“Outsourcing is inevitable, but the path is fraught with potential pitfalls. As Peter Drucker, the renowned management consultant, once said, ‘The best way to predict the future is to create it.‘”
Drucker’s quote highlights the need for proactive management to shape successful outcomes. In outsourcing, it means that while outsourcing can be strategic, its success depends on effective management and planning. Failing to anticipate and address potential challenges can lead to problems instead of opportunities. Proactive management is key to avoiding common outsourcing pitfalls and ensuring that partnerships contribute positively to organizational goals.
Outsourcing, when done right, can drive significant value for businesses by leveraging external expertise and optimizing operational efficiency. However, the reality is that outsourcing can also lead to a range of problems if not managed effectively. A LinkedIn article highlights that 25–50% of outsourced projects fail or underperform, with 76% of companies facing supplier management issues and hidden costs. Communication problems affect 30% of companies, and 51% express dissatisfaction with performance, saving only an average of 26%. Understanding these issues is crucial for executives aiming to harness the benefits of outsourcing while mitigating risks.
This article examines outsourcing failures, identifies their causes, and offers insights on avoiding similar issues. By learning from these famous examples, businesses can refine their outsourcing strategies to maximize benefits and avoid common pitfalls. The examples are as follows:
- Queensland and IBM
One of the most infamous cases of outsourcing failure involves IBM and the Queensland Health Department in Australia. In December 2007, the Queensland government gave IBM a contract to create a payroll system for the Queensland Health Department. The project was initially budgeted at $6 million, with a completion date set for July 2008. However, IBM encountered technical difficulties during development, which led to a revised cost estimate of approximately $27 million. Eventually, the project experienced significant delays, with costs soaring to $1.2 billion. Despite the massive investment, the payroll system never functioned correctly, resulting in payroll errors for thousands of employees. The Queensland Government attempted to sue IBM, but the lawsuit was dismissed due to a waiver that absolved IBM of any liabilities.
Cause: The root cause of this failure was a lack of clear communication and detailed requirements at the outset. Both parties assumed a shared understanding that did not exist, leading to frustration and missed deadlines, not to forget the massive costs.
Solution: To avoid such issues, it is crucial to establish clear, detailed specifications and expectations from the beginning. Regular communication and alignment meetings can help ensure that both parties are on the same page and that any misunderstandings are promptly addressed. (Source: Timedoctor.com, Zdnet.com)
- 2. Virgin Airlines and Navitaire
In September 2010, on an otherwise ordinary day, Virgin Airlines experienced a massive failure in its online reservation, check-in, booking, and boarding systems, affecting more than 50,000 customers. These IT systems, developed by Navitaire, failed completely, and the situation worsened when the company was unable to resolve the issue as stipulated in the contract.
Cause: There was also no backup hardware available, thus leaving Virgin Airlines vulnerable to huge loss of finance, operational disruption, unhappy customers, and a bad reputation.
Solution: When selecting a vendor, consider logistics and time zone differences for smooth collaboration and timely issue resolution. Retain in-house experts to work with external specialists, and ensure IT outsourcing companies are competent and capable of addressing challenges effectively. (Source: Signalx.ai)
- Accenture and Hertz
In 2016, Hertz engaged Accenture to modernize its website and mobile apps. Hertz had established business plans, set objectives, and created roadmaps for expanding its platform offerings. However, Accenture failed to address the scalability needs of the platforms, delivering a product that was only applicable within North America. The project faced several issues, including delays, unsecured data, and sluggish design. As a result, Hertz was left with a subpar product and sued Accenture for $32 million in April 2019.
Cause: The primary cause of failure was inadequate communication and project management. Accenture failed to grasp Hertz’s scalability requirements, resulting in a product that didn’t meet Hertz’s global needs. Additionally, insufficient ongoing engagement and unformalized expectations exacerbated the project’s shortcomings.
Solution: When contracting a project, it is crucial for businesses to clearly articulate their expectations to the outsourced team. Throughout the project, maintain regular communication with the team to ensure alignment and address any issues promptly. Additionally, formalize any claims or statements made by the outsourcing suppliers to ensure clarity and accountability. This approach will help in managing the project effectively and achieving the desired outcomes. (Source: Medium.com)
- Royal Bank of Scotland and their IT vendor
In 2012, RBS Bank experienced a major disruption when a software update carried out by an outsourced IT developer caused a complete shutdown of their banking system and payment processing. The system was down for almost a week, rendering customer accounts inaccessible. While Union Officials initially pointed fingers at the outsourced IT firm from India, it was eventually found that the problem originated from mistakes made by RBS’s own technical staff during the update. In 2014, the Financial Conduct Authority (FCA) imposed a penalty of 42 million euros on the bank as a result of this incident.
Cause: As mentioned above, the disruption was primarily caused by errors made by RBS’s own technical staff, rather than the outsourced IT vendor. However, the operational instability and inadequate contingency planning on the part of RBS contributed to the severity of the service disruption.
Solution: Evaluate the outsourcing partner’s stability and contingency planning capabilities. Establish clear terms for handling service interruptions and include provisions for backup solutions to ensure continuity. (Source: Signalx.ai)
5. IBM and The Texas State
In another costly setback, IBM was terminated from a project with the State of Texas. Initially hired in 2006 to consolidate the data centers of 27 state agencies into just two, the contract was a hefty $863 million deal spanning seven years. However, after four years, IBM had only managed to complete 12% of the work. The shortcomings in this outsourcing venture resulted in major backlogs and higher expenses, failing to achieve the anticipated savings from the IT system integration.
Cause: Ineffective communication channels and the complexity of coordinating multiple global suppliers created barriers to effective collaboration and timely decision-making.
Solution: For the optimal contract structure, short-term projects should utilize a set fee model, while long-term collaborations are best suited to a material and time model. It is essential to formalize this arrangement with a detailed agreement that outlines the project’s deliverables, scope, and due dates. This ensures clarity and sets clear expectations for both parties involved. (Source: Medium.com)
Outsourcing can offer significant advantages, but it also comes with inherent risks like the ones discussed above, that need to be managed effectively to prevent such outsourcing disasters. By understanding common outsourcing failures and implementing strategies to avoid them, businesses can enhance their outsourcing practices and achieve better results. Clear communication, rigorous quality control, cultural alignment, data security, and well-defined contracts are all critical components of a successful outsourcing strategy.
At Menal Partners, the outsourcing services are structured to be accessible and hassle-free for mid-size businesses in the USA. The model emphasizes clear communication, robust quality assurance, and transparent processes to ensure that our clients receive the highest level of service. With our dedicated approach, we make outsourcing a seamless and efficient experience, allowing businesses to focus on their core operations while we handle the complexities of outsourcing.
Embrace the benefits of outsourcing with confidence, knowing that our expert team is here to support you every step of the way, ensuring that your outsourcing journey is successful and rewarding.