In this increasingly globalized world, ever more software projects originating in high-cost countries are being undertaken by third-party organizations in low-cost countries. These projects, known as offshore-outsourced software development (OOSD) projects, exhibit offshore-specific risks that cause them to be more prone to failures than other types of projects. We investigated 19 failed OOSD projects using the ground theory methodology and analyzed why project managers fail to act on the early warning signs (EWS) of failure. Managers based in India and Switzerland from both the client and vendor sides participated in this research to explore the early stages of project failure. Our analysis of the perception of EWSs of failure has resulted in a four-stage model that explains the process by which issues are resolved between clients and vendors. The stages are: monitoring EWSs, detecting EWSs, acknowledging issues, and addressing issues. We further examined, for each stage, the reasons behind project managers’ inability to manage the issues. We have contributed to the information systems literature on failure and on outsourcing by exploring the early failure stages in OOSD projects.