Conflicts in outsourcing: how to spot them, and what to do when they happen

Consider for a moment a rather startling figure. Analysis from Dun & Bradstreet reveals that a full 50% of all IT outsourcing agreements will fail within their first five years. A number this high is a clear signal that without a robust strategy for managing the partnership, most of these technological ventures are simply destined to collapse, inevitably generating significant financial and operational losses. This article, therefore, will dissect why communication stands as such a critical risk factor, how these conflicts are perceived through the distinct lenses of managers and lawyers, and what concrete steps can be taken to pre-empt them.

The key takeaways

• Communication is the definitive risk factor. For every billion dollars invested in a project, according to the Project Management Institute (PMI), an astonishing $135 million is put at risk. The true revelation, however, is that inefficient communication is directly responsible for 56% of that sum- a staggering $75 million loss.
• Agile methodologies dramatically shift the odds of success. The long-running CHAOS Report from the Standish Group provides undeniable evidence: projects utilising Agile frameworks achieve success 42% of the time. In stark contrast, those following traditional models succeed at a rate of only 13%.
• Mediation is an overwhelmingly more effective tool than litigation. The data is conclusive. Not only is mediation significantly less expensive ($2-5k versus $15-20k) and faster (2-6 months versus 12-28 months), but with a success rate exceeding 85%, as confirmed by data from GCAAM, it proves a far more reliable path to resolution.

Typical flashpoints in projects

Disputes in outsourcing partnerships are seldom born from random chance. More often than not, they are symptoms- the outward manifestation of deeper, systemic issues that, if left unaddressed, will begin to poison the entire collaboration. To understand this fundamental dynamic is to take the first, most critical step toward building technology partnerships that are truly built to last.

Disputes over scope

Scope creep is the quintessential project ailment, an absolute classic of the genre. As one of the most thoroughly documented risks in project management, its prevalence is confirmed by the Project Management Institute (PMI), which reports its presence in 52% of all projects. It begins with an innocent request for a “small change,” which, in the absence of a formal control process, quietly expands the original scope of work. The inevitable result? Budget and timeline overruns become a certainty.

Disputes over budget and deadlines

So pervasive is the issue of budget overruns in the IT sector that many managers have come to treat it as a simple, unavoidable cost of doing business. This perspective, however, dangerously understates the scale of the problem. A joint study by McKinsey & Company and Oxford University found that large IT projects exceed their initial budgets by a staggering 45% on average. Each delay, every extra pound spent, represents a tangible loss that directly impacts the company’s financial results and systematically erodes trust in the partnership.

Disputes over quality

Here we enter one of the most difficult terrains, as the nature of “quality” is often deeply subjective. These disputes erupt when client and supplier hold fundamentally different conceptions of what “a job well done” truly means. For a client, this might be an entirely bug-free, intuitive interface. For the supplier, it could be software that has successfully passed a battery of pre-defined tests. When these crucial definitions are not made explicit and measurable within the contract, the door is opened to endless, frustrating debate.

The main culprit – ineffective communication

This is the true genesis of most outsourcing failures, and its impact is not merely anecdotal; it can be measured in stark financial terms. According to an in-depth report from the Project Management Institute (PMI), a full 56% of the project budget at risk is endangered specifically by poor communication. The implication is direct and unavoidable: weak communication translates into immense financial liability. The same report, furthermore, concludes that one in every five projects fails for this reason alone.

Unspoken assumptions

Both parties enter a collaboration carrying the weight of their own experiences, habits, and internal definitions, operating under the flawed assumption that these are universal. When a client, for instance, requests a “simple form,” their mental model may be a complex, multi-stage process with real-time validation. The supplier, hearing this, might reasonably picture three basic input fields. It is when these key concepts- “completed module,” “acceptable server response time”- are not painstakingly described and mutually agreed upon that they become a ticking time bomb, set to detonate later in the project lifecycle.

Differences in work culture

To ignore cultural differences in a global business environment is to court disaster. Though a single, universal statistic is difficult to isolate, a wealth of research confirms that divergent approaches to deadlines, hierarchy, and feedback mechanisms inevitably lead to misunderstandings and delays. These factors, in turn, necessitate additional rework, directly increasing costs and extending project timelines.

Conflict from three perspectives: the PM, the AM, and the lawyer

A conflict is never a monolithic event; each key stakeholder views it through the unique prism of their own objectives and success metrics.

The project manager’s (PM) view: guardian of scope, budget, and schedule

The world of the Project Manager is an ordered system of metrics and dependencies, neatly contained within the “iron triangle” of scope, time, and budget. Their singular goal, the very measure of their success, is the delivery of the project on schedule, within cost, and with all specified functionality intact. In this highly structured reality, conflict is an anomaly- a dangerous deviation that threatens every key performance indicator. The greatest threats? Scope creep and ambiguous requirements. A PM understands better than anyone that these are the gateways to an uncontrolled expansion of work, which will invariably shatter the schedule and the budget. Their arsenal, therefore, consists of tools of control: a product backlog to impose order on tasks, an SLA to define the rules of engagement, and transparent reporting to detect deviations at the earliest possible moment.

The account manager’s (AM) view: guardian of the relationship and business value

An entirely different reality is inhabited by the Account Manager. With a timeline extending far beyond the project’s completion date, this individual thinks in terms of long-term client value (LTV), satisfaction, and the potential for future collaboration. For the AM, the ultimate objective is the cultivation of a strong, trust-based relationship. Conflict, from this vantage point, represents a fundamental threat to that relationship- an alarm signalling that the technological solution is failing to meet the client’s real, often unstated, business needs. Their tools are not technical but relational: open communication, deft negotiation, and a deep, contextual understanding of the client’s business, all brought together in strategic reviews that assess the health of the partnership itself.

