Why does outsourcing fail?

Let’s be real, so many people are scared of outsourcing as they believe it is part of the dark side of business strategies, but they are ignoring the benefits it can provide. Outsourcing is not a bad thing, unless you allow it to be, most of the time when it fails is due to poor planning, wrongfully distributed resources, bad training, or outsourcing every task companies don’t want to do. 

It is a mistake to believe that by doing all the wrong things, outsourcing will come as a savior, but the truth is, it won’t. This strategy is not a one-size-fits all solution nor is it a hero that will save you from all your problems. It needs a lot of work behind it to actually thrive, so you need to put some effort into outsourcing before you actually hire a vendor. 

How can you prevent your outsourcing strategy from failing? It is not as hard as it may seem, you just need to make sure to plan thoroughly, define clear goals, allocate resources smartly, and hire a strategic partner, not just an outsourcing firm. If you want to prevent an outsourcing failure, then let’s review the most common failures to help you avoid them!

Why outsourcing fails: 10 common issues

Despite some outsourcing services accelerating toward $500 billion by 2025, outsourcing will still fail if not done it correctly. The reasons for this are not mysterious, they usually come from poor planning. If companies are not addressing the issues early in the process, they will suffer expensive consequences, putting their reputation at risk too. 

Do you want to know why outsourcing fails? Well, these 10 common reasons are usually associated with it:

Why outsourcing fails

1. Not defining clear goals

When you outsource any task without thinking about the metrics or KPIs, you are most likely going to fail. How would you know if your strategy is working if you are not measuring it? On business strategies there should not be any room for interpretation, everything needs to be measurable.

You and your outsourcing vendor need to be specific with KPIs and timelines to have your priorities straight. Without them you are navigating without any destination, which will lead to unfocused work and unmeasurable assignments. Clear goals could include: Increasing customer satisfaction levels up to 95% or reducing our average handle time to 4 minutes.
Sign to watch: You or the vendor just realized that you didn’t set any goals at the beginning of the process, and months later you want to define what success looks like. RED FLAG WARNING! These goals need to be agreed upon since day one, if not you are on the road to failure.

2. Lack of communication and control

Sometimes when you hire a third-party vendor, you may feel like they are too distant or that some barriers exist between you two. These barriers can be due to physical locations, languages, time zones, or levels of expertise. It is important that you meet with your potential partners before hiring them to prevent this from happening.

You should not lose the control over your strategy, nor should you take full control of it, it must be a combination of efforts to work best. Communication is key, from the beginning you must work together to determine the levels of control each party will have. Also, you must not forget about your partner once the work begins, they shouldn’t do everything on their own. 
Sign to watch: You start identifying several delays, issues, or sometimes even surprise fees. When you are not receiving timely updates, then it is too late, and you should hire another partner.

3. Outsourcing the wrong tasks

Not everything should be outsourced. Some tasks are core to your value proposition or require deep institutional knowledge. Others lack the documentation needed for an external team to succeed. When companies offload strategic or poorly defined processes just to lighten the workload, it almost always backfires.

Not all of your business tasks need to be outsourced, some of them must be overseen entirely by you. You may feel overwhelmed by responsibilities, but you should not trust anyone else with your critical business decisions. Only you know the entirety of your company and its products, so stay working on production. 

But, there are some perfect tasks that can be outsourced, like: customer service, back-office operations, content moderation, technical support, etc. These tasks won’t compromise your company if you work strategically with an outsourcing partner. Delegate only when you are totally sure about the benefits these vendors can bring, but make sure you stay involved.
Sign to watch: Your outsourced team is not delivering satisfying results or they are not proving to be experts on the task. Another sign is when their tasks are delayed and affecting other business departments or worse, your customers.

4. Not doing thorough research before hiring a company

Every business decision must be taken seriously and part of it comes from doing your research. Looking for potential partners, browsing through their website, reading their customer stories, watching testimonials, and having interviews with them, will all help you decide whether or not they are a great fit for you. 

Selecting a vendor only based on reviews or because they showed up first on Google is not a good idea. You must investigate and meet with them in order to know if they are a good fit. Skipping research will lead to great mistakes that will affect the quality of your strategy, don’t let that happen, it is your responsibility to do it. 
Sign to watch: If your vendor doesn’t offer a service that will satisfy your needs, if they don’t have case studies or reviews, if their pricing is way too high or suspiciously low, or if they don’t have enough experience in your industry are signs that they are not a good choice.

5. Going for cheap options

Even though pricing is a great deciding factor when it comes to outsourcing, your decision shouldn’t be based solely on their fees. If you go for the cheapest option, don’t expect them to do a great job and definitely don’t be surprised when extra costs start piling up. Companies need to be clear on their pricing strategy so others know exactly what they are hiring. 

As going for the cheapest option usually turns out to be a mistake, going for the most expensive, just for the sake of thinking that expensive means quality work is a mistake too. Before making a decision, meet with your options and ask them about their pricing rates, understand why they charge that amount, ask about hidden fees, and make sure they know exactly how to justify their pricing.

