Business Risks of Offshoring Software

While the previous blog posts have covered the financial benefits of offshoring, there are also considerable risks that businesses have to take into account when sending software projects overseas. According to a well known study done by the Aberdeen Group, nearly 50% of all projects that were outsourced to a foreign country either failed outright or failed to meet expectations. 76% of companies that participated in the study reported that the costs and effort of vendor management was much higher than expected. 51% of companies reported that the outsourcer was not meeting their expectations, while 30% reported that there were existing problems with the outsourcer management process such as inadequate governance and conflict resolution procedures. When it comes to software, a low quality offshored product that does not meet expectation can include disorganized, hard to read code with poor comments and a lack of unit tests. There are several reasons why offshored software projects have a higher failure rate compared to local ones. The most important of these include educational and cultural differences between countries.

The large gap in the level of education between the United States and foreign countries like India or China is a major reason why offshored software projects have a greater chance of failure. According to data collected by the United Nations, the United States ranks 13^th in the Education Index, while China and India rank 98^th and 147^th respectively. According to the Academic Ranking of World Universities, the United States offers the best computer science education in the world with the top 9 (and 16 of 20) computer science universities being American.

Cultural differences also increase the chance that offshored projects will not meet expectations. A study from Accenture found that “two-thirds of 200 U.S. business executives said that miscommunication arising from cultural differences has caused problems when outsourcing offshore.” This is due to the fact that communication and decision-making styles among other factors are different for each country. Communication is a very important aspect for software development, especially agile development, which relies on communication to maintain a high performing team.

It is a risky choice for businesses to offshore software. Offshoring software projects make sense where robustness and quality aren't crucial factors (such as prototyping). However, in most cases the correct choice isn't clear, as it can cost more money to maintain poor quality software, as opposed to producing it right the first time.