Blog
Learning from Mistakes: A Comprehensive Analysis of IT Outsourcing Failures

Karl Gorman

April

2023

Learning from Mistakes: A Comprehensive Analysis of IT Outsourcing Failures

Outsourcing is a business practice in which a company hires an outside person or organization to perform tasks, provide services, or produce products that would otherwise be processed in-house. Typically, the purpose of outsourcing is to reduce costs, increase efficiency, or gain access to specialized knowledge or resources. This can be done domestically or abroad and can include a wide range of activities including IT services, customer support, manufacturing, and more.

In recent years, IT outsourcing has become increasingly popular among companies seeking to reduce costs and improve efficiency. However, outsourcing can also be a risky venture, with the potential for failures that can lead to significant financial and reputational damage. This article aims to comprehensively analyze IT outsourcing failures and the lessons that can be learned from them.

Companies Outsource

Outsourcing has become a common business practice for companies around the world. This includes delegating a specific business process or task to external dedicated teams that specialize in that area. Companies outsource for a variety of reasons, including cost reduction, access to specialized skills or technology, and scalability.

Cost reduction is one of the main reasons companies use outsourcing. By outsourcing, companies can save on labor, infrastructure, and other overhead costs associated with maintaining their own team. Outsourcing also allows companies to access specialized skills or technologies they may not have, which can help them stay competitive in their respective markets. In addition, companies outsourcing provides scalability, allowing you to quickly scale up or downsize your operations as needed without incurring fixed costs.

Despite the benefits of outsourcing, it can also lead to setbacks and problems. In particular, IT outsourcing has been associated with several high-profile failures that have resulted in significant financial losses and reputational damage to companies. These failures have raised questions about the effectiveness of outsourcing and the risks associated with it. Basically, all problems appear due to the fact that the wrong outsourcing strategy is selected.

Why Outsourcing Fails

Outsourcing can be a risky business venture, and statistics show that failures are common. One of the most common reasons for outsourcing problems is poor communication between the client and supplier. This can lead to misunderstandings, missed deadlines, and poorly executed projects. The wrong supplier choice is also a major reason for outsourcing failures. Companies often choose suppliers based solely on price, without regard to feedback, experience, or cultural affiliation. This can result in the supplier being ill-prepared for the project, resulting in poor-quality work or missed deadlines.

Another reason for outsourcing failures is unrealistic expectations. Companies may expect too much from their suppliers by setting deadlines or budgets that cannot be met. This can lead to disappointment when the end product doesn’t meet expectations. Failure to properly manage outsourcing relationships can also contribute to project failure. Companies must maintain regular communication with their suppliers, provide clear expectations and recommendations, and monitor the progress of the project to ensure that the project is completed.

In more detail, we will talk further about why outsourcing can lead to failure and what experience can be gained from outsourcing failures.

Common Causes of IT Outsourcing Failures

IT outsourcing can be a profitable strategy for companies, but there are several common reasons why outsourcing fails. In this section, we’ll look at some of the most common causes of IT outsourcing failures, including poor communication, poor vendor selection, and unrealistic expectations.

Poor Communication

One of the most common reasons for failures is poor communication between customers and suppliers. Poor communication can lead to misunderstandings, missed deadlines, and poorly executed projects. That is why it is worth clarifying all the details with the supplier so that the overall communication would be more organized. It is worth clarifying the process of completing the task or the problems that have arisen. It is best to hire some specialist who will directly communicate with the supplier and organize the work.

One example of how bad communication can derail a deal is in 2013 the UK’s National Health Service (NHS) ran into serious trouble over an IT outsourcing contract with Fujitsu. The contract was terminated early due to poor communication between the two parties, with the NHS citing “unacceptable delays” and “poor quality of service” as major issues.

