Recognizing and Avoiding Hidden IT Outsourcing Costs

Recognizing And Avoiding Hidden IT Outsourcing Costs

IT outsourcing, the concept that originated in the 1980s, gained momentum in the 1990s and turned into a trend in the 2000s, seems to be perfect for business-IT alignment. As per IDC, the global information technology industry spend is set to reach $5.2Trillion in 2020.

As the owner of small sized company or big organization, you outsource the IT-related tasks to a third-party vendor or a reputed IT outsourcing company and focus on what you do the best. Obviously, an automobile manufacturer or an insurance provider should be more focused on making cars or selling insurance rather than taking care of their IT processes.

Owing to this simple logic, players of different sizes in every industrial vertical are jumping on the bandwagon to get their IT needs to be fulfilled externally. Be it software development outsourcing or technical support externalizing or contracting out any other IT task, the concept promises a number of benefits, the most sought-after being the advantage of saving costs. Rather than hiring, managing, and maintaining the in-house IT teams, outsourcing seems to be a cost-effective solution. Until and unless you are introduced to the costs that remain under the cover initially but begin to surface one by one as you proceed.

Right from the time you start the search for an IT outsourcing company, you should be prepared to discover these costs and know the measures in order to avoid them. The following guide is your most comprehensive resource to get ready.

Incorrect Need Identification

Enterprises often fail to precisely identify IT outsourcing needs and end up designing a poor strategy in this direction. It happens because, in their fascination with outsourcing, they miss performing some important activities that are useful in allocating the right IT budgets and demanding a customized set of services from the IT outsourcing company.

What you should do is develop a specific organization case through market analysis, risk analysis, and recognition of core competencies and then decide which IT services you should demand from an offshore vendor. Remember that the one-size-fits-all approach is never of any worth.

Searching and Selecting the Right Company

Searching for the right vendor (read: experienced and trusted software outsourcing company), may cost you in terms of resources, time as well as money. You may come across a number of companies bidding on your project requirements and submitting business proposals in response to your request for proposals. And, then begins the cumbersome process of evaluating each business proposal carefully and finally choosing the best one.

What you should do is prioritize your time and efforts in considering only the experienced and trustworthy companies that have a strong portfolio and a good reputation in the market. Don’t mind interviewing the client-companies that have experience collaborating with an IT outsourcing company before reaching a conclusion.

Writing and Managing the Contract

Effective contract writing is one of the biggest parameters that would decide your success with an IT outsourcing company. Though, it is not that easy as it appears. First, you need to decide how the evolution in terms of technology, needs, and staff would be dealt with in the future. Remember that most of the IT services are of non-standard nature and may evolve with time, adding to your requirements.

Next, you may have to bear the costs of monitoring whether everything complies with the written contract or not. The key to handle these costs is to choose a company that promises an extremely transparent approach throughout the contract cycle. The clauses in the contract must be agreed upon in advance to mitigate possible risks in the future.

Cultural and Time Differences

When you decide in favour of software development outsourcing, you may end up choosing a company that is located about thousands of miles away, maybe in some other continent altogether. The cultural differences, therefore, are bound to creep in. In addition, the time differences have the potential to hamper the communication between you and the company that may add up in project completion time and costs.

Again, you should be selecting an IT outsourcing company that works with clients from different parts of the world and offers round-the-clock availability in actual. Even if there are cultural differences, you and the vendor should be quick and willing to resolve them.

Let us help you make the right decision for your next outsourcing project. Contact us today!


Many IT services providing companies endorse themselves as IT consultants offering consultation as a part of reviewing the overall IT needs specific to different enterprises approaching them. There’s no harm in it until and unless the consultation comes without or with a small additional price tag. However, the IT outsourcing company should not sell consulting as a separate service, and it should be a part of the actual IT offering.

For example, if you are planning to hire a software development outsourcing company, there should not be the hidden charges of providing software development consultation. The requirement review, advice, recommendations, etc. should be part and parcel of the overall development process.

