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5 Outsourcing Risks and How to Mitigate Them

by Nemanja Manojlovic
by Nemanja Manojlovic

Risk is inherent in everyday life and we all make subconscious split second decisions on how we can mitigate or tackle them. Where businesses differ greatly to the public is that they consciously tackle risks every day, from operational to reputational. Outsourcing has many benefits for your business but it is not without some risk. The ability to call on subject matter experts to tackle complex issues is of great benefit, but it requires careful management.

As you manage the selection of outsource resource you need to consider the risks associated and how you can mitigate them as early as possible. Here we will look at the 5 main outsourcing risks and how you can mitigate them.

1. The Outsourcing Companies Technical Ability

The internet is full of companies who will claim they are technically competent, the best in the business in all areas or have developed the world’s greatest software. It is easy to get carried away with their claims but you need to undertake extensive research to establish if they are as good as they say they are.

The first sign you should look for is their online presence: is their website high quality, easy to navigate and do they have social media accounts with a wide fan base? All of these aspects should be noted. If their online presence is not up to standard, what do you think that says about their values? If they don’t care about themselves, will they care about your project?

You should ask for references and examples of previous work and have these independently verified; furthermore, you should engage directly with previous clients for an open and honest review.

Identify the staff in the outsourcing company who will be undertaking the work, ensure they aren’t going to ‘sub-contract’ out the work, creating a barrier between you and the people who are actually working on your project.

2. Costs

by Nemanja Manojlovic
by Nemanja Manojlovic

Once you have established that you are dealing with a competent and professional company, you must ensure all costs are fully disclosed and you don’t suddenly find yourself liable with an unpaid bill because you didn’t budget for it. In preparing your outsource contract, it is essential to understand the type of contract you are entering. There are many different types out there, from Iteration Fixed price, Time and Material, Fixed Price and Fixed price per Feature.

Whichever method you chose, be absolutely clear on your project requirements so there are no surprises, on either side. When you receive the proposal, go through it carefully, clarifying any unclear or ambiguous points and be cognoscente of what exactly you are paying for and when. Understand if you will have VAT or other liabilities on top of the quoted prices.

3. Geographical Location

In assessing your proposal, be aware that contractors in different countries may have different taxation or legal rules. In some extreme cases, you may also find that there are potential risks of unwittingly partaking in human rights or criminal activity. You should research the overseas business risk guides produced by national governments which advise on how you should proceed.

When considering a company overseas, you need to pay attention to the practicalities of how easy it will be to work with them. Would you be able to visit them for any meetings or site visits? Are there time zone differences which makes contact difficult? How would you make payments across borders and is there any duty owed to that service? By engaging with the company, you can address these concerns; a good outsourcer will be able to advise how they have mitigated these issues for serving overseas companies. If they can’t, then it may be prudent to seek another service.

4. Intellectual Property

by Nemanja Manojlovic
by Nemanja Manojlovic

Protecting your intellectual property has been a problem across many industries for many years and with the increase on free flow of information online, it continues to be a problem. Your investment into your project is underpinned by your outsourcing company being able to not only deliver, but by them protecting what they have developed on your behalf. Not even the largest IT companies in the world are safe from this as has been seen in Blackberry’s 2018 legal onslaught against Nokia, Facebook and Samsung to name a few.

To mitigate this, you must ensure that any contractor you engage with is open to signing a non-disclosure agreement (NDA). This will protect your IPR and at least give you legal cover to sue should they disclose it.

Identifying companies who have undertaken sensitive projects before for agencies such as the government, military or fiscal institutions will mitigate the risk of breaking a NDA. If they were to break the NDA, they would almost certainly lose future business with these other high profile clients.

5. Proprietary Lock-in

Proprietary lock-in, also known as vendor lock-in, occurs when a customer becomes completely dependent on one supplier for services or products, this happens due to the substantial costs incurred should they want to switch to another provider. This can have a devastating impact on your business as it would not matter how poor the service is, or if prices were increased, you would be stuck with that vendor.

To mitigate this, from the outset, you should establish what the costs would be to transfer your outsourcing should any problems arise and budget accordingly. You could insert clauses or key performance indicators into contracts, which if broken, enabled you to exit the contract without high costs.

From a technical perspective ensure the company follows coding conventions and utilises open software such as Java or .Net which could be picked up and worked by another contractor. Do not allow bespoke applications or frameworks to be used on your project without identifying how they could be transferred to another company.

Conclusion

These are many aspects to think about when recruiting your outsource company but taking a pragmatic, logical and careful approach will ensure you are not caught out by these risks.

This article was originally published on @nemanjaman