Best Outsourcing Model for a Start-up?

What is the best outsourcing model for a start-up?

Every start-up needs to scale operations, especially development, at some point of time. However, they face many challenges such as

1. Availability of required skill set in the local geography to the build the right R&D.

2. High costs of hiring people with desired expertise. Additional costs in benefits administration and in general taking a longer term liability while the business has yet to prove itself.

3. Additional funds requirement to scale-up infrastructure to match with the team expansion.

4. Founder management getting swamped with operational issues due to increased team size while they need to focus more on technology, raising funds and new customer acquisition.

What are the options available to a start-up to get out of this tough spot and manage growth without having to invest significant $$s? Outsourcing to an offshore location is a viable option since there are geographies, like India/China, where talented manpower is available at a relatively lower cost.

Outsourcing sounds simple but may not be easy to execute. Standard outsourcing models present their own challenges to the start-up. Let’s take a look at the options available:

1) Time and Material based contract: The offshore company provides you with a team for fixed duration and charges on a MM basis. While this model is good for established companies outsourcing peripheral developments, for a start-up the issues faced are:

a) Your intellectual property is being shared with engineers who will not stay with you over extended period. Once the T&M contract is done, there is no assurance that the same team will be available to you for extended work.

b) The offshore partner will possibly rotate engineers between various customers depending on their business needs. The engineers carry your residual IP with them when moving to next project, which could be with one of your competitors.

c) Offshore partners typically have high attrition rate. You can loose critical resources midway in the project.

d) As a start-up, your objective is to build a strong development team which stays with you for an extended period of time, continuously enhancing the IPR created. This objective is not met by T&M contracts

2) Fixed price contract: You define a statement of work (SoW) and the offshore partner executes the same with a lump sum price. Again the model works for established companies which can carve out a clear, unambiguous SoW and then invite bids from several partners. It fails for start-ups for the following reason:

a) Start-ups have to work in a reactive mode in early years. A critical requirement from that first customer must have higher priority than the long term roadmap. Hence, it is kind of impossible for you to carve out a SoW in concrete and use the same for awarding fixed price contract

b) Just like T&M projects above, you are taking a very high risk by exposing your intellectual property to employees of offshore partner. Remember that your IPR is possibly your only differentiation in the early years as start-up.

c) Creating a SoW is not a trivial job. Drafting one takes quite some time and it has to be fairly complete so that there are no gaping holes when deliverables arrive. A start-up management has to spend lot of effort in making SoW. This is really not-so-productive work for a founder of a start-up as it is neither leading to new customer acquisition nor raising of additional funds, the two most critical activities required to make a start-up sustain early years.

d) More often than desired, the deliverables from a fixed price contract do not match the expectation of the customers. There are always some gaps and mostly because of differences in understanding and even minor change in specifications. You as a start-up can not afford this to happen as for you time to market is most critical.

So what are your options? You do want to outsource but which is the best business model to adopt. Lately a new model has evolved the Build-Operate-Transfer (BOT) model. The BOT model is really cut out for start-ups more than established players. Here is how it works:

1) Offshore partner BUILDs a 100% dedicated team of qualified engineers as per the start-up requirement. Note that the team is not selected from an existing pool of resources but typically “hired fresh” for the start-up work. Every candidate is prescreened by start-up management. Team size is typically 4-8 people but could be more.

2) The offshore partner OPERATEs this team for a designated, pre-agreed upon period. Basically the offshore partner will provide complete infrastructure, admin, HR, payroll and other benefits to the team while they get working directions from the founders at the start-up end. So basically you get a 100% dedicated “virtual” team managed FOR you at an offshore location.

3) The offshore partner will TRANSFER the team to start-ups own offshore entity as and when latter secures funding to expand. The offshore partner actually facilitates setting up direct operation for its customer (govt. clearance etc.) and then moves the entire development team to this new outfit.

The BOT model clearly meets the “outsourcing pre-requisites” for a startup. Just to summarize:
– Your intellectual property stays with you all the time. It is shared only with employees who are on your payroll, indirectly first and directly at a later point of time.
– You have a fully functional offshore team but do not take any long term liability. You do not spend capex in building infrastructure etc.
– No need to spend precious time on creating SoW or detailed specs. Since the offshore team is functionally reporting to you, you can decide upon priorities as per your business needs.
– As a founder, you save precious time by not getting bogged down by admin, HR or payroll issues. Your offshore partner is taking care of all that. You just focus on proving your business model and being successful.

Samadhan Systems is a technology services company which helps start-ups to set-up offshore operations, for sales or development, on a build-operate-transfer basis without having to invest any significant $$s upfront. Several start-ups have used our IncubationPlus program to expedite development and reduce their time to become a successful company.

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Suresh Kabra has 20+ years experience in the field of communication and software. He did his BE from BITS, Pilani (1987), MS from Concordia University (1990) and Executive MBA in International Management from NUS-Stanford, Singapore (2004). After working in telecom industry in senior sales and general management position, Suresh founded Samadhan Systems in August 2007. Samadhan Systems provides build-operate-transfer services to start-up who want to have a design/sales operations out of India.

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