Attritions and Role-changing

Consider a scenario in which you hire a custom software development outsourcing company to get a new enterprise software or application developed. The firm would assign a team to the project, convey your exact requirements to them, assign responsibilities to each team members, and decide a deadline to finish the project. Now, what if one or more of the team members resign from their jobs?

In another situation, the company you chose might have a complete rotation or change in leadership. You may be required to start a new kind of association with the new people that may lead to project delays, for which you may need to bear the expenses too. What you need to do is have a word about these possibilities and reach a conclusion on solutions beforehand.

Refactoring – Should You Be Spending?

You might not be aware of what refactoring is, but the cost you might need to spend on it is definitely not wasted. It is one of the hidden costs that your IT outsourcing company might not talk about in advance but might be later required for improving the final product or service. In a layman’s language, refactoring is revisiting the design, code, structure, or user interface to make your IT investments actually work in the direction of bringing the desired ROIs.

For example, after you get the software ready through software development outsourcing, the company may suggest refactoring to enhance its speed, to clean up the code, to fix bugs, etc. However, you must have a trustable development company which doesn’t suggest refactoring unnecessarily, but as per concrete improvement needs.

Transition Period

During the period of transition, also known as the period of onboarding, knowledge transfer, relationship building, and in the process of outsourcing, you would be explaining your requirements business needs, processes, markets, and actual goals to your vendor IT outsourcing company. In many cases, it also involves the transition of hardware, software systems, and even staff and may take many weeks to a few months. The most hurting aspect of the period is that there is negligible productivity while the expenses meter keeps on rotating.

Most probably, you didn’t count these costs while allocating the outsourcing budget. Now that you know them in advance, the best you can do is to select an experienced team that has the potential to grasp things fast and can help in shortening the transition period as much as possible.

Managing and Monitoring

After the transition period, the real phase of IT and software development outsourcing begins as the company you hired would start working on developing the required product or service. It is then that you would need to devote time and money in managing the project and monitoring the performance of the company. For this, you may have to assign a project manager who would communicate with the team. Next, you must ensure that the IT outsourcing company is abiding by contractual commitments.

Organizing meetings (either in person or through video conferencing), performance reporting and reviewing, budget reviewing, project progress reviewing, and many other similar activities may add to the costs. What you can do is calculate these costs in advance as these are inevitable and necessary to maintain the project flow.


A company offering offshore software development outsourcing might not make you familiar in advance with certain taxes that are imposed in their geographical region. These may surface later as the hidden costs.

To sort out these situations later, it is better that everything is highlighted in the contract. Minimum commission costs must be decided before signing the agreement, and both the parties should abide by it. Also, read the business proposals to ensure that various taxes are included by the IT outsourcing company. If not, enquire about the same and leave no room for future additions.

Not Done Yet- Some Other Costs

  • Bills for software licensing. Either the IT outsourcing company should pay for them, or the same must be mentioned in the contract.
  • Costs related to changing technologies, especially during a long-term project or service period. Either you decide to stick to the current technologies or be ready to bear the costs.
  • Costs if you decide to transit to a new vendor if the present vendor is not performing as expected. You can imagine how difficult it can be and try to avoid it by choosing the first vendor after good research.

Make Your Investments Worth It with Radixweb

If the company you hire for software development outsourcing or any other IT service tries to offer low-cost solutions to draw your attention, don’t fall into the trap. A good software outsourcing company would stick to the industry standard price and follow a transparent approach to provide you with its details. The team at Radixweb has forged quality outsourcing partnerships and well-established processes that ensure nothing but success for its clients. Let’s talk to make your investment worth its value.

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Pratik Mistry is a rare mix of technologist and senior business head at Radixweb. His passion lies is in helping companies to grow revenues by delivering top notch software development services and build value-based partnerships. When not driving high-impact go to market strategies, Pratik loves to try new cuisines and going to the movies.