Outsourcing is present in virtually every business sphere: order fulfillment, accounting/billing, IT, software and hardware development, manufacturing, business processes, call center, human resources, tech support - almost anything a company chooses.

Outsourcing is thriving due to the opportunities it carries, including cost-cutting, speed, and boosting productivity. By taking advantage of the lower labor costs in various countries, companies that outsource report savings as high as 50%. Higher productivity is achieved when a company concentrates on its core strengths and utilizes outsourced experts for everything else.

Unfortunately, as with most good solutions, outsourcing has a dark side for those who use it carelessly and more and more articles are drawing attention to the fact that outsourcing is not always as profitable, easy or logical as was once proclaimed.

Anita Wotiz writes a blog post Outsourcing Software Development - a bad idea? describing things to consider before making an outsourcing decision.

1. "Analyze your rationale for doing it. Do a realistic cost/benefit analysis. Don’t assume that just because it would take 20 in-house staff to do this work that you can get 20 cheaper developers … to do the same work by the same deadline. Figure out what the real cost will be, and don’t forget the in-house staff that you need to make sure the project is on track."
Considering why you want to outsource a process is definitely the key point. If the goal is to lower costs, then first calculate the cost of achieving the savings, i.e., would training in-house staff or hiring temporary contract labor be simpler and cheaper than normal outsourcing.

Taking advantage of transformational outsourcing is a very different question, since it involves more of a partnership relationship and is usually longer term.

2. "As a part of cost/benefit analysis, analyze the risks and consider the costs associated with mitigating them. Often management assumes that by giving away software development… they also give away the risk… (but) the project manager will face all of the challenges of an in-house development plus many additional ones. The outsourced employees are part of another company with its own goals that are not the same as your company’s goals… They have their own managers they must obey."

It is true that the outsourced employees are not always at your disposal; but there should be a champion in your corner - the outsourcer’s project manager who represents your interests.

You also need to find out how the communication process in the contracting company is organized, i.e., how often, and how you communicate.

3. "Create a Request for Proposal (RFP) that describes … the software you want a supplier to create (the software requirements), anything else you want them to deliver (documentation, testing results), the testing they must do, the processes and tools you expect them to have and use, and all of the project management reporting you expect of them so that you will have insight into their progress and their evolving product. Include your deadline for completion, and if the delivery is to be phased, describe the phasing."

If your RFP isn’t clear enough to work from, choose a company that can do a simple needs assessment document and then convert it into a detailed spec.

4. "Ask for bids, and question the supplier to be sure they understand what you’re asking of them… [Don't] try to fool the supplier into bidding low based on a misunderstanding of the scope… If you have a choice of suppliers, don’t necessarily use the lowest bidder."

Price is a poor deciding factor. Far more important are the supplier’s expertise, understanding of your project’s nature and scope. Cost-saving, when carried to absurdity, can only waste money, not save it.

5. "Analyze your costs to manage the supplier…: project management tasks (analyzing status, managing progress),… technical staff to manage technical reviews and assess quality, and … testing staff. With an offshore supplier make sure you’re ready for language challenges, the time zone shift, and the distance between you and the faces of the development team. Then the final step should be to "redo the cost/benefit analysis and make sure that you still want to outsource the work."

The language barrier is minimized if the supplier’s team has good written English skills and some understanding of your culture, while the time zone shift is actually an advantage when treated properly.

6. "Choose a supplier and write a contract that includes everything you put in the RFP."

Even when outsourcing makes sense based on the cost-benefit analysis, remember that you still need to provide proper management of the process.

Outsourcing isn’t a silver bullet or a one-size-fit-all option for companies. It must be approached with care and managed properly. Choosing a competent, reliable supplier is the best way to alleviate the challenges inherent in outsourcing.

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