Outsourcing services to third-party companies can help streamline your business, but how can you avoid common pitfalls?
Outsourcing is the new black. Scroll down the list of top companies on Crunchbase and you’ll hardly find two in a row that haven’t outsourced a project at least once. Stellar growth demands extra resources and a conscious allocation of money. Business owners should distinguish which functions to keep in-house and which to outsource.
IT holds the edge as the most commonly outsourced function. 74% of companies delegate software development to offshore and nearshore outsourcing providers. Other functions hold promise to flourish next year.
Functions companies outsource the most
More and more companies are seeing IT outsourcing as an opportunity to innovate. They’re entrusting outsourcers with complex solutions and assigning them the role of service integrators.
It should come as no surprise that both enterprise and mid-sized companies recognize IT outsourcing as one of the main enablers of their business growth — all thanks to the distinctive advantages outsourcing has to offer.
Widely accepted benefits of outsourcing
But despite these benefits of outsourcing, not every company achieves success. There are plenty of well-known companies that have failed at outsourcing. So while keeping a positive attitude toward software development outsourcing, decision-makers should stay objective.
Let’s take a look at three companies for whom outsourcing led nowhere but the wrong direction, followed by five companies that have made effective use of software development outsourcing.
Three companies that failed at outsourcing
The Boeing Company is an American manufacturer of aircraft and telecommunications equipment for the global aerospace and defense industries. Unfortunately, Boeing’s most recent IT outsourcing failure led to many casualties.
On March 10, 2019, a Boeing 737 MAX crashed and took the lives of all 157 passengers on board. One of the most widely discussed reasons for this crash was the malfunction of the flight control software. When designing the new 737 MAX, Boeing tried to reduce costs and accelerate development by any possible means. Boeing relied on an Indian outsourcing provider with a lack of aerospace experience to develop and test life-critical software. With millions of details as well as millions of lines of code, software for the aerospace industry is not a thing you should entrust to a cheap ($9 an hour) and inexperienced supplier. This Boeing outsourcing failure turned into a fatal disaster.
Electronic Data Systems (EDS), an American IT equipment and services company, had not one but several controversial outsourcing contracts before and after their acquisition by HP in 2008. But the US Navy Marine Corps Intranet project is the most notable of their top outsourcing failures.
In 2000, EDS signed a contract to develop internal video, voice, network, desktop, and training systems for US Navy personnel. In their rush to win this lucrative contract, EDS fell short in estimating the initial project scope. Broken communication and lack of a technical background on the client’s side heated a fuse in this explosive mixture. The US Navy planned to upgrade 10,000 legacy applications without the appropriate server-side hardware installed on their premises while refusing to transfer Marine Corps data to an external development environment as the project was already running.
After four years of rough cooperation, EDS had written off nearly $500 million in losses for their inconsistency in service delivery.
Failure can overtake anyone, even the greatest outsourcing software development companies. The health service of Queensland, Australia learned this lesson in the hard way after an IBM outsourcing failure.
In December 2007, International Business Machines (IBM), a famous American provider of computer and IT products and services, signed a contract with Queensland Health to develop a payroll application. IBM claimed it was an easy task and committed to finishing the project by mid-2008 for $6 million.
It took several years instead of the proclaimed half a year for Queensland to get their updated payroll app. Moreover, it put a $1.2 billion hole in their budget. Underestimating project terms and costs by 16,000% won IBM not only a spot on our list of bad outsourcing examples but a long-term ban from government projects and legal claims to compensate losses.
Five examples of successful outsourcing
Delegating operational activities to a reliable outsourcing provider empowers internal IT staff to focus on core objectives. Cisco, an American conglomerate delivering telecom technologies and services, successfully outsourced its network monitoring and management operations to Cisco Remote Operations Services (ROS).
Cisco ROS was known for its deep expertise in network monitoring and management, which made them a match made in heaven. Cisco ROS provided CCIE-certified engineers, applied industry best practices, and built infrastructure and libraries. The client received a high-quality service, maintaining control over their network while allocating time to their internal IT staff to focus on enhancing network resilience.
Microsoft also has a successful outsourcing case study under its belt. In 2007, Microsoft outsourced the complete restructuring of its global financial processes and operations to Accenture, signing a seven-year contract worth $185 million.
This project, called the OneFinance initiative, grew after two years of successful engagement into a $330 million contract with an expanded scope. Accenture covered the entire back-office for financial transactions across 95 countries.
The reasons for success lay in carefully planned outsourcing processes, implementation of a comprehensive governance structure, change management, adoption of innovative tools (Controller Workspace and Governance Workspace) for outsourcing management, and a commitment to ongoing transformation.
AdsWizz, a digital ads provider revolutionizing radio and video streaming services, started its ascent from a Belgian startup to an established company headquartered in San Mateo, California, by outsourcing its ads insertion algorithm to a Ukrainian software development provider. After the owners of AdsWizz felt their organization was mature enough to maintain its own in-house engineering capacity, they opened their own development center in Eastern Europe. In 2018, Pandora acquired AdsWizz, recognizing the product as worthy of global attention and justifying the founders’ choice to outsource software development at the beginning.
MySQL AB, the actual inventor of the open-source MySQL relational database management system, was a Swedish software company acquired by Sun Microsystems, which in turn became part of the Oracle Corporation.
From the very beginning, MySQL AB relied on outsourcing capacity to scale operations globally. Before it was acquired by Sun, MySQL counted 400 employees across 25 countries, 70% of whom worked remotely. Today, software giants like Facebook, Twitter, YouTube, Amazon, and Google are running MySQL on millions of servers around the world.
Outsourcing for startups may accelerate business growth as well as become a stumbling block, spoiling a unique product culture. GitHub, an American provider of Git hosting services, set the gold standard for how to start a business by contracting narrow and often costly engineering tasks instead of hiring in-house specialists.
In fact, their current CIO Scott Chacon, a well-known Git expert, was first contracted to develop an MVP product that granted instant success to GitHub’s founders while keeping their budget lean.
Is outsourcing good or bad? You decide
The ability to learn from others’ experience drives more predictable results.
Lessons learned from previous outsourcing experience
Looking through these successes and failures in software outsourcing, we can come to a few conclusions about how to succeed:
- Review estimates for scope, price, and timing not once but twice.
- Avoid extra-cheap services and companies with lack of industry experience, as they lead to trouble.
- Design a comprehensive outsourcing governance structure.
- Simplify your quality control with measured KPIs.
- Spend on tech expertise, not only on working hours.
- Implement innovative tools while the project is growing.
- Ensure you get senior engineers for complex tasks.
- Ensure transparent communication at all levels.
- Look for a narrow specialist instead of a jack-of-all-trades.
- Weigh your project’s scope and your supplier’s ability to focus on it.
These good and bad outsourcing experiences provide valuable tips to help you successfully launch your next outsourcing project. It would be a pleasure to extend our list of successful outsourcing cases with yours. Don’t be shy — share your latest project or idea with us.