12 Reasons Why Outsourcing Software Development Fails

Rui Lourenço

27 September 2022

As an entrepreneur, you are spoiled for choice when it comes to outsourcing software development.

I don’t know if you’re aware but there are at least 22k listed software development companies all over the world.

This means you not only have to decide whether you should outsource or not, but you must also find a way to choose between the massive amount of options.

And when we’re talking about 15,000 options, separating the wheat from the chaff is no mean feat.

Choosing the wrong partner is one of the main reasons why outsourcing software development fails. Therefore it’s vital that you take the time to choose the right partner. 

But more on that in a bit.

Let’s start with the main reason why so many entrepreneurs and business leaders choose to outsource software development. 

It works.

Want proof?

Let’s look at a real-world situation…

Altar - What is Saying

With our MVP, we won a pilot project with a global financial institution. The other success story was that we were able to put together a seed round using the MVP.

Our further development wouldn't have been possible without it

Philip Schoch, Co-Founder, Apiax

Apiax is a fintech startup that provides regulation as a service for financial services companies. 

They went live in the summer of 2018. By the end of that year, they had secured major clients in the banking industry.

They went on to win Early Stage Startup of the Year at the  2019 Swiss Fintech Awards

They were recognised as one of the HOT TEN FinTech companies by FinTech50 and have been ranked among the Top 100 Swiss startups for the second year in a row.

To date, they’ve raised over $8.1M,  with Headline leading the investment.

And it all started with an outsourced  MVP.

And Apiax is not alone. 

Another prime example is Fave. After spending over a decade in the music-tech industry at companies like Google and Universal Music, Founder & CEO, Jacquelle Amankonah Horton, set out to build a fandom-centric community for the music industry. 

Despite a wealth of experience in product development, she outsourced the product and software development of her MVP. 

Here’s what she had to say about her outsourcing partner: 

“They added value to the project far beyond the intended scope of work. Their advice and guidance about running a new business have been invaluable. The team is clearly passionate about the work and shares innovative ideas and solutions to drive the project forward.”

Since launching just one year ago (at the time of writing) Fave has gone on to raise over $2.3M and win prestigious awards like The 10 Most Innovative Social Media Companies 2022, by Fast Company.

In fact, nearly 90% of small businesses outsourced a business process in 2022 – according to Clutch.co.

According to new data, the IT Outsourcing market is forecast to grow by  $117.24M globally between 2022 and 2026. The annual growth rate is expected to be around 4.5% during that period.

Giants of the industry, such as Apple, Google & Facebook have all outsourced or currently outsource aspects of their software development. For example, since 2018 Google’s outsourced workforce has outnumbered their in-house employees. 

I mean, even Github, one of the largest software development communities, outsourced their initial software development.

So why do some startups (and even big corporations) fail to outsource software development successfully?

The problem doesn’t seem to be the model. Rather it’s about choosing the right people and organisations to partner with. 

As I’ve said before (more than once) when it comes to your startup, it’s all about the people you work with. A bad co-founder, CTO, freelancer or agency can all quickly kill your startup. In my experience, it’s better to spend less time thinking about the model and more on how to make sure you have the right people.

The Nightmares of Outsourcing Software Development

There are obvious risks with outsourcing. Fail to vet the right partner and you’ll probably face a business disaster sooner or later.

Want to see an example?

Let’s rewind to 2004. 

IBM lost a major outsourcing project when JP Morgan Chase & Co. cancelled the remainder of its 7-year IT contract with IBM, worth $5 billion.

The alleged reason? 

JP Morgan wanted to bring their IT infrastructure management home.

Although IBM was never formally accused of failing its contractual obligations,  J.P. Morgan still spent millions of dollars to reassemble its IT team.

This is not the only tale of IBM failing to see a contract through. In 2007 the Queensland Health Dept. contracted IBM to administer a technical payroll solution. 

IBM initially proposed a $6 million cost with a delivery time of one year.

Can you guess how much the whole project ended up costing?

$27 million. Due to unforeseen technical challenges. 

A nightmare, right? 

Well, not yet.

Years went by and the platform never functioned properly with the costs escalating to $1.2 billion.

That’s a staggering 19,900% more than the projected cost. 

And this not only affects big corporations.

Ask any consultant or advisor you know in the startup scene and they will all have a list of horror stories of founders getting screwed by outsourcing agencies.

So the big question is: how can you avoid your own set of nightmares?

Well, you can start by getting to know the red flags and poor decisions that usually break outsourcing experiences.

Starting with the most vital one – lack of alignment.

