10 Hidden Costs of Outsourcing

by Scio Team | Apr 25, 2016 | Agile Methodology, Customer Experience, Nearshore, Product Development, Project Management, Successful Outsourcing

Outsourcing is a standard practice in the software development industry and it continues to experience steady growth, year after year. Among the common drivers cited are lowering costs of outsourcing, rapid acquisition of skilled resources,  and avoiding staff overhead for one-time projects that would result in layoffs after completion.

In other words – it is all about costs in one way or another, whether they are real expenses or lost opportunities because you could not bring together a new team for a project in time to achieve your market. But, when you have paid the invoices and implemented your new application, what is on your balance sheet? Did you really save the money you thought you would? Are there hidden costs that have drained all the benefits out of the engagement?

10 hidden costs of outsourcing you may not be considering (in no particular order):

#1 – Deciding that driving cost to the lowest level possible is your primary goal

Are you confused? If outsourcing is all about costs, how can it be that using lower costs as your primary reason for outsourcing would actually end up costing you more?

• The lowest cost vendor cannot also be the best equipped with the best resources, deep expertise, strong cultural fit, high reliability and excellent real-time communications in your language. Solving each of the issues mentioned has a cost to the vendor, during the contract period or before to find, train, and maintain the necessary resources. Pushing to the lowest possible costs will require trade-offs that you and your team will bear. You may be able to anticipate the cost of working with less experienced and less independent resources at a production level, but can you also judge the costs that could come when unexpected issues arise? Have you ever experienced a project without unexpected issues? Really?
• Often, when price is the primary driver, the service buyer decides to manage costs by requiring a fixed-price bid. The upside is the risk is placed on the outsourcing vendor. To mitigate their risks, the vendor will then require extensive documentation, a detailed waterfall-type project plan that leaves acceptance testing to the end of the project, and penalties or prolonged negotiation if changes are needed. Plus, to pad for risk, the vendor will actually increase their bid because they know that fixed-price engagements rarely finish on time and within budget. In addition, they may decide to use less experienced resources (lower cost) overseen by senior resources (high cost, but with little time to look deeply into design and coding issues), So, in the end, instead of gaining assurance the project will end on time with an expected cost, the buyer has more cost for upfront specifications, more risk the final application will meet specifications as written but fail to achieve its goals, and much less oversight and flexibility once the project begins. The vendor will manage to the contract requirements and not the business goals their client decided were important internally. The vendor takes the entire responsibility for cost control, quality assurance, and management. In most cases, this means if their timeline or costs get out of line, quality control and communication between the development team and the client team will suffer.
• If your primary driver is cost, you will probably be pushed to offshore resources that are very low cost but have difficulty making their teams available in real time to collaborate with your team, lack good communication skills in your language and little in common with your culture. In these cases, you will have to  do what you can to mitigate the fact that 28% of projects fail because of communication issues and 16% fail because of poor cultural matches.

#2 – The cost of selecting a vendor

Few buyers have a budget for selecting an outsourcing vendor and if they do, they rarely allow for the work that would really contribute to successful projects and relationships.

• Up-front requirements and bidding document preparation. In order to assure all vendors provide comparable bids, considerable time needs to be spent, by your in-house team specifying both the project and the vendor requirements. If a number of non-compliant or non-comparable bids are returned, what is the cost of going back to the vendor with more details and allowing other vendors to update their bids with what is perhaps new information or different assumptions for them? The hourly cost of internal staff, consultants or both add up but are often not counted in the final project analysis.
• Time and opportunity costs. Depending on the value of the project, the vendor selection process can take 4 months to a year. This includes selecting the vendor pool, preparing documents, sending, receiving and reviewing documents, negotiating and preparing contracts, demonstrations, travel to selected vendors, and more.
• Travel costs. To properly evaluate final round vendors for a strategic project, it is imperative that is spent at the data center or workplace of the vendor team to assure that practices and conditions match expectations. The greater the distance, the greater the actual costs and the time required for travel. Typical round-trip times to India and Asian locations are two to three weeks depending on the goals and number of vendors to be visited.

#3 Project initiation

The costs of project initiation have an inverse relationship with project risk. The less you spend on project initiation, bringing the teams together, assessing process and methodology, assuring communication, respect, and team collaboration is strong, and that there is a shared understanding of project goals, the greater the risk that the project will fail. But even knowing this simple fact, most vendors and buyers will decide to cut the project initiation phase in favor of “getting to productive coding” quickly. The downside of this choice is a longer time to reach full productivity, more risk of rework to meet expectations, and increased costs for project oversight and team management.

