In recent years, IT Outsourcing services have surged in popularity, offering undeniable benefits such as cost reduction and optimized workforce management. But do these services truly deliver the promised results? If so, why do approximately 25-30% of IT Outsourcing projects fail to meet expectations? In this blog, MOHA will explore the realities behind these IT Outsourcing failures and provide insights to help you navigate this complex landscape.
Why do companies opt for outsourcing?
While it’s clear that IT Outsourcing comes with a host of benefits, is that really what convinces businesses to take the plunge? What are the true motivations behind outsourcing and whether the perceived advantages are the key factors driving these decisions.
Companies choose to outsource, especially IT Outsourcing, for a multitude of strategic reasons. Cost reduction is often a primary driver, as outsourcing can significantly lower operational expenses by transferring tasks to regions with lower labor costs. However, beyond just saving money, companies are increasingly looking to outsource as a way to access specialized expertise that may be lacking internally. This allows them to stay competitive in a rapidly evolving technological landscape without the need to invest heavily in new infrastructure or training.
Another crucial factor is the ability to focus on core business functions. By outsourcing non-core activities, companies can allocate more resources and attention to areas that directly impact their growth and innovation. IT Outsourcing, in particular, offers the flexibility to scale operations up or down based on demand, which is especially valuable in today’s fast-paced market environment.
However, the decision to outsource isn’t solely based on these advantages. Companies also weigh the potential risks, such as loss of control over certain processes, quality concerns, and the complexities of managing relationships across different time zones and cultures. Ultimately, the choice to engage in IT Outsourcing is a strategic one, made after careful consideration of both the benefits and potential pitfalls.
The results behind IT Outsourcing failures
Statista show that 25-50% outsourced projects fail or underperform, with 76% companies facing provider management issues and hidden costs. Why is that? Imagine building a house, but the contractor doesn’t fully understand your blueprint. Without clear communication and proper management, the house might not be completed as planned, and it could end up costing more than you expected. That’s exactly what happens with many outsourcing projects
Poor Communication
In the intricate dance of IT outsourcing, communication is the rhythm that keeps everything in sync. Yet, too often, this rhythm falters. Imagine trying to solve a complex problem when every question, every clarification, has to traverse time zones, languages, and cultures. The smallest miscommunication can snowball into a project-halting issue. It’s not just about speaking the same language; it’s about understanding each other in the context of the work at hand. Effective communication is the cornerstone of success, and without it, even the most well-planned projects can crumble
Lack of Control
When a company hands over the reins of a project to an external partner, there’s an inherent risk of losing control. This isn’t just about monitoring progress—it’s about staying aligned with the original vision. The fear of a runaway project looms large, as the outsourced team may drift from the initial goals. This lack of control can erode the quality and integrity of the work, leaving the company with a product that doesn’t meet its needs or standards. Maintaining a firm grip on the project, even from afar, is crucial to ensuring it stays on track.
Security Concerns
In an age where data is the new currency, security concerns are paramount. Companies outsourcing IT services must grapple with the potential risks of exposing sensitive information. A single breach can have catastrophic consequences, both legally and financially. Unfortunately, not all outsourcing partners prioritize security with the same rigor, leading to vulnerabilities that can be exploited. This underlines the importance of selecting partners who not only understand the technical aspects but also the critical nature of safeguarding data.
Hidden Costs
The allure of outsourcing often lies in its promise of cost savings. However, what’s less visible are the hidden costs that can emerge along the way. These aren’t just financial—they can include the cost of time spent managing the relationship, the strain of coordinating across borders, and the unexpected delays that can derail a project’s timeline. Companies must enter outsourcing agreements with their eyes wide open, understanding that the cheapest option isn’t always the most cost-effective in the long run.
Inadequate Vendor Selection
Selecting the right vendor is akin to choosing a partner in any significant endeavor—it requires diligence, trust, and a clear alignment of goals. Yet, too often, companies make this decision hastily, lured by promises that don’t hold up under scrutiny. The wrong choice can lead to a cascade of issues, from missed deadlines to inferior quality. It’s essential to conduct thorough due diligence, ensuring that the vendor not only has the technical expertise but also shares the company’s values and vision for the project. A bad match at the outset can set the stage for failure down the line.