The lawyer’s view: guardian of the contract and formal risk

Operating in a world of clauses, obligations, and potential liabilities is the lawyer. Their primary function is to shield the company from legal and financial risk. They ensure contractual compliance, protect intellectual property, and fortify the company’s position in the event of a dispute. To a lawyer, a conflict is a potential financial claim or a formal breach of contract; in the worst-case scenario, it is the spectre of a costly and paralysing court battle. They know that litigation is a destructive last resort, a process that, according to data from GCAAM, can grind on for 12 to 28 months. Their strategy is one of formal order, of minimising ambiguity through precisely constructed contracts, detailed SLAs, and, if problems arise, a meticulous paper trail of official correspondence.

Prevention – how to build a partnership to minimise disputes

A core principle of both medicine and business holds true: prevention is invariably more effective and less costly than treatment. Rather than channelling energy into complex dispute resolution procedures, the wiser investment lies in constructing a collaborative foundation so solid that most disputes become moot. The following principles are not merely good practice; they form a coherent system for proactively eliminating the root causes of outsourcing failure.

Rule #1: Clear rules and shared goals (the SLA)

The Service Level Agreement (SLA) is too often mischaracterised as a purely legal document. It is, in fact, a fundamental management tool. While universal statistics are elusive, research by the analyst firm Forrester demonstrates tangible benefits, including a 20% rise in IT productivity and a 25% reduction in major incidents. This is because the very act of creating an SLA compels both parties to define their objectives and metrics with precision, serving as a direct antidote to the problem of unspoken assumptions.

Rule #2: Regular communication and flexibility (agile practices)

In the dynamic world of IT, traditional project management, with its upfront definition of all requirements, can itself become a source of conflict. Agile methodologies provide a systemic answer. Their effectiveness is well-documented, notably in the CHAOS Report from the Standish Group, which found that agile projects achieve a 42% success rate, a stark contrast to the 13% success rate of traditional waterfall methods. The constant communication that is the bedrock of Agile ensures transparency, allowing for continuous course correction throughout the project’s life.

Rule #3: A single central place for information (project management tools)

Where teams are geographically dispersed and communication is often asynchronous, relying on a fragmented mess of emails, chats, and spreadsheets is a direct path to chaos. Information is lost, and misunderstandings multiply. It is therefore essential to establish a single, shared project management platform (such as Jira or Asana) as the “single source of truth.” This provides all stakeholders with complete transparency and immediate access to the status of tasks, decision histories, and current priorities, creating a foundation for efficient, data-driven collaboration.

Responding – a step-by-step guide for when problems arise

No partnership, no matter how well-planned, is entirely immune to difficulty. The true differentiator between a mature collaboration and one destined to fail is not the absence of problems, but the methodology for solving them. A pre-defined, structured plan is key to preventing the escalation of emotion and the transformation of a minor issue into a major conflict.

Step 1: Jointly diagnose the problem without blaming anyone

When a problem arises- a missed deadline, a software bug- the instinctive human response is to assign blame. This is, however, the least productive strategy imaginable, as it immediately forces both parties into a defensive posture. The correct first step is to convene a meeting (a retrospective in agile terms) with the sole, explicit purpose of understanding what in the process failed, not who. The inquiry should focus on the system: “At what point did our understanding diverge?” or “What can we alter in our process to prevent this from recurring?”. This blameless approach allows for a candid discussion focused on systemic solutions, not personal accusations.

Step 2: Activate the formal escalation path

Should a problem prove intractable at the operational level, it must not be allowed to fester. The formal, contractually-defined escalation path must be activated. This typically involves elevating the issue to the next tier of management in both organisations, bringing in leaders who possess a broader perspective and greater decision-making authority. This procedure ensures the issue receives the serious attention it warrants and is not simply ignored.

Step 3: Mediation as the smart alternative to court

In the event that even executive-level discussions fail, the reflexive action for many companies is to engage legal counsel for litigation. Yet, the economic and business data present a compelling case against this course of action. Mediation- a process guided by a neutral third party who facilitates a mutually agreeable solution- is demonstrably superior. The arguments are overwhelming:

• The business argument: As detailed in analyses from organisations like GCAAM, mediation is substantially cheaper (averaging $2-5k per side versus $15-20k for litigation) and incomparably faster (2-6 months versus 12-28 months). The savings in both financial resources and executive time are immense.
• The strategic argument: With a success rate between 85% and 93%, mediation is extraordinarily effective. Crucially, unlike a court verdict which creates a winner and a loser, a mediated settlement is a joint achievement. This allows the business relationship not only to be preserved but often to be strengthened, a stark contrast to the destructive finality of a lawsuit.

Summary

Success in IT outsourcing is not achieved by avoiding problems, but by architecting a system designed to prevent them and possessing a mature framework for their resolution. Conflicts should not be viewed as failures, but as tests of a partnership’s resilience. The ability to navigate these challenges constructively, with mediation as a preferred tool, is the ultimate indicator of a strong and mature business relationship, capable of transforming a crisis into an opportunity to build greater trust.

This blog post was created by our team of experts specialising in AI Governance, Web Development, Mobile Development, Technical Consultancy, and Digital Product Design. Our goal is to provide educational value and insights without marketing intent.