#4 Staff transition

When a new outsourcing team is started on a project, internal staff is often given new roles as part of the initiative. They could be tasked as product owners, to oversee user story development, to run internal quality and acceptance testing, or to assure that questions that cannot be handled directly by the internal product team are handled quickly by the right subject matter experts. If the outsourced team cannot work during the standard workday of the client team, the daily schedules of the internal team may have to be shifted drastically. Their existing roles and responsibilities will need to be handed off or reprioritized to allow them the time to handle their new work and the task switching that invariably occurs. The costs of transition (and retraining in the case of those that may be new to methodologies like agile) are rarely considered in project costs but in reality, if they are not allowed for, the resulting issues can be very costly.

#5 Infrastructure & operations realignment

Inevitably,  a new outsourcing project will incur changes in local infrastructure and software development operations. The changes may include new virtual environments, changes to internal processes for continuous integration, automated testing, security and authentication, incremental releases to production or many other issues. Again, part of this falls to poorly planned project initiation, but even with upfront time focused on team cohesion and user stories, the requirements for infrastructure and operations are often overlooked. When they are, count on additional costs because of lowered productivity as issues are ironed out and everyone gets on the same page.

#6 Contract & relationship management

Throughout the project, the buyer/client-side project manager needs to assure that incremental payments match the effort spent and the deliverables received as well as the necessary progress toward completion. Not spending enough time on this aspect of the project can result in very tough negotiations if the project goes off track or unexpected issues arise. In addition, selecting the right project model, whether it is fixed price, time and materials, dedicated team or another variation, has a big impact on this area. A lack of trust and understanding or lack of partner-level communication during the project can make a project very hard to manage to a successful conclusion and very costly when issues must be resolved.

#7 Cultural & organizational alignment

It may seem like a “soft” issue, but if the outsourced team and vendor cannot navigate your cultural norms and organizational environment it is likely to make project management very difficult. Bringing a team from a hierarchical culture into an organization with a flat structure can be very disorienting to team members with different expectations for interaction and responsibility. Merging a small team into an enterprise system with many silos and layers of control can be very difficult. The new team in either case will require additional time to reach full productivity and oversight to ensure they can fully participate as expected – and has a real cost.

#8 Intermediaries

To mitigate many of the issues in this list, outsourcing vendors and buyers often impose intermediaries on projects as an extra layer of “assurance.” This imposes two extra layers of cost on a project: The direct cost of the extra labor required and the indirect cost from the risk incurred when developers, product owners and subject matter experts do not regularly engage in project discussions directly. Every time an intermediary becomes involved, there is a loss of fidelity and clarity. In the end, instead of assuring better communication, the sides are pulled into a “blame-game” when issues are not fully explored or questions are “translated, collated and summarized.”

#9 Technologies

The selection of technologies for a new project can have significant impact on project and application success. If the internal team restricts choices because of a lack of understanding and confidence in the options offered by the outsourcing team, if a lack of communication results in a poor understanding of risk and downsides of technologies selected, or if choices are avoided to keep from exposing a lack of awareness – the downsides can be very hard to overcome. They can raise “technical debt” to a degree that limits options “down the road” in the project or the application lifecycle and lower team cohesion to the point that trust and communication are lost completely.

#10 Location, location, location

To a degree, we’ve covered this already in the sense that work time overlaps, cultural fit, and communication issues can cause project costs to rise significantly. But on its own, the location of the outsourcing team in relation to the client team should be a part of vendor selection, a factor in project initiation, and a major concern from the beginning of any outsourcing relationship. The greater the geographic distance between the teams, the greater the issues will be. Mitigation costs, in general, will increase including travel, working hour adjustment, intermediaries, communication, contract management, etc. While considering nearshore vendors will not eliminate all outsourcing risks and issues, they can make other choices much easier to deal with and diminish risks significantly if they have the right resources and ability to work at a partner level with your team.

Outsourcing can save you time and money, but only if it’s done correctly. With so many factors to consider, it’s important that you do your research before making any decisions. The 10 points above are a great starting point – but there are still more software development costs to think about, such as marketing development costs and advertising expenses. By taking the time to understand all of the possible hidden costs associated with outsourcing, you can be sure that you’re not overspending on your project.

Scio is a nearshore vendor of software development services for our clients in North America. We tune our project model to the project at hand and operate with our clients at a partner level to lower risk on both sides. If you would like to discuss your next project and the options we can offer, please contact us. We would be happy to work with you.