Biggest risks in software development

In today’s fast-paced digital landscape, software companies often find themselves juggling more than just codes and project deadlines.

They must also contend with a growing list of critical risks in software development — like security threats, copyright infringement, and a maze of regulations — making it feel like a high-stakes game of Whac-A-Mole. And the rapid evolution of tech tools and trends means that remaining competitive requires proactive planning.

What’s at stake for software companies that forgo tackling risks? Project delays, cost overruns, scope creep, security vulnerabilities, reputational disaster — the list can go on and on.

The good news, though, is that understanding risks is the first step in staying one step ahead of them. 

In this guide, we’ll look at the common risks software development companies face, along with some tips on tackling those challenges head-on.

1. Inadequate testing

Quality assurance testing is one of the most crucial aspects of software development. Rushing to meet deadlines and forfeiting testing can lead to a bunch of problems down the road — for the software, your customers, and your business. Insufficient software testing during development can have numerous adverse outcomes, including potential bugs and malfunctions, security threats, increased costs later in development, missed deadlines, and reputational harm to your business.

Tips for dealing with testing risks:

• Develop a detailed test plan for each new software development.
• Conduct code reviews to catch potential issues as soon as possible.
• Use automated testing tools to run test cases.
• Keep detailed documentation of testing results at every interval.

2. Security risks

There’s no question that security is a major risk area for software companies. While developers often focus on functionality and speedy delivery, software security should never be an afterthought. Security vulnerabilities, which can arise from misconfigurations, coding errors, insider threats, or outdated resources, can compromise software’s privacy, security, and accessibility of a software.

Tips for dealing with security risks:

• Train your team on common software vulnerabilities and cybersecurity best practices.
• Follow secure coding practices and implement code review processes to detect potential vulnerabilities.
• Carefully vet any open source code before using it.
• Ensure all programs, tools, and resources stay up-to-date with the latest versions.
• Protect your business from the cost of a cybersecurity incident (which can be steep) with cyber liability insurance.

3. Lack of talent

“You’re only as good as your team” is a phrase every business owner should know well. 

Having a team of inexperienced developers or a constant revolving door of employee turnover can create significant issues, including subpar quality work, reduced innovation, project delays, employee disengagement, and difficulty growing your company. And with recent headlines about a tech talent shortage, this risk needs to be on every software company’s radar. 

Tips for dealing with talent risks:

• Review what resources are needed before starting development.
• Foster a positive work environment so employees feel respected and valued.
• Implement an employee benefits program to help attract and retain experienced individuals.
• Upskill your current team members by providing ongoing training opportunities.
• Promote a healthy work/life balance.

4. Dissatisfied clients

No matter how hard you try, you can’t always please everyone, and you’ll inevitably encounter a dissatisfied client at some point. Claims of negligence and breach of contract – whether justified or not — can lead to a customer taking legal action, which can cost your business time and money.

Tips for dealing with dissatisfied clients:

• Before starting any work, have detailed discussions with clients to understand their needs.
• Encourage questions from clients and be proactive in asking for feedback.
• Ensure open communication and relay any project challenges ASAP.
• Have the right insurance coverage to protect your tech business from claims alleging errors and omissions.
• Always have a contract in place for any client work.

5. Product liability risks

Let’s say you’ve developed software for a new client. All is going well until a few months down the road when it’s discovered that a defect in the software has caused the client to lose a substantial amount of money. The client could file a lawsuit against your company to recoup damages.

Or perhaps your software causes physical harm to others. The Therac-25 radiation therapy machine from the 1980s is a warning of the potentially disastrous consequences of delivering software that hasn’t been thoroughly tested for bugs. In the case of the Therac-25 machine, which was the “most computerized and sophisticated radiation therapy machine of its time,” software errors led to overdoses of radiation treatment, causing the deaths of six patients between 1985 and 1987. No software developer wants that kind of result on their conscience.

Taking a proactive approach to risk management can save your business from costly problems. A Risk Profile helps you spot gaps in your software liability coverage, so you can address them before they become an issue. Get your free Risk Profile in minutes and protect your tech business from unexpected financial risks.

Tips for product liability risks:

• Rigorous quality assurance is your best ally.
• Ensure the software license agreement has a limitation of liability clause.
• Provide clients with user manuals and warnings about any potential risks associated with the software.
• Have insurance to cover financial costs if you are sued by a client for damages caused by your software.

