Risks of Outsourcing IT Services

Risks of Outsourcing IT Services

IT services are among the most outsourced services for businesses worldwide. By 2028, the market volume is expected to exceed $777B, up from $512B in 2024. While the benefits of outsourcing IT services are numerous, this approach also comes with certain risks.

Evaluating these risks before adopting the outsourcing model for your IT needs is key to avoiding unexpected expenses and downtime. While each of these risks appears substantial, all of them can easily be mitigated.

Let’s take a closer look at the main risks of outsourcing IT services and talk about overcoming these challenges successfully.

Risk #1: Security Breaches and Data Leaks

When you outsource IT services to a third party, you provide the chosen company access to your company’s information. Control over sensitive data and critical systems is almost unavoidable. Without relevant permissions, IT experts won’t be able to get the job done.

By handing over some of the control, you could be creating vulnerabilities that malicious actors may exploit. Such breaches can lead to severe consequences, including financial losses. Unfortunately, around 60% of small businesses go bankrupt after experiencing a data breach.

To mitigate this risk, you have to be proactive:

Solution #1: Robust Security Measures

Implement robust security measures throughout the outsourcing process. You have to go through potential vendors to ensure they take a responsible approach to data protection. Depending on your industry, ask them to demonstrate compliance with such regulations as GDPR, HIPAA, or PCI DSS.

Solution #2: Clear Contractual Terms

Establish clear contractual agreements that outline the vendor's responsibilities regarding data protection. Be very specific about penalties for non-compliance. Throughout your collaboration, conduct regular audits to verify adherence to these terms.

Solution #3: Strong Access Controls

Always implement strong access controls and encryption mechanisms to safeguard data. In fact, the IT outsourcing partner can help you with that.  Employ multi-factor authentication, role-based access controls, and regular password updates.

Solution #4: Analyze Network Traffic

After sharing controls with the service provider, monitor and analyze network traffic for suspicious activities. Learn how to conduct frequent security assessments and penetration testing to identify vulnerabilities.

Solution #5: Train Your Employees

Provide comprehensive cybersecurity training to both in-house staff and outsourcing vendor personnel. You have to make sure that everyone handling your data knows exactly how to keep it safe. Teach everyone involved how to report security incidents promptly.  

Risk #2: Potential Decrease in Service Quality

When you trust a third-party vendor with your IT functions, you are relinquishing some control over the delivery process. The lack of this type of control could lead to:

  • Missed deadlines
  • Unsatisfactory outcomes
  • Subpar performance

Eventually, this can hurt your business operations and decrease customer or client satisfaction. The worst part about this risk is that you may not notice the problem until it hurts your business and becomes hard to resolve.

To avoid this issue, you can leverage the following solutions:

Solution #1: Prioritize Vendor Selection

Before settling on an outsourcing partner, you need to conduct comprehensive research. Take the time to evaluate the candidate's capabilities, expertise, and track record. It may take a while to make a choice. However, the more effort you invest in this selection, the more problems you can avoid during the collaboration period.  

Don’t hesitate to interview outsourcing companies rigorously and ask them for contact details of the existing or past clients.

Solution #2: Performance Metrics

Establish clear performance metrics that define expected outcomes, response times, and quality standards. You need to make sure that these metrics are:

  • Realistic
  • Measurable
  • Enforceable

In the contract, you should discuss penalties and remediation actions that you can leverage if you notice underperformance.

Solution #3: Regular Communications

In many cases, poor performance stems from the lack of effective communication between the company and the managed IT service provider. While the vendor should also participate in this, it should be your initiative to maintain regular communication to monitor progress.

Ask if the company you are settling for will provide a manager who is solely responsible for your account. Together, you can contribute to developing a collaborative relationship built on trust.

Solution #4: Quality Assurance Process

Setting the metrics is only part of the job. Next, you have to think about implementing a robust quality assurance process. This process can evaluate deliverables against predefined criteria. You can bring this to life by conducting regular reviews and assessing compliance with the agreement. Schedule weekly meetings with the company to hear about the progress.

Solution #5: Staff Training

Even though you are outsourcing services to a team of experts, you should continue investing in in-house training. Help your staff develop new skills that allow them to collaborate with the vendor and monitor their progress.

Risk #3: Unexpected Expenses and Hidden Costs

When you work with outsourcing companies, there is always a risk of facing unforeseen and hidden costs. Depending on the size and budget of your company, these hidden costs could have a significant impact. While one of the benefits of delegating IT tasks to an outsourcing company is cost-effectiveness, additional fees and unforeseen expenses could drop the ROI.  

To avoid these outsourcing risks, you can take advantage of the following solutions:

Solution #1: Review the Costs

Before signing the contract with an outsourcing company, you have to evaluate the total cost of this partnership. Initial service fees may be just the beginning. Take the time to consider potential indirect expenses, such as:

  • Setup fees
  • Transition costs
  • Maintenance expenses

As your company begins to grow, so do your IT needs. Make sure to discuss this situation and state it in the contract. Think about adding penalties for exceeding budgeted amounts.