Sign to watch: You find a vendor that promises the world and beyond, but their pricing is way lower than the average price. Or you find a vendor that’s the most expensive, offers many services, but can’t justify why their rates are too high. 

6. Hidden costs

Many companies will advertise a specific pricing strategy, but stay silent about their extra costs, you must be careful when dealing with this. Have an interview with your top options and question everything about their pricing. It may seem annoying, but it is the only way for you to be sure that they are actually worth it. 

Hidden costs, as their name suggests, won’t be specified on a company’s website and they won’t talk about them either at first. Once you meet with them, make sure you understand the calculation behind their price. After you have decided on a vendor, read carefully the contract before signing, that is the last filter to understand if they are your best option. 
Sign to watch: The price seems too good to be true, when this happens, most of the time, it is because extra “features” or “benefits” are going to be charged. Dishonest charges should not be tolerated. But, on the other hand, if your vendor communicates with you with enough time and is able to justify why an extra cost will be charged, then that’s okay if you agree.

7. Culture misalignment

Culture shouldn’t be taken for granted when making a business decision. Your culture is your driving force and every decision you make needs to reflect your values. Company philosophy is important to understand where they come from and it will give you an idea on why they are doing things the way they do. 

If your cultures don’t align, then do not associate with them, as much as everything else may seem perfect, trust us when we say it is going to bring several issues over time. 

Customer-facing tasks like customer support are affected by this especially when you have an outsourced team that is not adapting their behavior with your culture. 
Sign to watch: If a company’s approaches seem too harsh or out of tone with your brand, and they are not willing to adapt it for you, then you shouldn’t hire them.

8. Ignore employee and customer feedback

Feedback is one of the most powerful tools for businesses, employee and customer feedback are important to identify trends or pain points that would otherwise be ignored. How can you spot things that only your users or employees are aware of, and how do you expect them to communicate them with you if you are not offering a way to do it. 

Insights that come from feedback are very valuable and should not be taken for granted. Before your employees and customers start complaining, take your time to understand them. The best way to do it is through feedback, companies that ignore this will not understand how to improve their outsourcing strategies. 
Sign to watch: When you start noticing a lot of customer complaints, decrease in satisfaction, or lower amount of sales, then it means you didn’t pay enough attention to what your customers and employees said.

9. Not worrying about employee wellbeing

In an industry like outsourcing where churn rates are very high, companies need to offer their employees the necessary tools for them to feel valued and cared for. 58% of IT workers report they can only manage 85% of daily tickets, this a mistake from vendors that often stretch teams thin to maximize profits.

Your employees need to be seen as your first line of defense, so treat them the best way you can. Make sure they are not feeling overwhelmed by their tasks, take care of their mental health by having wellness sessions and breaks that will make them recharge their energies. Avoid unnecessary pressures on them and invest money on more team members if needed to prevent your employees from running away. 
Sign to watch: High churn rates in your vendor’s team or declining responsiveness and quality over time. This can lead to a decrease in both employee and customer satisfaction, when employees feel unmotivated, they will not offer their fullest.

10. Poor security protocols

Outsourcing exposes companies to data breaches and IP theft if vendors lack strong cybersecurity practices. Weak contracts, unclear data access policies, and inadequate oversight can open the door to compliance violations or reputational damage.

A great challenge that can be faced when hiring outsourcing vendors is security and data privacy. Not every vendor invests enough on these critical aspects, and your customers will not love this. You risk losing their trust, and like every other relationship, when trust is lost, there is nothing else left to do.

Pay attention to what strategies they implement when it comes to data leaking and breach prevention. Weak security can lead to dissatisfaction, and worse, it is going to hurt your company’s reputation. They should not be the only ones worrying about it, as you must invest in it too. 

Sign to watch: The vendor hesitates or is vague when asked about their security certifications, protocols, or incident history. 

Examples of outsourcing failures

1. JP Morgan

JP Morgan partnered with an outsourcing provider to cut costs and modernize their IT operations. Instead, it turned into a billion dollar budget disaster, because the focus was too narrowly set on cost reduction without assessing operational complexities or ensuring alignment on deliverables.

What went wrong? Prioritizing cost savings over strategic fit and failing to set clear service expectations.

Lesson: Outsourcing any function requires planning and a strategic approach, not just lowering expenses.

2. Boeing 737 Max

Boeing outsourced software development for the 737 Max to low-cost contractors. Critical design flaws in the system led to two fatal crashes, costing many lives and severe damage to Boeing’s brand and market value.

What went wrong? Outsourcing high-stakes software development to cut costs without strict oversight and quality controls.

Lesson: Critical tasks should not be delegated since it can have irreversible consequences.

3. Dow Chemical

Dow Chemical partnered with an outsourcing provider for IT services, but the relationship ended when the partner was embroiled in a massive internal fraud scandal. Dow suffered operational disruption and reputational risk by association.

