Recognizing and Avoiding Hidden IT Outsourcing Costs

Quick Summary: One of the biggest mistakes organizations make while outsourcing their IT and software needs is to overlook the total cost of the engagement, including the hidden IT outsourcing costs. We have thus aimed to shed light on these potential financial risks in this blog so that enterprises can diligently identify those extra expenses and take proactive steps to manage them.

For many decades now, IT outsourcing has emerged as a winning, can’t-miss business strategy. As per global IT outsourcing statistics, the information technology outsourcing industry spending is set to reach $1.3 trillion in 2023.

As the owner of a startup, SME, or agile enterprise, you outsource the IT-related tasks to a third-party vendor or a reputed IT outsourcing company and focus on what you do 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 fulfilled through external support.

Fulfill All Your IT Needs with Our Reliable Dev Team That Works Seamlessly Across Time Zones and Borders

Schedule a Free Consultation

Whether you need to expand your development capabilities, hand over technical support, or contract out any other IT task, IT and software development outsourcing services promise a number of benefits, such as incremental revenues and large profit margins, and the most sought-after being significant cost reductions.

Rather than hiring, managing, and maintaining the in-house IT teams, outsourcing seems to be a cost-effective solution - until and unless you are well aware of the costs that remain under 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 ready to discover the hidden costs of outsourcing and know the measures in order to avoid them.

The following guide is your most comprehensive resource to get ready.

Keep reading!

Understanding the Hidden Cost of IT Outsourcing

1. Misaligned Business Needs

Organizations often fail to precisely define IT outsourcing needs and end up designing an inefficient strategy. It happens because, in their fascination with outsourcing, they miss performing some important activities that are useful in allocating the right IT budgets.

What you should do is develop a comprehensive roadmap through market analysis, risk analysis, and recognition of core competencies and then decide which IT outsourcing services you should demand from an offshore software development company.

2. Refactoring and Upgradation

Refactoring is another hidden cost of IT outsourcing services. The company might not talk about it in advance but might be later required to improve the final product or service. In layman’s terms, refactoring is revisiting the design, code, structure, or user interface to deliver the most optimal outcome at all times.

For example, you might need to enhance the speed, clean up the code, fix bugs, etc. However, you must have a trusted development company that doesn’t suggest refactoring unnecessarily, but as per concrete improvement needs.

3. Scaling Team and Role Changing

Consider a scenario in which you need to add more professionals and scale the software dev team. What if you realize halfway through the project that you assigned the right task to the wrong person? You might need to start a new engagement with the new people which 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.

Hire Offshore Developers to Access Diverse Skill Sets and Get a Competitive Edge in Today’s Global Marketplace

Create Your Dream Team

4. 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 as easy as it appears. Since most of the IT services are of a non-standard nature and may evolve with time with additional requirements.

The key to handling this increasing cost of IT outsourcing is to choose a company that promises an extremely transparent approach throughout the contract cycle. Ensure to review and agree with the clauses of outsourced software development services in advance to mitigate possible risks in the future.

5. Implementing New Features and Changes

Changes are inevitable in any IT and software project. You might come up with a new feature idea or a sudden change in market requirements. Most businesses assume that changing project scope does not add to the overall budget and that it’s just a simple tweak in the product or an extra couple of hours of work for the development team.

To avoid this glaring cost of outsourcing IT services, you must have a clear understanding of your short-term and long-term requirements. Extensively discuss the project with offshore consultants and if possible, go for MVP software development and prototyping to test your idea.

6. Cultural and Time Zone Differences

In case you end up choosing a vendor that is located about thousands of miles away, maybe on some other continent altogether. The cultural and time differences, therefore, might hamper communication between you and the company, leading to increasing IT outsourcing costs and project delays.

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

7. Additional Consulting Fees

IT consulting services are a critical part of the overall outsourcing deal, i.e., reviewing the overall IT needs specific to different clients. There’s no harm in it until and unless the consultation comes without or with a small additional price tag.

