Outsourcing is very common. Two-thirds of US businesses outsource. Globally, 1.57 billion people freelance in some capacity. That means that 40% of the world’s workforce are self-employed or engaged in gig work.
Customer support, software development, and marketing are some of the most commonly outsourced functions.
Outsourcing provides cost savings, speed, and flexibility.
But it’s not without its issues. Common problems with outsourcing can end up negating the potential benefits and cause major risks and long-term challenges.
In this guide, we dive into every conceivable outsourcing problem you might face. Plus, we offer 5 essential tips to help you avoid these issues.
What’s in this guide:
- What is outsourcing and staff augmentation?
- Why is outsourcing an important strategy?
- 20 problems with outsourcing and staff augmentation
- 5 essential tips to avoid outsourcing pitfalls
- FAQs about the pitfalls of outsourcing
What is outsourcing and staff augmentation?
Outsourcing refers to the practice of hiring a third-party vendor to do necessary work for a business, instead of hiring internal staff members and adding them to your payroll. The term “outsourcing” doesn’t necessarily mean that you are sending that work overseas, but the term has commonly become synonymous with overseas outsourcing, although most businesses outsource domestically as well. 84% of outsourcing deals take place in the US.
Staff augmentation is similar to outsourcing, except that it only refers to hiring third-party talent who will work directly with your team, whereas outsourcing can also encompass hiring a fully-managed agency that will work independently of your team.
Why is outsourcing an important strategy?
Most businesses outsource in some capacity. Hiring internal staff is notoriously time-consuming. It can be difficult for hiring managers to get approval for new roles, because a business should have the intention for the position to be long term, whereas outsourcing can be more temporary.
Internal hiring processes also require lots of interviews and coordination between departments, leading to further delays.
Meanwhile, outsourcing can be much quicker. So long as a manager has the budget, they can often get approval to hire a new vendor in days or weeks—instead of months.
Outsourcing also allows businesses to acquire not only talent but proven processes and expertise. For example, companies that hire DevSquad acquire a high-performing product team trained in our development playbooks.
20 problems with outsourcing and staff augmentation
So what issues should you be aware of?
The more you know, the better you can prepare.
Here are a whopping 20 problems that businesses experience when they outsource or augment their staff. (Don’t worry. There are ways to avoid these issues, so keep reading for our advice.)
1. Insufficient vendor evaluation
It is not easy to evaluate third-party vendors. You might only talk to their sales team, and never have a chance to interview the people who will actually be doing the work. This means you have to trust their technical interview processes, instead of being able to interview candidates yourself the way you would if you were hiring for a full-time role.
Outsourcing services might also blatantly lie about their capabilities in order to win your business. Or, salespeople might make promises that the vendor can’t fulfill.
To mitigate this issue, you’ll want to talk with former clients to hear their experience. You should also ask the vendor what sort of guarantees and cancellation policies they offer in case you’re not satisfied.
2. Lack of all talent and resources needed
When you choose to outsource something, it’s typically because you don’t have the talent you need in-house.
But that doesn’t necessarily mean that the outsourcing company has all of the appropriate talent either. This issue is particularly common when outsourcing software development. You might outsource to a company that hires high-quality developers, but if they don’t also offer product managers, UX designers, DevOps engineers, and QA testers, then your software project won’t be a success.
3. Lack of fit with company culture
If the outsourcing company will be interfacing with your internal team regularly, then culture fit is important.
Your company has a personality. It’s a living, breathing organization. Communication style, work-life balance, priorities, and sense of humor are all elements of your company culture.
It can be a challenge to find an outsourcing vendor that not only meets your service needs but fits your company culture as well. Without that culture fit, the working relationship might be strained or inefficient.
4. Finding people who care
Will your outsourcing provider be able to deliver talent who truly cares about your business and your customers?
If not, the work might be sloppy or lackluster.
You’ll want to make sure that there are some quality control processes in place. And you should also check portfolio samples and case studies to ensure that the company is hiring people with integrity to work on client projects.
5. Loss of control over processes and outcomes
When you outsource, you often lose control over the work processes and procedures—which in turn represents a loss of control over the final outcomes.
This is especially true when hiring a fully managed agency. They will be managing individual players, and you might not even have access to the customer support reps or developers working for your brand. This can be a good thing if their managers are skilled (because you don’t have to do that work), but it can also be a bad thing if you don’t like the way they operate.
When interviewing vendors, make sure you’re aligned on work philosophies so you’re pleased with the process and more likely to achieve your desired outcomes.