6. Copyright infringement

Google “software copyright infringement,” and you’ll get plenty of evidence of why this is a risk for software companies. Your source code is like your grandma’s secret chocolate chip cookie recipe — you don’t want just anyone to get their hands on it and call it their own. Whether it’s someone copying your code directly, giving it a little “makeover,” or copying its functionality, there are a lot of reasons for software companies to take copyright infringement seriously. 

Tips for dealing with copyright infringement risks:

• Register software with the United States Copyright Office to establish ownership, which is crucial for taking legal action against infringers.
• Use copyright infringement detection tools that will alert you of potential issues.
• Document all aspects of the development process.
• Limit access to sensitive information to only those who need it.

7. Regulatory compliance

Understanding software regulations isn’t always easy, with requirements changing based on jurisdictions. Since the number of domestic and international regulations continues to grow, staying compliant is an ongoing effort that demands careful attention. Failing to comply with these regulations can lead to fines, legal issues, and harm to the company’s reputation.

Tips for dealing with regulatory risk:

• Take time to research and understand the regulations pertinent to your business.
• Use a compliance management system to organize and track regulatory requirements.
• Appoint a compliance officer.

8. Poor project management

Poor project management is a recipe for disaster for software companies. When project plans are unclear, disorganized, and poorly managed, it can lead to increased costs, scope creep, missed deadlines, derailment of product quality, and, ultimately, project failure. 

Tips for dealing with project management risks:

• Always create a comprehensive project plan with clear goals, expectations, timelines, testing milestones, and deadlines.
• Use project management software to help keep tabs on things during development.
• Hire a project manager.
• Be proactive with risk management.
• Ensure open communication with regular status updates is maintained between developers, the project manager, and the client.

9. Employee theft

Although no business owner likes to consider the possibility that their employees might steal from them, employee theft is a reality that can’t be ignored. And it happens more often than many realize; 75% of employees confess to stealing from their employer at least once. In fact, US businesses lose up to $110 million a day due to employee-related crimes, with small businesses accounting for higher losses from employee theft.

Tips for dealing with employee theft:

• Develop a workplace theft policy outlining types of theft, how your business investigates theft, and disciplinary action.
• Control access to sensitive code repositories based on the roles and needs of employees.
• Have nondisclosure agreements (NDAs) with all team members.
• Conduct background checks for all new hires.
• Consider purchasing insurance to protect your business from losses caused by employee theft or fraud.

10. Disgruntled employees

It may not seem as important as security risks or copyright violations, but disgruntled employees can pose significant risks, such as decreased productivity, data breaches, theft, and negative publicity.

Even if you’ve had to take action and terminate a disgruntled employee, the risk doesn’t necessarily go with them out the door. Unfortunately, employees taking legal action against their former employers is increasingly common, particularly for allegations of wrongful termination.

Tips for dealing with disgruntled employees:

• Encourage employees to feel comfortable voicing their concerns. 
• Never confront an unhappy employee in front of others – that will only lead to more problems.
• Document everything when dealing with a disgruntled employee.
• Have strong cybersecurity measures in place to mitigate data breaches as a form of retaliation from unhappy employees.
• Protect your business from claims of workplace harassment, discrimination, or wrongful termination with an employment practices liability insurance (EPLI) policy.

Benefits of risk management for software companies

Risk management is all about identifying and addressing potential pitfalls before they become full-blown disasters. Think of it as having a trusty roadmap that helps you avoid the dead ends and traffic jams of software project chaos. Because when it comes to navigating your way through testing (and more testing), tackling unexpected bugs, and the occasional curveball request from clients, having a risk management strategy will help you stay on track.

What’s more, effective risk management fosters an employee culture of ongoing improvement, where teams learn from past experiences or challenges and use that knowledge to enhance future projects. Risk management keeps everyone in sync and gives your clients confidence that their project is in safe hands — making it a win-win all around.

Understanding your exposure is a key first step. A Risk Profile helps software businesses uncover hidden risks and strengthen their financial protection before issues arise. Start your free Risk Profile now and ensure your tech company is prepared.

One of the most effective ways to mitigate risk is to transfer it to an insurance company. With comprehensive business insurance, your company will be protected from whatever challenges are thrown your way so your team can focus on what it does best: creating innovative software.

To learn more about protecting your company from risks, check out our guide on risk management for software companies.