Australian businesses thinking of using an outsourcing company need to be aware of the risks and benefits of such a strategy.

The appeal in outsourcing lies in getting a better job done by someone else at a lower cost. This has become a booming industry for the IT and telecom sector, to the tune of $US251 billion as per the most recent research by Gartner. Unfortunately this idyllic approach does have its own limitations and challenges and can turn into a sour deal when it doesn’t yield the expected benefits.

Slyvia Penning recently wrote an article in the Sydney Morning Herald – in the article she mentions the top 5 mistakes businesses make with outsourcing. Below are some of her key points.

Here are a few of the strategies used by experts in the outsourcing industry to avoid a bad experience, which have been collated and presented by IT Pro:

1. Avoiding too low a Price:

While the beauty of an outsourcing contract lies in its cheapness, the contractor should not keep bargaining for the lowest price. According to Jim Longwood, research Vice-President for Gartner, if too cheap a deal is struck, the service rendered will have minimum to no service levels and rigid working conditions. The outsourced supplier doesn’t have much of a choice, since he needs to at least meet his cost price and will take any measures that help him do so.

2. Giving Due Importance to Teamwork:

A vendor’s job does not end with signing the outsourcing contract; a constant interaction with the client is the key to a long and mutually satisfying working relationship. In this way, any dispute that may occur along the way is quickly settled and the show goes on.

Alan Hansell, Intelligent Business Research Services (IBRS) shares his advice with outsourcing contractors to ensure that a skilled troubleshooting individual is made available to them by the supplier at all times. This individual will preferably belong to the senior management team and will come in handy when there is a fall-out, to orchestrate a solution and liaise with the CEO of the supplier’s firm, if the need should arise.

3. All Hands on Deck:

Many IT companies are quick to adopt the outsourcing model, while those that have been playing this market for some time may choose to try the services of a new supplier. Faltyn says that such a big transition in the operating model of a company needs to be backed by cohesive efforts between both parties, especially in the initial phases.

4. Levying Effective Penalties:

Longwood urges outsourcing contractors to strike the right balance between using their own power and trusting the supplier’s level of work. One of the areas where this applies is in setting penalties for a slack performance. It has to be relatively harsh, so that the supplier actually addresses the problem rather than just paying up. On an average, it is found that a penalty of 10 to 20% on the monthly fee ensures quick remedial action.

5. Finding the Optimum Term of the Contract:

An important question that companies face is how long the outsourcing contract should last. While a longer relationship with a single supplier means higher monetary savings for the contractor, the quality of work delivered may degrade over time. On the other hand, a constant change of suppliers brings in overhead costs and will possibly hamper the flow of business. There are no prescribed guidelines; contractors must simply track the progress of work and follow their instincts.