. It can be hard to stay focused when so much is up in the air.
But just because the business is going under a transition does not mean that the world stops spinning. There are things that need to be done every day to ensure the continued success of the company, and if employees are disengaged, this can be very difficult to do.

Understand that in periods of change, your team will feel starved for information. And, since no one enjoys working blind, it isn’t hard to see how this can cause a steep drop-off in the effectiveness of your employees during a time when they need to be at their best.

The solution? Talk to them. More than you think is necessary.

But first, a caveat:
Communication is key, but keep in mind that there is a balance which exists at any company. Over-communicating does not mean over-managing. You hired your employees because you trust them to be capable of doing good work on their own. Don’t double-back on this right when they have a chance to prove it to you.

Still, it’s crucial that you’re transparent.

 

9. Slow on payments

 

No matter what type of business you operate, you’re bound to experience the slow payments. In fact, a survey released by PaySimple a few years ago found that 80% of small businesses struggle with receiving payments past their due dates.
A little positive reinforcement might help you get paid on time. Consider offering clients a discount of 1 or 2% if you receive their payment a certain number of days before the invoice due date.

Unfortunately, not all customers will be motivated at the prospect of saving money. They might pay up on time, however, if paying late comes at a cost. Even an amount as small as 1.5% might grab their attention and get that check in the mail.

There are many mistakes to avoid when invoicing customers. Invoicing tends to be your least favorite paperwork to do as a business owner or freelancer since it’s time consuming and tedious. But, it’s arguably your most important. After all, if you don’t invoice your customers, you can’t get compensated for your goods or services.

Rules of thumb can be a good approximate guideline for invoicing decisions, and there are tons of money rules that aim to get your finances on track. While everyone’s situation is different, these serve as a good starting point.

Whilst all businesses send their invoices at different intervals depending on their product or service, the general rule of thumb is that you should invoice as quickly as possible. It minimises risks of making mistakes with the detail of the invoice and ensures that your payment terms are activated and start ticking immediately.

 

10. Outsourcing too much or not enough

 

Everyone knows that outsourcing software development offshore can greatly decrease software development costs. At the same time, everyone knows that these lower rates don’t necessarily translate into better price-quality ratio. However, it’s beyond doubt that there are a lot skilled developers in countries with lower living costs. So how to find them? How much should you pay to ensure quality software development services and still minimize software development costs?
IT outsourcing has become increasingly integral to building and operating the enterprise IT environment, but many IT services customers remain frustrated with their results.

Part of the problem may be a lack of understanding by the outsourcing customer about their actual level of maturity in IT outsourcing. Meanwhile, their more mature outsourcing providers can do little to help them overcome their internal challenges, whether related to relationships, processes, contracts, or services.
For every company, the right time to outsource is different. Some businesses have in-house staff to handle daily activities, but may need outside help to undertake new projects that don’t warrant another full-time employee. When you and your current employees are unable to manage the day-to-day business of your company and build the business satisfactorily, it may be time to consider outsourcing.

For startups, outsourcing is a great way to save money by avoiding the costs of hiring employees that may require work space and benefits.

Temp agency workers may also be a solution your company could benefit from at a certain point.
For bigger businesses, personnel issues can take a lot of time, and involve complicated procedures such as compensation, benefits, payroll, policies, and training. Most HR processes are highly detailed and include legal aspects, and therefore better off left to the trained professionals.