IT outsourcing risks and challenges: where they show up and how to control them

Six months ago, you signed with a development team, and the invoices have arrived on schedule ever since. The weekly update says the work is on track. Then an investor asks what shipped last month, and you are not sure what to show them.

If that sounds familiar, you are dealing with two kinds of IT outsourcing risks and challenges at once. Some were set in motion before the contract was signed, and others come from how the work is managed every week. Most guides fold both into a single list of 10 things that can go wrong. That format is hard to act on, because each problem appears at a different point in the relationship and needs its own fix.

The sections below follow the order you will run into these problems: choosing a team, signing the contract, the first 90 days, and day-to-day delivery. Each one covers the early warning signs and the control that addresses them, and the risk register at the end puts everything in a table you can use with your own vendor.

Risks and challenges are different problems

A risk is something that might happen. Your vendor might lose the two engineers who know your codebase, or a dispute might cut off your access to your own code.  You handle risks mostly before the work starts, by pricing them, transferring them, or blocking them in the contract.

A challenge is something that will happen. Your team and the vendor's team will read the same requirement differently, and a time zone gap will slow down feedback. Challenges are managed every week, through routines, shared tools, and one person on your side who owns the relationship.

In practice, you need both toolkits. The contract protects you when something breaks, and the weekly routine catches most problems before they get that far.

Where outsourcing goes wrong, according to the data

Deloitte's 2024 Global Outsourcing Survey asked more than 500 business and technology leaders what gets in the way of value from outsourcing. The top answers point at the client side of the relationship more often than at the vendor.

Four of the top six are things the client controls: tracking value, preparing its own people, fitting the vendor into how the business runs, and managing the money. Deloitte surveyed large organizations with procurement teams and vendor management offices. A startup or small business usually has none of those, which tends to make the gap wider.

The same survey found that 70% of organizations had brought some outsourced work back in-house over the past five years, most often to get better control over quality and performance (68%). Even so, 82% of those organizations said outsourcing still met or exceeded their expectations. The pattern points to how the work was managed, which is something the client can fix.

Security adds a newer layer. Verizon's 2025 Data Breach Investigations Report found that third-party involvement in breaches doubled to 30%. Every vendor with access to your systems is now part of your security perimeter.

Before you sign: selection and scoping risks

The cheapest time to reduce outsourcing risk is before anyone writes code. Three mistakes at this stage tend to surface as trouble months later.

• Outsourcing the wrong work

Not every part of your product should leave the building. Ask yourself whether you would lose your edge if a competitor had this capability tomorrow, and if the answer is yes, keep the decisions about it in-house, even if a vendor writes the code.

Deloitte found that 64% of organizations that pulled work back did it to build strategic capabilities in-house.

For most small businesses, that means you own the product decisions, the roadmap, and the customer relationship. The vendor owns implementation. Problems start when a founder hands over the "what" along with the "how," and the vendor ends up deciding what the product is.

•  Choosing a team on hourly rate

An hourly rate is the easiest number to compare and the least useful on its own. The real cost also includes the hours you spend clarifying requirements and chasing updates, the weeks before a new team is productive on your codebase, features rebuilt because a requirement was misread, and the cost of starting over if the team does not work out.

A lower rate with no tests and little overlap in working hours can end up costing more than a higher rate from a team that pushes back on unclear scope. Quotes are only comparable when they price the same written scope, so send every vendor one document before you look at the numbers.

Read more: 8 MVP development challenges, and how to scope around them

• The sales team and the delivery team are different people

Agencies often bring their strongest people to the sales call. The engineers who show up after signing may have less experience. Before you sign:

• Ask for the profiles of the people who will work on your project, and write their names into the contract.
• Run a paid pilot of two to four weeks on a real piece of work. It shows you how the team handles questions, estimates, and feedback, which no sales call can.
• When you call references, pick two clients close to your size and stage, and ask what went wrong on their project and how the vendor handled it.

In the contract: risks you can price or block

The contract is where risks become someone's responsibility. Three clauses matter more than the rest for a small business.

• Who owns the code

In the US, software an outside developer writes for you is not automatically yours. Under the US Copyright Office's work-made-for-hire rules, commissioned work qualifies only in nine specific categories, and software is not one of them. Without a written assignment, the vendor or the individual developer can end up as the legal owner of your product.