Inadequate Vendor Selection

The wrong choice of supplier is also a major cause of failure. Companies can choose suppliers based solely on price, but this is an inherently losing position. There are cases when the price is justified, and you can get high-quality work for a low amount, but this happens very rarely. You need to pay attention not only to the price but also to the experience, implemented cases, and customer reviews. In software development, there is something that can be delegated to outsourcing, but before that, you need to familiarize yourself with the company. Thoughtless choices can result in the supplier being ill-prepared for the project, resulting in poor-quality work or missed deadlines.

For example, in 2014, Target experienced a serious data breach that was linked to a vulnerability in its payment system. The breach was caused by a third-party vendor who was hired to manage their HVAC systems. The supplier had access to the Target payment system but did not take adequate security measures to protect it.

Unrealistic Expectations

Another reason for outsourcing failures is unrealistic expectations. Companies may expect too much from their suppliers by setting deadlines or budgets that cannot be met. That is why it is worth initially discussing with the supplier what budget is needed and in what time frames all tasks will be completed. If this is not done, then the company will get disappointed in the results obtained.

For example, in 2015, the US Department of Defense (DoD) terminated an IT outsourcing contract with HP Enterprise Services (formerly Electronic Data Systems) due to missed deadlines and cost overruns. The Department of Defense expected HP to consolidate and modernize its IT infrastructure, but the project was well behind schedule and over budget.
IT Outsourcing Failures

Examples of IT Outsourcing Failures

Problems with outsourcing can arise for various reasons, the example of well-known companies will show that this happens often. And in order to determine outsourcing, you need to understand what the risks may be and how serious they will be in case of failure. As you can see, some companies have gone back to independent development services.

1. The Hershey Company

In 1999, The Hershey Company outsourced its IT infrastructure to IBM in an effort to cut costs. However, the transition did not go smoothly, and the company experienced significant problems with its supply chain and order processing systems. The resulting delays and lost revenue forced Hershey to cancel its outsourcing contract with IBM and bring its IT operations back in-house.

2. JPMorgan Chase

In 2013, JPMorgan Chase outsourced some of its IT operations to an Indian company called HCL Technologies. However, the transition did not go as planned, and the bank experienced a number of difficulties with its IT systems. This included an outage that affected the bank’s online banking platform, leaving customers unable to access their accounts for several hours.

3. UK National Health Service

In 2003, the UK National Health Service (NHS) signed a contract with a company called Accenture to manage its IT systems. However, the project quickly ran into problems, with delays and cost overruns. After numerous years of struggling to make the project work, the NHS eventually terminated its contract with Accenture and brought its IT operations back in-house.

4. Boeing

In 2019, Boeing outsourced some of its software development for the 737 Max to a company in India. However, it was later revealed that the outsourced software contained critical flaws that contributed to two deadly crashes. The resulting public outcry and investigations have had significant consequences for Boeing and the aviation industry as a whole.

5. IBM’s Australian Census Failure

In 2016, the Australian Bureau of Statistics (ABS) experienced a major IT system failure during the country’s national census. The ABS had outsourced the design and implementation of the census system to IBM, which failed to deliver a system that could handle the high volume of traffic on census day. The failure resulted in the website being shut down for two days, and many people were unable to complete the census.

6. Dow Chemical and Satyam

Dow Chemical, an American multinational chemical corporation, had decided to outsource its IT operations to Satyam, an Indian IT services provider, in order to reduce costs and improve efficiency. The project began with high hopes but soon ran into trouble due to fraudulent activities by Satyam’s management. These activities included falsifying financial statements and inflating revenues, which ultimately led to the exposure of a massive accounting scandal. The scandal had far-reaching consequences, causing significant financial losses for Dow Chemical and damaging its reputation in the industry.

7. Kodak and IBM

Kodak’s outsourcing of its IT operations to IBM was a major undertaking aimed at cutting costs and improving efficiency. However, the project turned out to be a costly failure due to a lack of communication between the two companies. While Kodak was looking to IBM to provide the necessary IT solutions, it did not clearly define its expectations, leading to misunderstandings and missed opportunities. As a result, the project ran over budget and behind schedule, ultimately leading to a loss of over $100 million for Kodak.