In fact, the IT outsourcing company should not sell consulting as a separate service, and it should be a part of the actual IT offering. The requirement review, advice, recommendations, etc. should be part and parcel of the overall development process.

8. Team Monitoring and Management

You would need to devote time and money to monitoring and managing the project and the team. For this, you may have to assign a project manager who would communicate with them, ensure that the company is abiding by contractual commitments, organize meetings, report performance, review budget, track project progress, and many other similar activities.

All these 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.

Outsource Your Software Project to a Reliable Dev Team That Creates an Actionable Plan for Your Digital Success

Let's Begin

9. Transition Period

This process involves the transition of hardware, software systems, and even staff to the outsourced team which may take many weeks to a few months. The most hurtful 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.

10. Server and Hosting Costs

The cost to build a server and host your software takes the most of a project’s budget. Organizations as well as incompetent IT outsourcing providers often create a blunder at this point by inaccurately estimating the possible number of users, the amount of data, and the frequency of requests. This results in inflating costs that might as well break your project.

To safeguard your business from such hidden costs of IT outsourcing, consolidate your software systems on a unified platform, opt for virtualization, move to managed services, and shift to cloud enablement services and solutions.

11. Regional Taxes and Commissions

A company offering outsourcing IT services might not disclose in advance certain taxes imposed in their geographical region. These may surface later as the hidden costs of IT outsourcing.

To sort out these situations later, it is better to highlight everything in the contract. Both parties need to decide the minimum commission cost before signing the agreement and abide by it. Moreover, read the business proposal to ensure that it includes various taxes by the outsourcing company. If not, enquire about the same and leave no room for future additions.

12. Security Measures

Prioritizing security is crucial for business owners and CTOs. In 2022 alone, the global data breach cost was $4.35 million. If your digital assets are vulnerable to hackers, the financial and reputational consequences would be huge, let alone the technical cost of fixing the system and recovering your data.

Hence, from the very beginning, focus on the security and privacy measures the dev team will implement in your IT outsourcing project. Ensure they have the right techniques and protocols in place, such as control permissions, adherence to code quality and coding standards, rigorous QA and testing capabilities, etc.

13. Third-Party Tools and Subscriptions

One more hidden cost of IT outsourcing services is the potential expense of integrating third-party tools and subscription fees.

While a lot of them are free, you should be ready to spend some extra bucks to purchase the paid frameworks and libraries, as well as subscriptions kike Play Store and App Store.

14. Technical Debt

When developers create structurally flawed software products for a shorter time to market, technical debt is a sure-shot outcome. If you don’t fix the flaws or bugs in time, the problem can get bigger and put your business at great risk.

Although you can’t avoid it completely, there are some proven best practices developers can follow to reduce this hidden cost associated with outsourcing software development. For instance, perform regular code reviews, use issue trackers, maintain 80% of code coverage, and conduct pull requests.

Some Other Hidden IT Outsourcing Costs

1. Bills for software licensing: Either the IT outsourcing company should pay for them, or they should mention the same in the contract.

2. Costs related to changing tech stack: 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.

3. Costs if you decide to partner with 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.

Tap into the Wealth of Industry Expertise from Our Strategy Consultants Who Have Collectively Advised Businesses Across 15+ Industries

Make a Move

The Bottom LineEvery organization today needs to rethink its IT outsourcing business strategy not because outsourcing is not the right approach but because the outsourcing industry is dynamically changing over time.What worked 25 years ago might not work the same way now and the above-mentioned hidden costs serve as a reminder to question your decision and keep a close eye on the circumstances. This might give you hundreds of dollars of saving opportunities and a lot more margin points.Here's a nugget of insight - 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 reliable 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. We’ll ensure that every penny you spend will return the desirable result and deliver the most economical IT solution.Let's talk about your requirements and create a cost-optimized project roadmap!