What went wrong? Lack of contingency planning for vendor integrity issues.

Lesson: Choosing a vendor needs to go beyond technical capabilities, they should be compliant and follow ethical practices.

4. Homejoy

Homejoy, once a promising on-demand cleaning service, outsourced customer support to reduce costs. The service became inconsistent and disconnected from customer needs, accelerating user churn and affecting brand loyalty. The company ultimately shut down.

What went wrong? Lack of quality control and insufficient training of outsourced support teams.

Lesson: Customer service is a direct reflection of brand identity, outsourcing this without quality standards and brand alignment is risky.

5. Solyndra

Solyndra, a solar panel manufacturer, outsourced key manufacturing components. The outsourced products failed to meet quality standards, contributing to performance issues. Combined with poor market conditions, this led to the company’s bankruptcy.

What went wrong? Weak supplier management and quality assurance in outsourced production.
Lesson: For manufacturing, rigorous supplier audits, material checks, and ongoing QA are non-negotiable.

How to prevent outsourcing failures

Set clear goals

Every outsourcing arrangement should start with well-defined goals and quantifiable targets. Having clear metrics aligned with internal teams and vendors on what success looks like will help you measure your progress. 

Tip: Include both performance metrics and business impact measures (cost savings, customer satisfaction scores) in your outsourcing objectives.

Develop rigorous vendor selection processes

Not all vendors are created equal, and skipping research is the quickest path to becoming another example of why outsourcing fails. Companies should evaluate potential vendors on:

• Track record and results.
• Customer references.
• Compliance standards.
• Financial health.
• Cultural fit.

Draft detailed contracts

Contracts are not legal safety nets only, they should be operational blueprints. These contracts need to detail everything that will be done during the contract’s time. A detailed contract outlines:

• Scope of work: What is (and isn’t) included
• Deliverables: Specific due dates.
• SLAs: Clear service level agreements tied to non-compliance penalties.
• Escalation paths: Who to contact when problems arise.
• Exit clauses: Terms under which the relationship can be terminated.

Foster transparent communication

Lack of communication is a recurring reason why outsourcing fails. Successful strategies require scheduled check-ins and shared dashboards for visibility. You shouldn’t only meet when there’s a problem, regular updates prevent small issues from snowballing.

Best practice: Establish communication protocols from day one, including preferred tools, meeting cadences, and escalation procedures.

Account for culture & training

Time zones, holidays, decision-making hierarchies, and even humor can create issues. Teams need cultural awareness training to bridge these gaps. Vendors must also be trained on your company’s brand voice, standards, and values, especially for customer-facing roles. So, don’t assume cultural alignment will happen organically.

Maintain oversight

Outsourcing doesn’t mean delegating everything to the other side, you must retain internal ownership of the relationship. Assign a dedicated vendor manager or team to oversee performance and ensure continuous alignment with business goals. Lack of control is one of the core reasons why outsourcing fails.

Risk assessment & mitigation

Outsourcing introduces risks like data breaches, IP theft, compliance violations, and supply chain disruptions. Before finalizing any deal, conduct a comprehensive risk assessment that identifies potential pitfalls and defines mitigation plans.

Mitigation strategies include:

• Multi-layer security protocols.
• Data protection agreements.
• Business continuity and disaster recovery plans.
• Vendor insurance requirements.

Manage dependencies

Over-reliance on the outsourcing partner creates vulnerability, if that vendor makes a mistake, your operations suffer. Do not overrely on a vendor only, you should have a backup plan for any potential case, so there must be another team ready to step in.

How to ensure a successful outsourcing strategy:?

Outsourcing can be a powerful driver of business growth when executed with strategic intent, without it, companies risk being added to the list of examples of outsourcing failures. To avoid that fate you must ensure that every outsourcing effort is aligned with your business objectives.

Companies need to ask themselves: how does this outsourcing initiative directly support competitive advantage or core strategic priorities? Do this to have a successful strategy: 

• A critical step in this process is conducting thorough research on potential vendors. This is where many companies stumble and discover why outsourcing fails. 
• Continuous improvement should be a part of every outsourcing relationship. Markets change, technologies evolve, and so do business needs. 
• Financial clarity is another pillar of a successful outsourcing strategy. Poorly structured pricing fees are common examples of outsourcing failures, hidden costs and vague pricing models erode the expected savings. 
• Ultimately, outsourcing success is about more than finding the right partner; it requires an intentional, disciplined strategy that prioritizes alignment and adaptability.

Ready to avoid outsourcing failures?

Planning is the key for these strategies to excel, you should look for an outsourcing vendor that wants to see your business thrive and not only their paycheck. Having a mutual passion for growth will help both parties incredibly, that’s why you shouldn’t shy away from waiting a long time before hiring an outsourcing company.

At Horatio, we are committed to see your company grow beyond your expectations. When you hire us, you are bringing in a team that’s passionate about your industry and products. We want to help you achieve your goals and overcome any roadblock. Contact us today and let’s find a strategic approach to your case.