6. Difficulty delegating work between internal and external resources
It can be very challenging to delegate work between people on your payroll and people that work for an external company. Your internal employees may not trust third-party vendors as much, or share the same camaraderie. They might fear that their job is on the line.
If you’re working with a fully-managed agency, and only the main points of contact need to communicate, then this will be a non-issue. But if people are working closely together, there can be challenges, especially if you have a somewhat toxic company culture or there have been a lot of layoffs recently.
7. Hidden or unexpected costs
Do you know all of the costs of outsourcing?
Sometimes, outsourcing can be cheaper than hiring, particularly when outsourcing overseas, but sometimes it can be more expensive, especially when you are choosing high-level business consultants or experts.
Just be sure that you understand what is included in your contract agreement, and what will incur extra charges.
8. Maintaining data security
A data breach costs an average of $9.44 million to rectify, and there are 2,200 cyber attacks daily. Your outsourcing vendor might need to access your critical systems in order to get their work done. Outsourcing can represent a cybersecurity risk because the workers will be using networks and computers that aren’t owned or overseen by your in-house cybersecurity team.
However, with remote work being so common, most companies have remote cybersecurity measures in place. Just make sure that you’re able to extend these to the outsourcing company, or that your internal cybersecurity team reviews the vendor’s procedures.
9. Protecting intellectual property
It can also be a challenge to protect your intellectual property. Of course, you’ll have the vendor sign an NDA, but that doesn’t necessarily fix all of the issues. The vendor can still leak your intellectual property to your competitors without ever getting caught.
The more integrity that your vendor has and the more that you trust their team, the better. This is why it can be helpful to choose boutique agencies over large outsourcing companies.
10. Working across multiple timezones
You’ll also have to contend with different timezones. This can be really challenging if you are interfacing with the vendor regularly.
It’s smart to choose a company that will provide you with a main point of contact who is in or near your timezone, even if most of the workers are not.
Again, with remote work being so common, you might already be utilizing asynchronous communication, making this a non-issue.
11. Culture and language barriers
When outsourcing overseas, you can experience major communication challenges due to culture and language barriers, particularly if you’re outsourcing to a region of the world you’re not familiar with.
The best way to rectify this is to work with a vendor that will provide you with a main point of contact who lives in your own country. This way, there will be seamless communication. This is particularly important for costly projects and services that have a big impact on your bottom line.
12. Dependency on third-party vendors
Over time, you could become dependent on your outsourcing partner. They’ll have all of the knowledge, talent, and processes needed to get the job done, and you won’t even know where to begin.
If you’re outsourcing something you never want to bring in-house, like customer service, this shouldn’t concern you too much. But if you’re outsourcing a key function of your organization, like product development, your dependency could become a problem down the line. Make sure the vendor is willing to train your team when you’re ready to take over the work.
13. Difficulty coordinating multiple vendors
If you think its challenging to coordinate your in-house team and your external resources, just wait until you try to get multiple third-party vendors to work together. It can be nearly impossible, especially if the vendors are very rigid.
If you need to coordinate multiple vendors, make sure to choose boutique agencies or freelancers who are flexible and will work as a natural extension of your team.
Otherwise, choose fully-managed agencies who can work independently and don’t have a need to coordinate with other vendors.
14. Loss of in-house knowledge and expertise
As you outsource more and more functions of your business, you’ll lose more and more knowledge. For example, if you outsource website development or paid digital advertising, you won’t have anyone in-house who can immediately take over those tasks or put out unexpected fires.
You’ll be stuck needed to replace your vendor should any issues occur.
This might not be a bad thing if it’s not something you want to manage in-house, but if this knowledge is important to your company, then the loss of it could be a major issue.
15. Limitations on innovation
When you outsource, you’re only as innovative and creative as the vendor you choose. If the company is doing product validation and development for you, then make sure they’re true all-stars. Ask what processes they use to ensure real innovation.
But if you’re outsourcing grunt work, this isn’t as much of a concern.
16. Additional risks to reputation and brand image
When you partner with an external company, you add more risks for social media and PR fiascos. Now, you’re not only at risk with what your employees do, but what their employees do too. You can and will be called out online for investing in a company that fails when it comes to cybersecurity, cultural standards, equality, and inclusion.
Large brands have extensive review processes in place to mitigate these risks, but smaller companies might fail to review their vendors thoroughly. Take some time perusing the vendor’s social media profiles and that of their team members to make sure you’re aligned on key cultural issues.
17. Insufficient handover and knowledge transfer
Many vendors don’t have great handover processes in place. They don’t provide training or upskilling as a service. When the contract ends, you’re on your own. This can be very detrimental to your business and customer experience, particularly when outsourcing essential functions like product or customer service.
