Arjun Thakuri

Outsourcing - is it good for a startup?

Asked September 10, 2012 by in Business Fundamentals

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Syl Di Diego

Syl Di Diego   October 3, 2012, Edited October 3, 2012

Arjun

Yes, and in fact it is essential for a start up to outsource.

While the CEO or Founder needs to be in the lead, manage and control the venture, one cannot "stand up" a new venture without help from others - especially if you need to be a fast company. This help can be for IT infrastructure or other operational roles (like back end accounting, payroll, etc.), strategic business design to gain financing; and revenue generation before a full sales force is on board. (Just to name a few areas.)

In fact, all companies large and small, once they are in in steady-state mode, still use outsourcing to run and grow their business. This was confirmed with the acknowledgement of the strategy of "Core Competence" which became big in 1990s and drove a lot of business and industry redesign since then. The approach is to find your competency and then outsource the rest in order to have a most efficient, flexible and competitive business model that can compete globally. It was observed in the information and computer sectors at first and once it was recognized by leading business school professors it expanded.

Example: Apple is a design and marketing company and outsources actual manufacturing to Korean and Japanese companies, etc.

Example: Banks outsource customer services and IT operations.

And there are historic roots. The value of international outsourcing builds upon the 18th century Theory of Competitive Advantage by economist David Ricardo.
'According to Ricardo, if one country is more efficient than another in producing all commodities, trade between the two nevertheless would be of mutual advantage. "
(more at http://timelessecon.wordpress.com/2010/05/15/ricardos-hit-comparative-advantage-and-miss-labor-theo...)

Best
Syl

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2

Jim Motes

Jim Motes   September 10, 2012, Edited September 10, 2012

I would take heavy advantage of cloud services like gmail for businesses. For a very low cost you get mail administration, storage, and simple collaboration and document sharing capability. Startups should be focused on getting the business off the ground and not paying an expensive IT team for services you can buy for a couple dollars a month. As you mature, you can shift your strategy toward a more internal model if it's right for you. Also hosted services with hardware included (basically infrastructure in the cloud) can save you a bundle as your capital costs will be far lower, but you need to be very careful of your Service Level Agreements in the contract and if you have something extremely proprietary, confidential and critical to your success, that should not be stored or kept in the cloud/hosted environment.

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2

Mory Bahar

Mory Bahar   September 11, 2012

It depends! Outsourcing development of your core technology or your key product/service, IMHO, does not make any sense. But outsourcing virtually everything else must be considered. Outsourcing admin, legal, finance, PR, ... activities that are not essential to differentiating you from others are no-brainers. You should also consider outsourcing lead generation, biz dev, sales activities, an interim CEO ... if you are not in a position to hire full time employees to do those, or existing founders lack those skills/experiences. As a founder your top priority should be to ensure that you have a viable and marketable product/service that addresses real world needs. Good luck.

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Sylvia Henderson
Sylvia Henderson This is one of answers with which I most agree! It depends. I recommend outsourcing those tasks that take you away from your revenue-generating and vision/goal-setting responsibilities. It's taken me years to finally get a Virtual Assistant, and now that I've done so it's the best decision I could have made. Ditto for my graphic designer.
October 12, 2012

1

Arjun Thakuri

Arjun Thakuri   September 10, 2012, Edited September 12, 2012

Thanks all - for you views. For me YES - everything is now getting global. So you really don't have to worry about each and everything in your business. Just focus on your core business functions - and out source the rest. However finding a reliable and genuine outsourcing partner is very important. Specially for startups - its very time consuming and costly, if you don't get the right outsourcing partner in the first place. I'll manage to post some tips on how to find right outsourcing partners in the first place soon.

********************
Update:

So almost everyone agrees outsourcing is good (and sometimes 'a must'). I'd like to post some tips on how to find a reliable and genuine outsourcing partner:

1. Know your business. Know what you're outsourcing & what outcome you're expecting.

2. Review their profile, portfolio and previous work.

3. Speak to them (only email doesn't work well). Skype them or call them at least once. Ask them if they can do your project - if yes ask them how they'll be solving any technical part of it. Ask them what technologies they'll be using etc.

4. Ask them to provide some (at least 1 or 2) reference of previous client(s). You can contact one of them.

5. Aks them if they're okay to sign NDA (no matter if you really need it)

6. Ask them if they're okay to give you full copyright of everything produced ('Work For Hire')

7. Ask them about the prices, payment models and methods.

8. Ask them about the post delivery support

9. Ask them about how they communicate during the project. Make sure you are getting updates on regular basis.

10. Ask them if they understand what you need (many times!) and make sure they really understand it.

***
Add more points - being based on your experience.

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1

Mel Shaw

Mel Shaw   September 11, 2012

I think ALL of these recommendations are spot on. From my own experience, I've learned that if you don't know your business yourself, you won't be able to effectively manage your outsourced team. So, get that down like so many of the recommendations below and be prepared to invest in slower turnaround times with your contractors until you get the hang of working with one another. Also, don't be discouraged when looking for the right fit. I went through a few contractors with various positions before finding the ones that fit with our work ethic. We don't plan on having any w-2 employees for at least beyond our first year because of the many benefits with working with contractors. Just be sure you speak with your accountant about the requirements of contractors vs. employees so you know your boundaries and rules of hiring contractors. Good luck!

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1

Sarah Johs

Sarah Johs   November 2, 2012

I see that there are mixed opinions there. Some strong objections too. Outsourcing is a great option if you know exactly what you want. Someone mentioned here that businesses will not succeed if core activities are outsourced. Of course they won't! If you want some assistance with secondary business tasks like bookkeeping, accounting, call handling, etc outsourcing is a great option. You will have more time to focus on your core business.

