One out of six projects has a 200% cost overrun, according to Adeva.
When working with external consultants, additional tasks will result in higher expenses. Even if the client and vendor have agreed upon a fixed fee, the vendor may charge for work that was not originally included in the contract.
The complexity and rapid pace of IT activities make outsourcing a challenging process. To establish a successful outsourcing relationship, it’s crucial to have clearly defined objectives that can be contracted rather than relying on multiple changes, adaptations, and modifications.
Many companies discover the hidden costs of outsourcing, including these changes and modifications, within two to five years of initiating the arrangement.
The demand for IT outsourcing services worldwide has reached unprecedented levels. In 2019, the market size, as estimated by Grand View Research, was $520.74 billion, with a projected compound annual growth rate of 7.7% over the next seven years.
The key message is clear: software outsourcing is one of the most rapidly expanding industries, and it represents the future.
However, it’s crucial to navigate the potential risks and significant hidden expenses involved in outsourcing software development.
The Hidden Costs of IT Outsourcing (And How To Address Them)
1) Cost of Getting a Reliable IT Service Provider
Getting the right IT service provider is not a cakewalk as it may take prolonged time as you will have to go through a number of companies’ portfolios, conduct interviews, negotiations, and much more to get a reliable IT service provider who can meet the needs and expectations of your project.
Preparing SOW, RFP, documentation, execution, and roadmap to complete the project will surely need your efforts and time. While getting the software development outsourcing team on board, you might need to conduct online tests and interviews with the developers, which again will be time-consuming.
The extra cost you may have to bear for getting a tech partner on board are:
Consultancy charges
Intermediaries Fees
Project Coordinators (If required)
Travel expenses- If you visit the service providers
Consultancy charges, fees of intermediates such as project managers or project coordinators (If required), and travel expenses- if you visit the service providers are the hidden costs of IT outsourcing that you will have to spend while procuring an IT service provider.
2) Scope Creep and Technology Swift
Scope creep refers to the perpetual demand for changes in the project scope once executed. It is one of the major factors that affect the project schedule, completion of milestones, project delivery, and eventually the cost of IT outsourcing.
If you are working with an in-house team you would oversight the changes and improvements you demand in an ongoing project. But with outsourcing IT company, it may cost you extra dollars if changes are major.
Scope creep could result due to the latest features, and technologies introduced that need to be added to stand the competition as well as to give the best UX.
These are unavoidable hidden costs of IT outsourcing because technologies, product features, software development platforms, and frameworks service providers keep on updating and keep on introducing advanced versions.
3) Transition Cost and Disengagement Fees
There have been some instances where outsourced IT projects have been left uncompleted. Either client terminates the project, or the service provider abandons the ongoing project in between due to any reason.
The service buyer may either transit the project to another IT company or hire an in-house team that could complete the project left uncompleted. But the transition process is not that easy.
When you get a new IT service provider on board, you will have to start from scratch by explaining the entire project, its objectives, and the technologies, tools, and resources used for coding.
If hourly transition charges or ‘run charges’ are imposed, then it will surely affect the cost of the IT outsourcing project.
The client may have to spend a few extra dollars to undergo the termination process and pay disengagement fees as negotiated and mentioned in the agreement.
4) Cost of Negligence
Probably your offshore tech partner may not have the audacity to inform you about the talent gap or skilled resources of the onsite staff. In such scenarios, the service buyer needs to be vigilant.
There have been some instances where the negligence of simple yet important factors has adversely impacted the overall project. Overlooking the importance of QA analysts, business analysts, and project managers could cost a lot to service buyers eventually affecting the product quality.
So, it is advisable to keep the minute requirements of the project in mind while building your team and creating your RFP. Because negligence of simple factors and parameters can hinder the development or fulfillment of the entire project.