Outsourcing for Start-Ups: Mythbusting
Although in today's business world many start-up companies are often put under pressure
to reduce operating costs via the outsourced software development by their investors and/or venture capitalists (VCs), it is still widely believed that only non-core development and/or testing functions can be outsourced to a 3d party offshore, nearshore or within home country. Since most of today's start-up companies are the innovative ones doing 100% of business in cyberspace, their entire software development is core and end-to-end and, thus, takes a lot of time, IT resources and money to complete and maintain. Because many start-ups consider their software development to be core, they try to stay away from outsourcing and continue to pay overheads each time they lose a member on their in-house IT team or each time they need to fix an error or bug in their application. However, we do believe that the idea that outsourcing is for huge and mature companies and the non-core development only is a stereotype which is no longer relevant to the Outsourcing 2.0 domain. There is clear evidence that start-ups can gain significant long-term benefits from the outsourced development the same way as their bigger competitors and these benefits can even be greater than those of large multinationals.
Myth #1: Product development requires a deep understanding of own business and customer needs and extensive user interaction. Locating development staff away from own office limits effective communication opportunities.
A real-life practice shows that this myth works well in the offshoring, but fails within the Nearshoring context. Locating own development team in a low-cost country nearshore (i.e. within / close to the same time zone) helps eliminate communication barriers by allowing the same or almost the same frequency of face-to-face communication as in the case of in-house development. The flight time is very short and cost is rather low, so your outsourcing manager(s) can visit vendor's office several times a week and ensure effective communication with all members on the outsourced team, monitor and track the project progress, and resolve most current issues etc.
Myth #2: To be able to establish successful outsourcing relationships, clients need to increase their management bandwidth.
Many start-uppers believe that hiring or promoting and training managers to deal with the outsourcing process would require additional spending and creation of a new management layer. As they try to focus on their core development and do not want to cope with a change management, they prefer to develop their solutions internally. In real life these steps can easily be avoided with no damage for ITO engagement. To be able to develop a state-of-the-art product or service within own house requires competent IT management, so start-ups have to dedicate certain financial resources to have the best IT / project manager they can ever find. In the case with outsourcing, it is enough to hire one manager with extensive ITO experience to lead the process. Nothing changes in the organizational structure and management hierarchy except that now IT manager will have to manage team located 2 to 4 hours away from company's head office. Hiring a good manager to lead the outsourced development will cost the same as hiring a good manager to lead the in-house development, so no extra costs and management bandwidth changes are involved.
Myth #3: IT outsourcing requires a lot of developers, as it is for large projects only.
Although it may sound unrealistic to many outsourcing skeptics, it is possible to outsource even very small projects that require 1 to 3 people to complete! Yes, that's true that many offshore ITO suppliers tend to win huge projects to provide work to 30 to 50 developers waiting on a bench (whom they want to retain due to fierce competition in IT headhunting) and do not like to deal with tiny projects. But it's only the matter of a business model involved. Many innovative business models such as, for instance, Own Team Model* are perfect for the start-ups, as they allow them to in-source a single developer to the vendor's office located in a lower-cost neighborhood and grow this one-person team to a 30- or even 50-persons team in a long term, enjoying such benefits as low taxes, relatively low salaries, vast IT talent / specific skills pools, 24/7 support etc.
Myth #4: In outsourcing the actual incurred costs often exceed the contracted ones, which is not affordable to start-ups who need to have control of every cent spent.
That's true. IT Sourcing Europe's All-European IT Outsourcing Research 2010, which is being in progress right now, shows that a growing number of Western European companies outsourcing their development offshore admit the fact that they pay overheads, which has a negative impact on their cost reduction strategy. But again, it's only the matter of the business model involved. It is indeed critical for start-up companies to control their software development budgets. To do so in outsourcing, you should try to find a partner offering transparent pricing structures.
Let's look at the main scenarios why buyers pay overheads in traditional business models such as, e.g., dedicated development center (DDC)**:
o Vendor loses one or more team members involved in your project and charges you an extra bill for staff replacement and the hiring process associated with it.
o Vendor needs to upgrade its infrastructure and charges you and other clients a "little" sum of money to cover it.
o Your development team is located more than 3 time zones away and your outsourcing manager has to improve communication with the vendor. For this frequent visits to the vendor's office are needed. Since the distant flights are a way too costly, frequent visits to the vendor's office can exhaust your outsourcing budget in a very short term.
Innovative business models in outsourcing allow eliminating these overheads. For instance, in Own Team model you know exactly what you pay for. Your payments are normally composed of a very simple formula: each member's salary on your outsourced team plus vendor's service fee (including cost of workstation and local taxes). From month to month you pay the same amount of money unless you add more people to your outsourced team. This knowledge will allow you to have predictable budgets and save more operating costs in a longer term.
Our Mythbusting shows that start-ups do have a good chance to leverage costs and develop an unsurpassed solution via outsourcing. However, they should be very careful selecting an outsourcing destination and partner, as not all traditional business models fit their sourcing strategy. Here are some of the recommendations that start-up companies may consider while making their outsourcing decisions:
take some time and resources to hire a competent IT manager with an extensive outsourcing experience to develop project specification and milestones;
hire a consultancy to help you select an outsourcing destination and suggest on appropriate ITO vendors (but always consider outsourcing nearshore to ensure minimal time, distance and cultural differences);
send your RFP to several vendors in several low-cost regions, then narrow your selection to the ones matching your requirements and challenge them to prove their expertise (make them complete a pilot project for free or call their past and current clients to ask for references);
make sure the contract to be signed offers a pricing structure as transparent as possible;
start your outsourcing relationship with few developers on the outsourced team and grow your team in a consequent way;
make sure it is you, not your vendor, who has 100% managerial control of your team members' compensation and retention. The vendor should only act as your recruitment agent and space and resource provider, but not as a sole project manager!;
make your personnel on the outsourced team feel like part of your company, share your business mission and vision with them and involve in decision making. It will eventually help you retain your team members for as long as your project needs.
You should always remember that the success of the ITO relationships depends much on whether or not you've managed to make the right sourcing decisions and have got a chance to develop your own development team in the ways which best meet your business needs and challenges.
*Own Team Model an innovative business model in which, unlike DDC where both the project execution and developers are 100% managed by the vendor, client gets 100%
managerial control of developers on the outsourced team and project progress. The vendor acts as an office space and resource provider, while client does the entire project management, staff retention etc.
**Dedicated Development Center (DDC, also referred to as an Offshore Development
Center (ODC)) is a service of developing and testing custom software/web development
project by the vendor located offshore (at least 2 time zones away from client's country) or
nearshore (maximum 2 time zones away). It is like having a virtual extension of the client
office in the nearshore or offshore country.
Outsourcing for Start-Ups: Mythbusting
By: itsourcingeurope
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