18. Internal lack of experience with outsourcing
If the manager in charge of working with your third-party vendor doesn’t have experience outsourcing, you could be in trouble. They might be too trusting, or be tempted to micromanage the vendor so much that they’re not able to lend the full extent of their expertise.
19. Inability to address problems with your internal team
When you outsource because your internal team isn’t getting things done the way you need, you’re essentially putting a bandaid on the issue.
Sure, outsourcing can help alleviate pent-up demand, but it won’t solve whatever is going on with your internal team, which could be insubordination or bad management. So make sure to keep an eye on those issues as well.
20. Legal and regulatory compliance issues
Outsourcing can bring all sorts of compliance issues. You can create tax nexus in a certain region, or fall under a government’s policies for payroll, hiring, data management, sustainability, or other compliance hurdles.
5 essential tips to avoid outsourcing pitfalls
You can avoid the common problems with outsourcing.
If you follow these guidelines, you’ll eliminate the biggest issues.
1. Know when to augment and when to hire an agency
It’s important to know the difference between these two strategies:
- Staff augmentation: Provides individual resources that you need to manage and coordinate.
- Hiring a fully-managed agency: Completes work end-to-end using their own processes and resources.
Some of the biggest problems with outsourcing stem from when a manager chooses the wrong method for their need. If you’re behind on hiring and just need more hands on deck, choose staff augmentation. But if you need an entire project or service completed successfully, then make sure to hire a fully-managed agency.
2. Make sure there will be no communication barriers with your main point of contact
It’s okay if the vendor company works with overseas talent. You just need to make sure that your main point of contact is either located in your home country or is very adept at communicating in your language and style.
There should be no communication barriers between you and your POC. They should not only speak your language, but be easy to reach during your timezone and using the communication tools you prefer (like Slack).
3. Choose an outsourcing vendor with excellent handover processes
Make sure to screen your potential vendors for their handover processes. If and when you're ready to stop outsourcing and manage the work in-house, how will they help you achieve that?
They should have an offboarding process or offer in place to assist with training and upskilling your team.
If they don’t, choose someone else. Otherwise, you’ll regret it down the line.
4. Strategically delegate work amongst internal and external teams
Don’t just expect your internal and outsourced resources to work seamlessly together. Particularly where differing work styles, communication styles, and timezones are involved, it can be very confusing to blend everyone together.
Instead, you should strategically delegate the work. Take our case study with Box as an example. They manage their core product with their internal team, and hired us to build an automated and secure onboarding and offboarding process for their employees.
5. Proactively address compliance and brand risks
Make sure that you are reviewing and addressing compliance issues proactively. Speak with your business lawyer or legal team to understand the implications of a large outsourcing contract. And have your brand, PR, or marketing team thoroughly audit the vendor company for any issues that could get you in hot water later on.
FAQs about the pitfalls of outsourcing
Here are some frequently asked questions about the problems with outsourcing.
What are the disadvantages of outsourcing?
The biggest disadvantages of outsourcing are the loss of control over work processes, the inability to grow knowledge internally, and the difficulty of handover and knowledge transfer. All of these issues can have far-reaching implications, leaving your organization less competitive over time.
What is the main negative effect of outsourcing?
The principal negative effect of outsourcing is that you lose visibility and control. The longer you outsource something, the harder it is to regain that control. If you don’t have the time or capacity to manage something thoroughly, that might not be a bad thing however.
When should I outsource and when should I avoid outsourcing?
You should outsource when you don’t have the ability to do something as good as an external vendor would. When it’s more important to get something done right than to do it yourself, it’s time to outsource.
The right vendor can bring a wealth of knowledge and experience that can have a massive positive effect on your company.
What are the disadvantages of outsourcing to other countries?
The disadvantages of outsourcing to other countries include legal compliance issues, communication barriers, and challenges working with different time zones. You can mitigate these issues by addressing compliance concerns proactively and ensuring that your main point of contact speaks your language fluently and is available during your working hours.
How DevSquad is different from outsourcing & staff augmentation
DevSquad is not a typical outsourcing vendor because we partner with you to bring your expertise, product vision, and market knowledge to life.
And we don’t offer staff augmention. You can’t just work with us to speed up your hiring and get some new devs. We only provide fully-managed product teams using our proven processes.
Here are just some of the things you get when you partner with DevSquad:
- Product validation workshops and user testing
- End-to-end product management
- High-performing product teams dedicated to your product
- Business and product strategy
- Excellent handover processes (including training your team in our playbooks)
- Dual-track agile development for speed