In this globally connected workplace, every successful company is benefiting from outsourcing, be it India for IT and software development or China for manufacturing. Benefits of well managed outsourcing contracts and offshore development centers have proven their merit beyond any doubt. No one is questioning that outsourcing is a must but people are still not sure when to outsource in the lifecycle of a company?
For a start-up, this question becomes all the more challenging. Should you start outsourcing at an early stage (self/angel funded) or rather wait for significant venture capital (VC) money to come in before going for an offshore presence? What if you are successful and need to expand development and sales at a rapid pace? Can you outsource effectively on a short notice or will it be too late? What if you outsource early and the venture runs into rough weather? Are you taking too much liability on your head?
This article tries to answer some of these questions and, as a founder of a start-up, helps you to determine the right time to outsource.
Here are ten reasons why a start-up should outsource early rather late. When we say early, we mean the start-up is funded by founders or an angel investor and yet to secure VC funding:
1) You have the funds to increase the R&D team to about 3-4 strength but you just do not have the bandwidth to do all the running around to do the hiring yourself. An HR manager would be a wasted overhead. How do you proceed?
– An effective outsourcing partner will understand your skillset requirements and does all the ground work to shortlist effective candidates. They will also administer a qualification test as per your benchmark. You can review results, do a call with candidate and then give final approval. Outsourcing company will manage everything else and build a team for you with minimal demands on your precious time.
2) You have funds to ramp-up development but you are not able to attract best of the talent since you are really a start-up with a yet to be proven business model? There is limited talent available locally and people are reluctant to join start-ups. What do you do?
– An effective outsourcing partner can attract best of the local talent in countries like India, where plenty of talent is available in almost all verticals. You can have a world class development team at a short notice.
3) You have funds which you would rather spend on team ramp-up rather then building the support infrastructure (office rent, communications, administration etc.). How do you proceed?
– Outsourcing will solve this problem. Outsourcing partner will provide the complete infrastructure and you do not need invest a penny in the same.
4) As a founder you want to focus 100% of your energy (and expertise) on product development itself. You do not want your focus to be diluted by handling admin/HR/IT related issues. How do you manage this conflict as you build your team?
– An effective outsourcing partner should be able to manage all administration, HR, payroll and IT related issues without having to take your cycles. You will be work 100% of your time on quality R&D work with the offshore team.
5) As a founder, your next milestone is to secure VC funding and you would rather focus on activities leading to funding closure. Does outsourcing help?
– Yes, very much indeed. All the angel/VC investors are well informed about the benefits of outsourcing. Most of them are invested in companies which have substantial off-shore teams. It creates a positive opinion when they see you, as a start-up, leveraging from offshore centers fairly early in the game.
6) After securing funding, your next priority is to target high growth markets such as India/China at minimal costs? Does outsourcing have a play here?
– Absolutely yes. If you already have an offshore development presence, you can very quickly build upon it to set-up a business development office and start tapping the local market. Support will not be an issue since you already have team in place. A good outsourcing partner should be able to help you to build a strategy for India/China market and get you the right local partners. This can save you about 8-12 months of ground work and increase your chances of success in the first go.
7) Agreed that start-ups should outsource early in the game. But what about protecting the IPR? Isn’t that taking a big risk?
– Depends upon the outsourcing model you choose. It is a risk if you outsource as a one-off project either on time and material or a fixed price contract basis. However, if you choose build-operate-transfer model, the risks are minimal.
8) What about liabilities? Am I not taking more liability when I am outsourcing to an offshore partner?
– Not really, provided you choose the right model for start-ups. In the build-operate-transfer model, you have no liability except for a pre-defined notice period (mostly three months). You can dissolve your offshore presence on a 3 months notice.
9) Why so early? Would not it be better to start outsourcing after having received substantial funding?
– Not really. Note that in any outsource engagement (more-so when it is offshore at the other end of world), there is a learning and settling period of 6-8 months. The earlier you do outsource with smaller team, the faster you are up to speed. You do not want to be in learning phase when you are spending thousands of $$s in capex and building a large team. Hence, better to outsource early and then go for a direct captive operation when substantial funding is in place.
10) Why not go for an offshore captive office to start with? If one is outsourcing, all the intellectual property is lost when outsourcing contract is completed.
– For an early stage start-up it is impossible to plan an offshore captive development center. It is a very challenging task and requires huge investments and tremendous amount of time for planning and execution. Don’t even think about it. If you follow the build-operate-transfer model, you can transfer the team held by outsourcing partner to your captive office, as and when you establish one. So there is no loss of IPR.
Samadhan Systems is a technology services company which helps start-ups to set-up offshore operations on a build-operate-transfer basis without having to invest any significant $$s upfront. Several start-ups have used our IncubationPlus program to expedite development and reduce their time to become a successful company. http://www.samadhansys.com
Suresh Kabra is an outsourcing consultant who works with early stage start-ups. He has more than twenty years of experience in Indian software industry and has worked for both captive and outsourcing establishments. He has held VP and General Manager positions with leading communication software and semiconductor companies. Refer linked-in for his complete profile.
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