Claudio, CTO of Altar, Product and Software development company specialising in building MVPs, full custom software development projects & creating UX/UI that is both functional and beautiful
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12 Reasons Why Outsourcing Software Development Fails

1. Zero Alignment With Your Software Development Partner

While outsourcing comes with its own set of inherent risks the model itself is not the only thing that can contribute to its failure. And it’s by far not the most important. 

Instead, given my experience working with dozens of successful founding teams and speaking with hundreds more, it all comes down to (like most things in the startup ecosystem) the people you partner with. 

You could outsource to the most technically brilliant partner in the world. But it will still fail if they don’t align with your mission and vision. 

When it comes to interviewing and onboarding a software development company, you should use the same parameters and process as you would with an employee. 

Alignment on the vision, commitment, drive, passion and responsibility – all of these factors are mandatory. 

Your outsourced partner should be excited to be part of your journey, and be as obsessed with your success just as a good co-founder would. 

Look for someone who – at the end of your collaboration – can make you say something like this: 

Altar - What is Saying

As a founder starting out, I was challenged, I was pushed and I was given support. In the same way my other co-founders pushed and challenged me throughout our journey.

At times we truly felt that they cared more about our success than maybe we did. Not only do they have a deep understanding of the field of software development, but they possibly have a deeper understanding of what a successful product should encompass.

Haider Baig, CEO & Founder, Curve

2. Choosing the Cheapest Provider

According to a global outsourcing survey by Deloitte 59% of companies use outsourcing as a cost-cutting tool.

But as the old saying goes “if you pay peanuts you get monkeys.” And it stands true that going with the cheapest option could harm your business. 

If you decide to offshore to the cheapest IT provider you have to consider a high probability of communication issues, culture clash and low-quality of work.

Remember, if the quote seems too good to be true, it probably is.

Choosing a partner to outsource software development too purely on price is a dangerous path. 

3. Unrealistic Expectations 

Again, watch out for the too good to be true.

Certain software development companies will promise to give you the moon and stars, in an instant, at a low cost.

Nine times out of ten it is just a way to get you “on the hook” and secure your contract. 

Like any business, software development agencies are trying to make a profit – but some agencies will put their profit above your business need

4. Sub-Standard Work (AKA Bad Code)

This is a major risk when outsourcing, especially when offshoring. 

In any outsourcing situation, you will not be able to oversee everything that the agency does. They may cut corners during production and you risk losing control of the project. 

The worst-case scenario is that you end up with an unusable platform. It may simply break, or no other developer can understand the code that has been written. 

In this case, you will have to start again – if you can afford to

It is essential that any potential partner follows the industry standards, especially when it comes to code quality and documentation. 

If you can, get a techie friend to audit the company. You can also ask the agency for references.

An Entrepreneur’s Advice
Altar - What is Saying

Outsourcing successfully is about the joint ownership of the outcome of your product. 

It’s about you coming away from the experience with a product that you’re proud of. It’s about the agency feeling proud that they’ve delivered an amazing product to you. 

That is a successful relationship. 

At each milestone, you should be able to look back knowing you’ve achieved something better than you expected. 

Adil Kurt-Elli, CEO & Founder, Synch

5. Lack of Tech Knowledge

If you are looking for a tech partner, you want them to know more about tech than you. 

Just make sure you don’t lose control of the tech decisions that are being made.

You should educate yourself and improve your tech knowledge so you know what you are paying for

I’m not recommending you go and learn how to code – far from it!

You should, however, learn the basics so you can have an educated position in the conversation. 

Remember, many tech decisions are vital business decisions

6. Failure to Understand Scope

I can’t stress enough how important it is that you make yourself heard when talking to software development agencies. 

The overall scope, project-specific requirements and time on delivery should be crystal clear from the word go.

If you don’t do this properly you are risking a misaligned product vision. 

This is dangerous because you may end up with a few surprises.

For example, the agency may start throwing features at it in an attempt to understand what you need.

It will begin to grow uncontrollably. 

This is commonly called “Scope Creep” and can plague a development process. 

The space between your expectations and what is being built is going to get bigger and bigger. 

You’ll end up pushing back your launch because, well, you haven’t got the product you want. 

This will obviously take its toll in terms of money, but also on patience and the trust you have in the agency. 

To combat this create clear documentation to outline your expectations on deliverables.

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7. Communication Barriers

First of all, if you are thinking of outsourcing to a native English-speaking country make sure you know your pants from your trousers!

From aubergines to eggplants colloquialisms and slang differ from country to country.

