Outsourcing for startups: Outsourcing is one of the most common cost cutting strategies that we’ve heard. However, does it work in a startup context? We have seen many large companies do this successfully. In this article, we will talk about the pros and cons of outsourcing as an entrepreneur.
The immediate benefit of outsourcing is the ability to reduce costs. As an entrepreneur, it is amazing to create minimum viable products and prototypes through an outsourced partner. Although it will save costs, does it give you the outcomes that you desire?
Outsourcing for startups
The most common tradeoff while considering outsourcing for startups are – Cost, Speed and accuracy of development. Communication is the most challenging aspect of outsourced product development. But, if you can make it work, the benefits are exemplary. Related: Meaning of outsourcing
As an entrepreneur, you have limited resources. I’d suggest looking into this approach if your product design and outcomes are already known. The number one rule for outsourcing is – predictability of outcomes. If however, your’e considering product development at speed and agility – in house development is the best approach.
Why do we need outsourcing in startups
The key reasons to outsourcing in startups are
Cost of Development:
When you’re trying to ensure you get the most for your investment and the balance between having multiple resources which you can play for your benefit and avoid the radar of employee benefits through contracts
Lack of expert resources, skill:
when you have to spend a lot of time hiring and training resources and you’re starting from ground zero
Non core development
Where you know what to really expect and there’s already an established standard
Clear expectation setting:
When you know the quality of expected material, very specific outcomes which are paid per project outcome as opposed to time and materials. This is often a very hard deal to strike but I’ve seen some being very successful at it.
When not to outsource for a startup
Proof of concept:
When you’re developing your MVP whose key requirement is agility and being able to change at the pace of a customer request
Cultural barrier:
Although language is a key concern, you cannot ignore the impact of local culture and the changes you’d need to make to comply
Without personal reference:
software companies are dime a dozen. There are plenty of them out there without a lot of expertise or experience. Try to find someone only through an internal reference
Quality Assurance
No point in hiring someone without your own QA. If you’re not able to check the quality of output, you’re giving up complete control to a third party who may or may not work in the best of your interests.
Outsourcing Vs Offshoring
I’d be wrong not to point out the difference between outsourcing and offshoring. You can outsource within the same geographic region to avoid some challenges such as distance, culture and agility of response. If the software development house is nearby and accessible then all the more reason to consider outsourcing.
Offshoring is a lot more challenging due to cultural and geographical barriers. You’ll need an in-house team to manage the external team. No matter how optimistic you are you’ll certainly need more closer line management and must allocate adequate time and resources for that.
Achieving balance between outsourcing and innovation
With all these outsourcing really works and that’s precisely the reason why it exists. It is certainly not as easy as it is made to sound but you can certainly benefit from its use. As a startup, of course it is doubly hard and Challenging. There is often a larger sacrifice for the cost of finances. I suppose the question is how valuable this trade off is.
On that note we call your thoughts on this discussion and would love to know your experience and recommendations about outsourcing. Please do share your views with comments below and help our fellow entrepreneurs to shine.
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Nice one ! Reminds me of a book by Gunter Faltin called Brains v/S Capital . Here the writer states that in today’s world there are so many companies providing specialised third party services that the founder of a startup has the advantage of outsourcing any kind of work that requires high capital investment if done in-house. Also, it’s always a good idea to focus on things that the founding team is best at and outsource other stuff to experts in respective fields. The author opposes the view that a founder should have tons of experience and/or knowledge in all the different processes of his/her company.
For example , I’ve worked for a start up in the travel luggage sector based in New York . Here the company outsourced the manufacturing to a Chinese company, shipping and warehousing to a Warehouse in California, The e-commerce website was built on Shopify, and they also sold on Amazon and other such sites. Their in-house activities were Product development and design, Marketing and branding , and of course finances (which was simplified by big-commerce, a software for tracking cash flow and related stuff). The founding team’s previous experience helped them in choosing right partners for all their activities but owing to today’s level of information and transparency provided by the internet , it’s relatively much easier for even inexperienced entrepreneurs to enter such fields. To be honest, the founder of the luggage company was previously into real estate!
Of course managing all the partners and the flow is definitely a task and the founders have to also bear the risk of initial investment of time and resources. So it’s important to know your partners well (through references or people who have worked with them before).
Thank you Jayasurya for the resourceful words. It is very interesting that you mention about your experience with the American Company. It is something I have seen being in vogue in UK as well, albeit a bit slowly. Most of the entrepreneurs here/ investors here expect first hand experience in the sector for any investments to come through. At the same time, operationally some companies do respect cross sector innovation which allows them to perform better.
– Having seen outsourcing first hand, I can certianly see a lot of benefits in maintaining a lean structure in a company and reduce overheads. Also you can write off a lot as supplier costs.
– On the flip side of course is about being very very specific about needs from the development company. Since time is being billed, communication needs to be at its best with very little room for speculation which makes it both easy and hard. This forces the designers to think and ensure that coders work on what they are best at – coding.
I do believe it is a delicate balance to make oursourcing work and it needs a good balance with internal resources.
I am particularly impressed and intrigued with your experience in the travel company and them outsourcing most of their activities. I am very curious as to how their communication model was, the level of management involved and how they ensured that the designs were well communicated. Can I pick your brain on these on any particular thoughts or processes you might be interested to share?
Yeah that’s right. Establishing proper communication is certainly important and identifying the right partners at the initial stage is critical. With the luggage company, the most important partnership was between the product development and the manufacturing units- since the final product is a Bag which is both a utility and fashion commodity, everything needed to be executed to the T. Also the chinese manufacturing companies are super efficient and advanced. Although initially the founders had to visit the manufacturing units and establish a deal and build relationships, but from then on the processes we pretty straight-forward- Founders came up with a design idea, sent the designs to the manufacturing unit, they discussed a bit over the phone about specifications, and within a couple of weeks or so, samples were sent to the US. They tested their products and if happy, went for a Minimum order Quantity to initially test their ideas in the market. The co-founder travels to China once before the product line launch to just check if things are in place.
Warehousing the products is another important aspect and again it boiled down to selecting a good partner (probably referred by an industry expert). Here as well basic communication was through email and phone, the founder visited them them just once, from the information i have.
Majority of our day to day efforts went into Branding and Marketing, Sales, Tracking- we had to come up with strategies to sell the products also identify right channels and partners( for offline/online sales) .
Yes, we had quite a few hiccups due to miscommunication with our partners, and it was very important for us to accurately communicate our needs and make sure the third parties are sticking to our timeline – toughest part. But, the trade off is a lean model without too much money in the game (equals to lesser risk), which gave us space to grow organically.