Even the most successful companies can falter when entrusting critical aspects of their business to external partners. These failures serve as cautionary tales, highlighting the complexities and risks involved in outsourcing. From multinational giants to tech innovators, the road to outsourcing success is littered with stories of costly missteps and strategic blunders.
Top 10 famous outsourcing failures
IBM and Queensland Health (Australia)- The AU$1,25 Billion Payroll system
In 2007, Queensland Health Australia, the public sector healthcare provider for the Australian state of Queensland, in an attempt to improve their focus through technology, hired IBM to develop an application for administering payroll.
At first, IBM estimated the cost to be roughly $6,19 million but soon after they realized that the job was going to be much more work than they had thought.
And by the end of 2007, IBM had adjusted its estimate to $27 million, which you can see clearly, the cost raised up ~4,5 times the original cost. But quickly everything start to turn worse, they could hardly have guessed that the project would snowball into a $1.2 billion nightmare with over 35,000 payroll mistakes and end up being labeled the worst failure in the history of public administration in Australia
This is a clear case of outsourcing due diligence gone wrong, a series of missteps, including poor planning, inadequate risk management, and significant communication failures.
IT Vendor and Royal Bank of Scotland – The biggest outsourcing missteps of “Big boys”
Although the Royal Bank of Scotland didn’t disclose the vendor that they worked with for what is, perhaps, one of their biggest outsourcing missteps, they did disclose how terrible the situation was, shedding light on the risks of outsourcing.
In June 2012, RBS initiated a software upgrade on its banking systems. Specifically, they planned to upgrade their CA-7 software, responsible for controlling its payment processing platform.
By all accounts, it should have been a simple and straightforward process. However, what happened next was catastrophic.
Just hours after the upgrade took place, RBS’ systems lost the ability to process payments for both individual and business customers. The central issue occurred in the computer system responsible for transferring money overnight between accounts.
Both commercial and non-commercial customers were unable to withdraw funds, perform transactions, or check their balances – and the worst part was that even the bank staff couldn’t do it for them. 30,000 social welfare clients did not receive their money as a result of their failed software update.
The failure affected not only RBS, but the other banking entities in the greater RBS Group, which included NatWest and Ulster Bank.
Hershey’s ERP implementation Failure
In 1996, Hershey’s set out to upgrade its patchwork of legacy IT systems into an integrated ERP environment. It chose SAP’s R/3 ERP software, Manugistics’ supply chain management (SCM) software and Seibel’s customer relationship management (CRM) software. Despite a recommended implementation time of 48 months, Hershey’s demanded a 30-month turnaround so that it could roll out the systems before Y2K.
Based on these scheduling demands, the cutover was planned for July of 1999. This go-live scheduling coincided with Hershey’s busiest periods – the time during which it would receive the bulk of its Halloween and Christmas orders. To meet the aggressive scheduling demands, Hershey’s implementation team had to cut corners on critical systems testing phases. When the systems went live in July of 1999, unforeseen issues prevented orders from flowing through the systems. As a result, Hershey’s was incapable of processing $100 million worth of Kiss and Jolly Rancher orders, even though it had most of the inventory in stock.
JPMorgan Chase
In 2013, JPMorgan Chase entrusted a portion of its IT operations to HCL Technologies, an esteemed Indian firm. However, the transition encountered unforeseen challenges, leading to significant disruptions within the bank’s IT systems. Among these issues was a notable outage that temporarily incapacitated the bank’s online banking platform, leaving customers unable to access their accounts for several hours.
Epic and Cambridge University NHS Foundation Trust
Epic was contracted by the Cambridge University NHS Foundation Trust to create an online patient record system, aiming to enhance information accessibility and staff efficiency through portable devices like iPads. This outsourcing effort, intended to boost flexibility, instead faced significant challenges. Post-launch, the system’s performance dropped by 20%, delivering inaccurate data that jeopardized patient care. Additionally, issues with data updates caused confusion among staff, underscoring communication gaps in the outsourcing process and highlighting the complexities of managing such projects.