If you are outsourcing to an offshore agency a language barrier can be one of the hidden “costs” of outsourcing software development.  

Yes, your pocket seems fuller – but what if you can’t understand the agency? 

  • Dialect 
  • Pronunciation 
  • Vocabulary 
  • Syntax 
  • Accent 

All of these can create barriers, especially between native & non-native English speakers.

When outsourcing software development to a company that’s not on your doorstep you have to account for two more factors. 

The first?  Timezone. 

Simply put, unless you or your service provider are willing to commit to late-night shifts you will be left waiting for responses from your agency.

The second? Communication Technology.

If you’ve spent any time on Skype, Google Hangouts, Whereby or Facetime you will be used to: 

What? I’m sorry I didn’t catch that! Hello? Helllloooo? I can hear you. Can you hear me? Sorry I got disconnected. Hold on, let me refresh.

Every single time, right?

These platforms are never 100% reliable. 

How about good old-fashioned email? 

That can work, sure. 

But crafting lengthy emails to solve issues that could be solved in a two-minute conversation is going to get frustrating quickly!

What does this mean for your business? 

Communication barriers can lead to a failure to understand the scope or an increased time to market – which will mean a higher cost. 

It’s vital to swiftly solve all communication barriers between you and the agency to whom you are outsourcing software development.

An Entrepreneur’s Advice
Altar - What is Saying

When it comes to building a startup, you’ll face more than a few bumps along the way – prepare to be persistent.

You’ll make mistakes, people around you will make mistakes and everything takes longer than you would expect (this bothers me still today).

Ultimately, the secret to surviving the roller coaster is surrounding yourself with people you can trust. People who believe in your idea as much as you do. 

Regardless of whether it’s a technical co-founder, CTO or an agency. Focus on finding the right fit for you and go for it.

Dudley Gould, Founder, Audapio

8. Culture Clash

The difference in cultural nuances can also play a huge factor in the relationship between you and a software development agency. 

Be aware that government & religious holidays may be different. 

The traditions of the boss-to-employee relationship can differ hugely across countries and continents. 

In the US or EU, you may sit directly opposite your boss — for example.

Whereas in countries such as Singapore, Japan and South Korea it is very rare a senior-level member of the team would be sitting next to a Junior.

It’s important to understand the differences in culture between you and the agency you are dealing with.

9. No Flexibility 

Don’t get me wrong, as I said before, you have to be clear on the scope from the get-go.

However, a product is a living organism so its needs will inevitably change over time. 

The ability to adapt and evolve is integral to success. 

Make sure you find a partner that is able to grow with you (e.g. expanding the team – or even the scope) and do what’s necessary for your product’s success. 

10. Lack of Thorough Testing

Every piece of software has bugs. 

When you’re building something you can’t expect it to be perfect.

But you do need to be obsessed with reducing the potential problems to a minimum. 

You do this with thorough testing.

Testing is a critical step. It will help you pinpoint the defects and discover errors and bugs before the product reaches the user.

As a result, you will have created a high-quality product that’s secure, reliable and performs well even when you push it to the limits of its capacity. 

11. Isolating the Agency

Relationships are sensitive – and distrust is lurking around each corner.

Without trust as a foundation, you are setting yourself up for failure.

You should recognise that both you and the agency are a team and this partnership is integral to the successful delivery of the product. 

Don’t treat your service provider as a foreign body. 

12. Not Taking Full Advantage of Your Partner’s Knowledge

Sure, you could hire an agency, hand over a list of features and let them get on with it – you’ll probably get a half-decent product out of it.

But a high-calibre, experienced agency will have helped build hundreds of businesses across several industries.

So why not take advantage of the valuable inputs they can give you?

From product to tech a committed software company that gets involved and challenges your ideas will make your product stronger.

This is a great asset for your company, you should use their expertise to complement yours whenever you can. 

Final Thoughts

Outsourcing software development to an agency can be a great option for your startup.

You just have to be careful and do it the right way.

Always keep your eyes peeled for red flags.

And if you still have doubts as to whether you should outsource software development check out this decision tree

It will give you a step-by-step process for making the right decision for your business.

Rui Lourenço
Partner & CMO
Rui is a partner and CMO at Altar.io. He’s been dedicated to B2B marketing for his entire professional career. After spending eight years honing his craft at Portugal’s first B2B marketing agency, he joined Altar, where he leads both the marketing and sales department under the same umbrella. His current focus is on business strategy, getting to know Altar’s customers and occasional early-stage strategy discussions with the entrepreneurs we work with.

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