As companies look to economize in a weak economy worsened by rising energy costs, it may be more tempting than ever to consider outsourcing your IT—whether to a cloud-based provider, to a shop in your town, or to a provider in some far-off land. Certainly, outsourcing has worked well for many companies, but it can also lead to business-damaging nightmares, says Larry Harding, founder and president of High Street Partners, a global consultancy that advises company on how to expand overseas. After all, if outsourcers fail, you're left holding the bag without the resources to fix the problem.

In his consulting, Harding has seen many outsourcing horror stories, from corrupt general managers "with all sorts of conflicts of interest" (such as service providers getting kickbacks from landlords on the leased space) to projects torn apart by huge turnover rates. "You end up with project teams that are hugely inconsistent. You might have a good team in place, but a month later, three-quarters of the team has transitioned," Harding says.

"Only when executed well can it pull out hundreds of millions in cost and transform organizations," says Brian Keene, CEO of Dextrys, an outsourcing service provider that focuses mainly on China.

In the sometimes panicked desire to save money—especially with the powerful lure of "half-price" workers in places like India, China, and the Philippines — good execution flies out the window. And that's where the problems flock in. Outsourcing is not for the faint-hearted or the

That's why understanding what can go wrong before you jump into outsourcing is a great way to reduce your risk, because then you can approach outsourcing with eyes wide open, Harding notes. The companies who've lived through outsourcing horrors have two things in common: lack of preparedness going into a new relationship and lack of communication once the projects gets under way. Other factors can make these worse, of course.

Outsourcing's Biggest Horror Show

In the pantheon of outsourcing horror stories, the $4 billion deal between the U.S. Navy and global services provider EDS stands out as one of the most horrific. It started back in 2003 when the Plano, Texas, vendor beat out the likes of IBM and Accenture for the contract. The deal was to manage voice, video, networking, training, and desktops for 350,000 Navy and Marine Corps users. But just one year later, EDS was writing off close to $350 million due to its inability to come even close to fulfilling its obligations.