8. Delta Airlines and IBM

Delta Airlines outsourced its IT operations to IBM in an effort to reduce costs and improve efficiency. Lack of planning resulted in a major outage that affected several critical systems and caused significant disruption to Delta Airlines’ operations. The outage lasted for several days and resulted in a loss of over $150 million for the company. As a result of the incident, Delta Airlines has since taken steps to improve its disaster recovery capabilities and has implemented more rigorous vendor management policies to ensure that all third-party vendors meet its standards for safety and reliability.

9. Royal Bank of Scotland and Infosys

The Royal Bank of Scotland (RBS) outsourced its IT operations to Infosys, a leading Indian IT company. However, the project did not go as planned, and the lack of understanding of the complexity of RBS’s systems by Infosys resulted in a major outage that lasted for several days. This outage affected millions of customers, who were unable to access their accounts or perform any online transactions, and caused a great deal of frustration and inconvenience. As a result, RBS had to pay a hefty price, as the outage cost the bank over $300 million in compensation, lost revenue, and reputational damage.

How to Avoid IT Outsourcing Failures?

Outsourcing of IT services is becoming increasingly popular among companies seeking to cut costs, gain access to specialized knowledge and gain a competitive advantage. However, outsourcing can be associated with certain risks and problems that can lead to errors or unrealistic expectations. Here are some tips to help you avoid IT outsourcing failures:

Clearly define goals and expectations.

Before outsourcing any IT service, such as product development, be clear about your goals and expectations. This includes scoping, expected deliverables, timelines, and means of communication. Make sure the outsourcing provider understands your expectations and can meet them. If this is not the case, then it is better to contact another service provider.

Choose the right outsourcing provider.

Not all outsourcing providers can boast of good results or deadlines. Select a supplier that has relevant case studies in your industry and positive reviews. Conduct thorough due diligence and evaluate multiple vendors before making a decision. You can also call each of the applicants and evaluate what suits you best. You can use Clutch or Onbench reviews to decide which company to start with.

Build strong relationships.

A solid relationship with your outsourcing provider is essential to success. This includes establishing clear communication channels, providing regular feedback, and treating the supplier as a partner, not just a supplier. Building a trusted relationship will help ensure that the provider is invested in your success and will go the extra mile to provide quality service.

Performance monitoring.

Regularly monitor the performance of your outsourcing provider to make sure it meets your expectations. This includes tracking key performance indicators (KPIs) such as quality, timeliness, and cost. If a supplier does not meet your expectations, take corrective action as soon as possible. You can also hold weekly phone calls where the supplier will talk about the results achieved this week. This will keep suppliers in good shape, and you will be aware of the whole process.

Have a contingency plan.

Even the best outsourcing arrangements can fail due to unforeseen circumstances. Therefore, it is important to have a contingency plan to reduce the risk of loss. This includes having a contingency plan, identifying potential risks, and having the plan to address them.

By following these tips, you can avoid IT outsourcing failures and reap the benefits of outsourcing. Remember that outsourcing is a partnership and success requires effort and cooperation from both parties.

In-House Team Vs. Outsourcing Team

As software development continues to grow and evolve, many companies are faced with the decision of whether to use an in-house team or outsource the work. Both options have their pros and cons, and it is important to carefully consider the needs and goals of your company before making a decision.

In-House Team

An in-house software development team is a group of employees who work directly for the company. This team is dedicated to the company’s projects and is familiar with the company’s culture and values. One important benefit of having an in-house team is that communication and collaboration with other departments become easier. This leads to better coordination, which in turn can result in more efficient development processes. Additionally, having an in-house team allows for greater control and oversight of the development process. With an in-house team, companies can prioritize projects and allocate resources as needed, leading to better outcomes.

Another benefit of having an in-house team is the opportunity to develop a strong company culture and team dynamic. Employees who work on a project together for an extended period of time can build strong relationships and work more effectively as a team. This can lead to better outcomes and a more cohesive company culture.