The fix is a clause that assigns all IP to your company, typically on payment. Add a list of anything the vendor brings that it already owns (libraries, templates, internal tools) and the license you get to keep using it. Have a lawyer review this section before you sign.

• An engagement model that does not fit the work

The pricing model shapes how the vendor behaves:

• Fixed price works when the scope is stable and written down. On a product that is still changing, vendors add a buffer to protect themselves, and every change becomes a change order.
• Time and materials fits evolving work, as long as it comes with a budget cap and regular reporting against it.
• Staff augmentation adds engineers to your team. Someone on your side has to direct their work every day.

If your scope is still moving and you sign a fixed-price deal, expect friction from the second month.

How you get out

Every contract should answer one question clearly: if this ends tomorrow, what do you walk away with? Check for:

• A termination-for-convenience clause with a defined notice period, such as 30 days.
• Every account in your company's name from day one: code repository, cloud hosting, domains, app store listings, and third-party services.
• Documentation and a handover period, listed in the contract as deliverables.
• Confirmation that nothing in the build depends on a platform only the vendor can run or deploy.

Vendor lock-in usually builds up over months, as the vendor collects the accounts, the knowledge of how the system works, and the only working deployment process.

The first 90 days: transition challenges

In Deloitte's survey, 46% of organizations reported poor vendor performance during the transition. The habits set in the first weeks are hard to change later, so this is where to spend your attention.

• Knowledge transfer

If a new vendor takes over an existing codebase, plan the handover as a project of its own. It should include a code review, a list of known issues, access to every environment, and a written summary of how the system fits together.

Tow Ninja's MVP had stalled with its previous developer when the company brought in Sproutly. Before adding any features, the team reviewed the code, fixed the most urgent problems, and added unit tests and an automated deployment pipeline.

The missing features came after that foundation was in place. The MVP launched and met the legal reporting requirements for its pilot in Harrisonburg, Virginia (read the Tow Ninja case study).

• Fitting the vendor into how you work

47% of organizations report poor integration of vendor services with how they operate. For a small team, fixing that means a backlog both sides can see, a single place where decisions get written down, and a named person on each side with the authority to say yes or no.

If the vendor tracks your work in its own tool and you cannot open it, you have lost visibility before the first sprint ends.

• Preparing your own people

53% cite poor change management on the client side. Your team needs to know who to ask, how to report a bug, and what changes in their own work. Set up a weekly demo from week one, where you click through working software yourself instead of watching slides.

Day-to-day delivery: the challenges that stay with you

Once the team is up and running, the IT outsourcing challenges shift from setup to upkeep. They stay manageable as long as someone on your side checks on them every week.

• Communication and time zone overlap

Shared working hours decide how fast questions get answered. For a US company, onshore teams typically share 6 to 9 working hours, nearshore teams 4 to 9, and offshore teams 0 to 3. With little overlap, a question asked at 4 p.m. gets an answer the next morning, and a day of work is gone.

Offshore teams can still work well when they have written specs, recorded demos, and a daily window when both sides are online.

Read more: Onshore vs nearshore vs offshore outsourcing: how to choose

• Seeing the real state of the work

The most common challenge in Deloitte's survey, reported by 55% of organizations, is a lack of tracking on whether the work delivers value. On a small project, this looks like green status reports while the release date keeps slipping. Ask for three things:

1. Direct access to the code repository, the task board, and hosting, in your company's name.
2. A shared definition of done, for example: code reviewed, tested, and deployed to a test environment.
3. A live demo of working software every one to two weeks.

Read more: 7 signs your dev team is behind (and you're the last to know)

• Team turnover and key people

Small vendors often have one or two engineers who hold most of the knowledge about your product, and when they leave, progress can stall for weeks. A key-person clause that requires notice and a replacement plan limits the damage. Documentation written as the work happens, along with regular code reviews, spreads that knowledge across more than one person.

• Security and data protection

Third-party involvement in breaches doubled to 30% in Verizon's 2025 report. IBM's 2025 Cost of a Data Breach research put the average breach at $4.44 million globally and $10.22 million in the US. A small company pays less in absolute terms, but it has far less room to absorb the hit.