Solution #2: Financial Monitoring

While a transparent contract can take care of unexpected expenses, you still need to monitor your financial relationship with the IT service provider. Review invoices and financial statements regularly and ask questions. If you detect any discrepancies, discuss them immediately.

Solution #3: Cost Management Strategies

When you sign a contract with one of the outsourcing companies, keep in mind that your financial relationship is always open to negotiations. Implement cost management strategies and discuss options for cutting costs with the vendor.

While the cost-effectiveness of managed IT services is often obvious, some companies still decide to go back to handling IT in-house.

Solution #4: Open Communications

Maintain open communication channels with the vendor to discuss cost-related issues. Always address any concerns or disputes promptly. Once you enter the partnership, consider establishing a process for reviewing and approving changes to the scope of work or service agreements. This can prevent unexpected cost escalation.

Risk #4: Communication Challenges

Another one of the outsourcing risks involves communication challenges. These usually happen when you hire service providers with geographical and cultural differences. Many companies in the U.S. believe that working with a vendor overseas can save them money. While this may be the case, the risks that come with this decision are significant.

Different time zones, languages, holidays, and cultures often stand in the way of maximizing the positive effect of the partnership. Here is how this can be solved:

Solution #1: Choose a Local Service Provider

The easiest way to avoid the problem is to choose a local service provider. Local companies don’t just provide a wide range of services, they can offer on-site assistance in emergencies. Meanwhile, it’s easier to find references and reviews that help make an educated choice.

Solution #2: Set Guidelines

When you are working with an overseas provider, you need to establish clear communication guidelines. If there is a significant time difference, you have to make sure they are available outside their regular office hours.

Take advantage of tools that simplify real-time collaboration and information exchange. In many cases, providers themselves offer access to video conference software, messaging platforms, and project management systems.

If the provider’s primary language is different from yours, make sure to discuss the need for all communications to be in your language.

Solution #3: Designate a Liaison  

You can designate a liaison or a communication coordinator, who will facilitate the communication between geographically dispersed teams. This person can clarify messages, resolve misunderstandings, and even translate. However, this approach comes with extra expenses, which may not be feasible for a small business.

Solution #4: Communicate More Often

Plan regular meetings, check-ins, and status updates to keep tabs on the collaboration. This can also create a better sense of connectivity among the team members. Rotate meeting times to accommodate different time zones and encourage participation from everyone involved.

Solution #5: Document and Share Information

Document important discussions, decisions, and action items consistently. This can help everyone stay on the same page. Then share documentation and knowledge resources with the IT service provider to ensure smooth collaboration.

Risk #5: Loss of In-House Knowledge

When you outsource IT functions to an experienced managed IT service provider, you can risk losing valuable in-house expertise. It can happen when you begin relying on third-party experts for critical functions.

The ease and cost-effectiveness of these actions cause companies to become dependent on this collaboration. This, in turn, causes a potential erosion of institutional knowledge. Such erosion can hurt your team’s problem-solving capabilities and slow down innovation.

Here are several ways you can prevent this from happening:

Solution #1: Document Knowledge

When you sign a contract with a managed IT partner, you can implement knowledge-sharing practices. Many outsourcing partners are willing to share their experience and knowledge with internal teams. Before choosing your vendor, find out if this is something they are ready to do.

Meanwhile, establish centralized repositories for all the documents and files generated by the third-party service provider. You need to make sure that all the knowledge remains in-house even when the contract is over.

Solution #2: Cross-Training

While you are working with an outsourcing company, don’t completely ignore your in house team development in the IT niche. Invest in cross-training initiatives to make sure that your employees gain the skillsets necessary to perform multiple roles within the company.

Solution #3: Retain Core Competencies

Identify strategic areas of expertise that are essential for your organization's long-term success. Then retain in-house expertise in these areas while selectively outsourcing non-core functions.

Just because you are hiring a managed IT service provider, it doesn’t mean you have to let your internal IT team go. These two teams can collaborate seamlessly.

Solution #4: Make Strategic Staffing Decisions

Make strategic staffing decisions that balance the benefits of outsourcing with the need to maintain l skills and knowledge in-house. Never rely fully on the service provider to get all of the tasks done. If, for some reason, the third-party IT service ends the collaboration, you shouldn’t be left at square one.

All the knowledge accumulated during this partnership should be shared with the existing workforce.

Solution #5: Work on Continuous Improvement

When the IT outsourcing provider takes the IT burden off your team’s shoulders, it’s easy to sigh in relief and focus on other tasks. In reality, your team should still participate in some of these activities. To help them do this, establish a culture of continuous improvement. Encourage your team to identify opportunities for process optimization even while the process is handled by someone else.

Making the Most Out of Outsourcing IT Services

Outsourcing IT services comes with substantial benefits and a few serious risks. Since the ROI of such a partnership is extremely high, mitigating these risks is worth the effort. By preparing for the possible downsides of such collaboration, you can ensure its success.

If you choose a reliable managed IT service provider, the majority of these risks won’t become an issue. Take the time to make the proper vendor selection to make the most out of the collaboration.