However, there are also some potential drawbacks to using an in-house team. One such drawback is the higher costs associated with salaries, benefits, and equipment. Companies must be prepared to invest a significant amount of money to build and maintain an in-house team. Additionally, an in-house team may have limited access to specialized skills and expertise. This can limit the types of projects the team can work on and the quality of the work they can produce.

Another potential drawback of an in-house team is the risk of employee turnover and loss of institutional knowledge. Employees may leave the company, taking their knowledge and expertise with them. This can be particularly problematic for companies that rely heavily on their in-house team for their software development needs. Finally, there is a potential for project delays or slowdowns due to limited resources. Companies must carefully manage their resources to ensure that their in-house team has the tools and support they need to be successful.

Outsourcing Team

An outsourcing team is a group of professionals who are hired by a third-party development company to complete specific software development tasks. One of the key benefits of using an outsourcing team is that it can lead to cost savings in terms of salaries and benefits. In addition, outsourcing can provide access to a range of specialized skills and expertise that may not be available within your company. This can be particularly valuable if you are working on complex or niche projects that require a high level of technical knowledge.

Another potential benefit of outsourcing is the ability to scale up or down as needed for projects. This can be especially useful if your company experiences fluctuations in demand or if you have a specific project that requires additional resources. Outsourcing can also potentially lead to faster turnaround times on projects, as you can tap into a pool of skilled professionals who are dedicated to completing your project on time.

Despite these advantages, there are also some potential drawbacks to using an outsourcing team. For example, you may have limited control and oversight of the development process, which can make it difficult to ensure that the final product meets your standards. Additionally, communication and coordination across time zones and cultures can be challenging, which can lead to delays or misunderstandings.

Another potential risk of outsourcing is that the team may not be familiar with your company’s culture and values. This can lead to quality issues or delays, as the team may not fully understand the goals and objectives of the project. In addition, there is always a potential for security risks or intellectual property concerns when working with an outside team.

Ultimately, the decision of whether to use an in-house team or an outsourcing team will depend on the unique needs and goals of your company. It is important to carefully evaluate the pros and cons of each option and consider factors such as budget, project timelines, and required skill sets before making a decision. If you do decide to outsource, it is important to establish clear communication channels and to set expectations for the project to ensure that it is completed successfully.

Conclusion

Outsourcing has become a popular practice for companies around the world, allowing them to cut costs, and gain access to specialized skills or technology. This allows you to scale your business and compete with other companies. However, outsourcing can be a risky endeavor with the potential for failure that can result in significant financial and reputational damage. The most common causes of IT outsourcing failures include poor communication, poor vendor selection, and unrealistic expectations. Such reasons are most often associated with insufficient communication or unrealistic expectations. When choosing between an in-house team or an outsourced team, companies must carefully weigh the pros and cons of each option and consider factors such as budget, project timeline, and skill set required. Ultimately, outsourcing can be a successful strategy if managed and implemented correctly, but success requires effort and collaboration from both sides.

FAQs About IT Outsourcing Failures

In this section, you can find out about the most asked questions and get answers to them. This section will help you summarize the information about IT outsourcing failures.

What is IT Outsourcing?

IT Outsourcing is a practice in which an organization hires an external company to handle some or all of its IT functions. This includes software development, data management, technical support, and cybersecurity, among others.

What are some common causes of IT Outsourcing failures?

Some common causes of IT Outsourcing failures include poor communication between the client and the vendor, lack of transparency in the outsourcing process, insufficient vendor management, and cultural differences between the client and the vendor.

How can organizations prevent IT Outsourcing failures?

Organizations can prevent IT Outsourcing failures by choosing the right vendor, setting clear expectations and goals, establishing a strong vendor management process, and maintaining open and transparent communication with the vendor throughout the outsourcing process. It is also important to conduct regular audits to ensure that the vendor is meeting the agreed-upon standards and to address any issues in a timely manner.