The basic controls cost little:

• Give the vendor the least access it needs, through individual accounts you can revoke in minutes.
• Keep real customer data out of development environments and use test data instead.
• Sign a data processing agreement if the vendor will handle personal data.
• Ask whether the vendor holds SOC 2 or ISO/IEC 27001 certification, and if it does not, what it does instead.
• Check whether data rules limit where your data can be processed, especially for health, financial, or location data.

• How your vendor uses AI

Deloitte found that 83% of executives expect vendors to bring AI into service delivery, yet fewer than half have seen productivity gains from it so far. AI coding tools can speed up delivery. They also raise new questions: which tools touch your code, whether your code or data goes to outside services, and who owns AI-assisted output.

IBM's 2025 research found that shadow AI, meaning AI tools used without approval, was involved in 20% of breaches. Ask your vendor for its AI usage policy in writing and reference it in the contract.

• Delivery continuity

Offshore and nearshore teams can be hit by events you do not control: power outages, political instability, or national holidays that stop work for a week. Ask your vendor what happens if the team cannot work for five days. A good answer names backup people or locations, explains how work gets handed over, and has been tested at least once.

IT outsourcing risk register

Here are the IT outsourcing risks and challenges from this guide in one table. Copy it into a spreadsheet, add a status column, and review it with your vendor once a month.

How Sproutly helps

Most of the controls in this guide sit on the client side, and a small business rarely has a procurement team or a technical lead to run them. That is the work Sproutly does. Since 2017, Sproutly has helped startups and small businesses ship software with outsourced teams, and since 2023 it has worked through its Edge Sourcing model:

• Define. Turn your idea into a written scope that vendors can quote against, so you compare like with like.
• Assess. Find the right team, onshore, nearshore, or offshore, or get an outside assessment of the team you already have.
• Monitor. A US-based Edge Facilitator works in your time zone, tracks progress, translates between the business and technical sides, and flags risks while they are still cheap to fix.

Sproutly's leadership includes a fractional chief product officer, chief operating officer, and chief information security officer, so product, delivery, and security questions each have an owner.

References

1. Deloitte. Global Outsourcing Survey 2024.
2. Verizon. 2025 Data Breach Investigations Report.
3. IBM. Cost of a Data Breach Report 2025, as summarized by Baker Donelson.
4. US Copyright Office. Circular 30: Works Made for Hire.

FAQs

What are the biggest risks of IT outsourcing?

The biggest risks are unclear IP ownership, losing control of your code and accounts, choosing a team on price alone, and poor visibility into progress. Security risk is growing: third-party involvement in breaches doubled to 30% in Verizon's 2025 report. Most of these can be reduced through the contract and weekly oversight.

What is the difference between an outsourcing risk and an outsourcing challenge?

A risk might happen, so you reduce it in advance through vendor selection and the contract; losing a key engineer is one example. A challenge will happen, such as two teams reading the same requirement differently, so you manage it week by week. Each one calls for a different tool.

How do you reduce the risks of outsourcing IT services?

Write the scope down before you compare quotes, run a paid pilot, and put IP assignment, client-owned accounts, and exit terms in the contract. During delivery, keep direct access to the code and task board, watch working software every one to two weeks, and name one person on your side who owns the relationship.

Is nearshore outsourcing less risky than offshore?

Nearshore teams usually share more working hours with US clients (4 to 9, compared with 0 to 3 for offshore), so feedback moves faster, while offshore teams typically cost less. Overall risk depends more on scope clarity, contract terms, and oversight than on geography. Data rules can also rule out some countries.

What should an IT outsourcing contract include?

At minimum: IP assignment to your company, named team members, a key-person clause, data protection terms, an AI usage policy, accounts in your name, termination for convenience with a notice period, and a handover period with documentation. Have a lawyer review the IP and liability sections before you sign.

How do you exit an outsourcing contract that is not working?

Secure access first: confirm you hold admin rights to the code repository, hosting, and third-party accounts, and transfer any that sit in the vendor's name. Then give notice under the contract, request documentation and the agreed handover period, and have an independent developer review the code before a new team starts.