Business often considers IT as a support function, which drives the business. In order to focus more on the business development, IT or IT enabled services is outsourced which is not their core competency as part of their business strategy.

Outsourcing helps to develop, manage and administer the IT activities in accordance with agreed upon deliverable's, performance standards and outputs as set forth in the contractual agreement.

Information technology outsourcing describes a process whereas an organization decides to contract out or sell the firm's IT assets, people and/or activities to a third party vendor, who in exchange provides and manages these assets and services for an agreed fee over an agreed time period. Outsourcing has benefits and also risks as well in IT function of business.

The following are the IT outsourcing risks:

Hidden service costs: The factors will be of complexity of activities measurement problems and uncertainty. First the company underestimates the setup costs, including redeployment costs, relocation costs. When the cost reduction is the main objective of outsourcing, there are typically early cash flow benefits and long-term cost savings. Certainly, a company can compare vendor costs with current costs and building technology and learning curves into future cost schedules.

Loss of organizational competencies: The factors will be scope and proximity of the core competencies and interdependence of activities. Organizations tend to learn to manage IT by doing, they do not appreciate the challenges until they have experienced them. Since, informed buyers of IT services have been providers of the particular service before. Management tends to learn the value of IT applications by using them and seeing further opportunities for development. The strategic scope of systems often emerges as users learn what is possible and also about the business context. This situation often occurs with the sales transaction systems in food and drink companies that were seen as essential. However, in other areas of business, responsibility for strategic assets is not so easily delegate to market place.

Poor quality and reliability: Factors will be inability to control vendor's technical quality and loss of control over vendor's technical quality

Damages due to security breach: Factors are Intellectual property protection and privacy concerns

Cost of delayed delivery/non-delivery: Vendors fail to deliver as per contract. There will be delayed delivery due to unexpected change in requirements.

Vendor lock-in: In some instances the services will be delivered by the vendors that are developed using proprietary methodologies. Organizations will have to stick with the same vendor to avail the services and might compromise on cost and time to ensure that business functions smoothly.
If organization decides to change the vendor, they have to rebuild everything from scratch which will involve lot of investment in cost and time.

Quality standards: Even though the vendors are very good at technical and functional aspects, the quality of the software maintenance services may not meet the standards of the organization. This can happen if the vendors are small and don't have enough appetite to invest in developing the quality standards in procuring infrastructure to deliver the services like high end tools. Quality standards vary from one country to another and contribute to risk.

Cultural: Operating procedures and the work standards vary from one organization to another, In case of cross border tie-ups this is clearly evident due to the differences in the communication, work style, behavior etc. Country specific cultures can add risk in global outsourcing. Language and work ethics vary from country to country and that may contribute to risk.

Political: Outsourcing is one of the sensitive areas which will be affected due to the political decisions taken, and these are very uncertain as the change in governments can lead to new rules and regulations. Political issues are out of the organization's control. Political instability is a major concern for global outsourcing as the government rules and regulations may have adverse effect on outsourcing.

Disputes and litigation: Companies should be careful in defining the contractual obligations and legal terms while getting in to an agreement with the third party vendors as they might lead to litigation's.

Security: In the present environment, Information plays a crucial role for any Organization and loss of information might lead to severe concerns on the performance and sustainability of the Organization. If the Organization deals with financial services like Banks or any financial institutions, data is very sensitive and companies cannot afford to expose them to outer world.
Irrespective of these companies having stringent rules with the outsourced vendor on data sharing policies, there is a degree of risk as the information flows out of Organization.

Example:
€ Bank account numbers, card numbers shared to vendors for processing.
€ Personal details shared to HR outsourced vendors which will have crucial information like mobile numbers, personal interests.

Multi-vendor arrangements: If the outsourcing happened to multi vendors, Integration of the services will be difficult as the quality, standards and the methodologies for delivering the services will be different.
Ex: In IT systems, there is a lot of dependency for system changes on the satellite systems, since the data from one system is used by another system for processing.
If both the systems are managed by different vendors, utmost care should be taken to align them on timelines and avoid communication gaps on the data standards. In this scenario Organizations will have to invest their time more in management than actual implementation of the projects.

Geographic location: Right services required for the companies may not be available the vendors operating region / country. The location of these vendors might not be suitable for business operations due to the countries policies on outsourcing, political uncertainties and natural calamity prone areas etc.

Disaster recovery: Most of the vendors might not have a proper Business Continuity plans in place, as it is very crucial for the smooth functioning of business in uncertain events like natural calamities and break down of systems etc.

Inexperienced staff: The IT companies are likely to have IT specialists. The biggest risk occurs when the outsourcing contract is awarded to major vendor. Even the boldest company would try to transfer some of its IT staff to the vendor to ensure some continuity of service and knowledge in short run.

Now that you have seen the risks associated with outsourcing the IT function of your business, there is a lot to think about. Whether you choose to outsource or hire internally, one thing is certain, you must know how to manage successful working relationships with your IT service providers.