Boeing
In 2019, Boeing outsourced parts of the software development for the 737 Max to an Indian company. However, this decision later proved disastrous when it was discovered that the outsourced software contained critical flaws. These defects contributed to two fatal crashes, leading to widespread public outrage and intense scrutiny. The repercussions were severe, not only tarnishing Boeing’s reputation but also shaking the entire aviation industry. Investigations revealed deeper issues within Boeing’s outsourcing strategy, emphasizing the risks and challenges associated with relying on external software development.
IBM’s Australian Census Failure
In 2016, the Australian Bureau of Statistics (ABS) faced a significant IT system failure during the national census. The ABS had outsourced the development and implementation of the census system to IBM, which proved incapable of managing the high traffic on census day. This failure resulted in the website crashing, forcing a shutdown that lasted two days. Consequently, many Australians were unable to complete their census, leading to widespread criticism and raising concerns about the risks associated with outsourcing critical national infrastructure.
Dow Chemical and Satyam
Dow Chemical, a major American multinational, outsourced its IT operations to Satyam, an Indian IT services provider, with the goal of reducing costs and improving efficiency. Initially, the project held promise, but it quickly unraveled due to fraudulent activities by Satyam’s management. These included falsifying financial statements and inflating revenues, leading to the exposure of a massive accounting scandal. The scandal had profound implications, resulting in substantial financial losses for Dow Chemical and severely tarnishing its reputation within the industry.
Kodak and IBM
Kodak’s decision to outsource its IT operations to IBM was intended to cut costs and enhance efficiency, but it became a costly failure due to poor communication between the two companies. Kodak did not clearly define its expectations, leading to misunderstandings and missed opportunities. As a result, the project ran over budget and behind schedule, ultimately costing Kodak over $100 million. This experience underscores the importance of clear communication and well-defined expectations in outsourcing partnerships to avoid costly missteps.
Delta Airlines and IBM
Delta Airlines outsourced its IT operations to IBM to cut costs and boost efficiency, but insufficient planning led to a major outage affecting critical systems. This disruption lasted several days, costing the company over $150 million. In response, Delta has strengthened its disaster recovery processes and implemented stricter vendor management policies to ensure third-party vendors meet rigorous safety and reliability standards. This incident highlights the risks associated with outsourcing and the importance of thorough planning and vendor oversight.
Tip to avoid IT Outsourcing Failures
Define Your Outsourcing Goals
A clear direction is essential when starting an outsourcing venture. After deciding to outsource, carefully determine which aspects of your project to delegate. Assess your team’s strengths and weaknesses to ensure you’re making informed decisions and avoiding common offshoring mistakes. By understanding what tasks can be efficiently handled externally and what needs to remain in-house, you set the foundation for a successful outsourcing strategy.
Prioritize Value
Outsourcing is undoubtedly a strategy to reduce costs, but it shouldn’t be the sole or primary reason for engaging an outsourced team. Rather than viewing outsourcing as a cheap way to offload tasks, it should be seen as an opportunity to optimize your business operations, with a focus on maximizing return on investment (ROI). Prioritizing value over price is crucial, as it helps avoid the hidden costs often associated with outsourcing. By emphasizing quality and strategic alignment, businesses can achieve more sustainable and effective results.
Use A Software Development Agreement
When engaging an outside party for your business, it’s crucial to formalize the agreement in writing to ensure proper outsourcing governance. Well-crafted software development agreements act as roadmaps for developers, highlighting the importance of clear service level agreements (SLAs). These agreements not only guide the development process but also offer a layer of risk management, protecting you from potential losses if things go wrong. Prioritizing a detailed, written contract helps secure the success and reliability of your outsourced projects.
Conclusion
Outsourcing has become a widely adopted strategy for companies aiming to reduce costs and tap into specialized skills or technology, enabling them to scale and remain competitive. However, it carries risks, including the potential for significant financial and reputational damage if not managed properly. Common causes of IT outsourcing failures include poor communication, suboptimal vendor selection, and unrealistic expectations. To ensure success, companies must carefully evaluate the pros and cons of outsourcing versus in-house teams, considering factors such as budget, timeline, and required skills. Proper management and collaboration are key to achieving positive outcomes.