But if you outsource your very core, it means that you are letting the outsourcing firm take over. In that you do not have control over your business and so naturally you will have a bad experience. So if you know what you want, and go to the right company, yes, outsourcing is great. Check for data security measures like 128-bit encryption, 24/7 surveillance etc. Once you are sure everything is in place you can begin. The cost reductions and quality of work at some of the firms are great - real value for your money.

But the secret lies is "knowing" what you want. Cheers!

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0

Venkata Kommaraju

Venkata Kommaraju   September 10, 2012

Not just for a startup but for anyone in business. Do what is core and leave the rest to experts.

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0

Mike Buffa

Mike Buffa   September 10, 2012

If you need something that is not core to your mission, focus and key strengths, outsource it. For example, if your key strength is software and you need hardware, outsource the hardware. Also, in the early days you may not be able to afford a key asset like an experienced CFO or Bus. Dev. person - find a great consultant and outsource it.

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0

Brad Olsen

Brad Olsen   September 10, 2012

It is probably the best operational means for any startup. You will have an area of expertise which is the core of your business. Make sure you have developed a positioning that outlines your uniquness as a business then outsource key business processes so you can stay focussed on developing your value proposition to drive sales.

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0

Rich Grehalva

Rich Grehalva   September 10, 2012

Yes, but not everything. I would need to have some more information about your business to give you specific recommendations. It might mean just having a virtual assistant as an example. It also is depended on your budget etc.

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Gayle Naftaly
Gayle Naftaly Virtual Assistants are the best resources on earth! I started my business15 years ago as a Virtual Assistant Services business and although we have grown and evolved, my entire staff is virtual. We accomplish so much being this way - think of the talent in one pool! Different services come with different fees, but even small budgets can get some help. A Virtual Assistant can do what you don't want to do, think of how great that would be.
September 11, 2012

0

Dana Theus

Dana Theus   September 10, 2012

Yes. Run the numbers and assess the risk. When you can free up valuable resources to work on mission critical work by outsourcing, do it. But be careful, it can get expensive when you're cash poor!

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0

Rob Spijkers

Rob Spijkers   September 11, 2012

My high level recommendation would be not to outsource core-processes till you do understand these in all detail and have documented these processes. After you became a deep exter of your own processes you can consider outsourcing the core processes. But always keep in mind this might negatively impact the flexibility of your start up, mostly one of the differentiators for this type of companies.

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0

Yoav Degani

Yoav Degani   September 11, 2012

After having bad experiences with outsourcing i can say that the more you can avoid using outsourcing the better it is. if you must use some services so may it be only things like graphic design and etc. As for the technology part i believe that in 90% of the cases your startup won't succeed when the core of your business is out there, not in your hands, can't be controlled and far from your eyes.
Even if you think it will save you time and money, trust me - at the end of the day it won't.
My advice - find the way to do it yourself.

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0

Horst von Wendorff

Horst von Wendorff   September 11, 2012

I've worked in the outsourcing industry since 2002 and now run a BPO firm (Business Process Outsourcing). Yes there are various strategies for outsourcing. Which is right for you, you will have to make that decision. I'd be happy to lay out some possible strategies over tea or coffee or Skype conversation.

We have some case studies on our not-yet-released website. I hope these help.

http://vkwinc.com/testenvironment/portfolio/significant-time-savings-for-a-best-selling-author-and-...

http://vkwinc.com/testenvironment/portfolio/content-moderation-of-large-online-dating-website

http://vkwinc.com/testenvironment/portfolio/technical-support-for-software-provider

http://vkwinc.com/testenvironment/portfolio/improving-processes-while-improving-lives

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0

Gayle Naftaly

Gayle Naftaly   September 11, 2012, Edited September 11, 2012

Outsourcing can be great but can also be a big disaster. My business is relationship based, not transactional. You have to represent your company and yourself in the best way so what you outsource may not be done as you would want. I had a problem once. Since then I only outsource to a local group of freelance professionals that have proven themselves to me. We have the same corporate culture and it makes doing business so effortless. I may pay the extra penny, its the small stuff but I receive first class suport, extreme talent, positive attitude and total committment. So, examine your goals. I need to know who I work with! Good luck.

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0

Sheldon Prenovitz

Sheldon Prenovitz   September 11, 2012

Obviously there are a lot of answers regarding outsourcing and many things you can outsource. Our specialty is the HR/Payroll/Benefits arena. Absolutely makes sense to do it. I am happy to discuss with you.

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0

Mark Richards

Mark Richards   September 11, 2012

Outsourcing can be a fantastic strategy for a start-up. When done properly, it gives a company the ability to compete on a equal level with companies who have developed extensive resources in a particular function. It can also give you tremendous flexibility to scale up or down and minimize risk. It can also be a disaster, if it's not done methodically. Our focus is on outsourced logistics and distribution services. We've used these services, provided these services, and now assist clients with navigating the outsourcing process.

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0

Dave Ogden

Dave Ogden   September 26, 2012

Certainly there are a lot of good points made in most of the comments posted.

The suggestion I have for you is first spend some real think time on what are the TRUE Core Competencies of your business. In other words what is your key intellectual property that will drive differentiation in your market.
Then, I strongly recommend to invest in internal resources that are critical elements of your core competencies. In my humble opinion, you should have has one of your highest priorities to "in-source" your core competencies.

Therefore, the other required business support processes that are NOT part of your core competencies are the ones that you should "consider" for potential outsourcing.

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0

Muse en Lystrala

Muse en Lystrala   September 11, 2012

Not generally, I don't think. A startup should be mostly concerned with getting its product or service up and running, and as much as possible should be done in-house to conserve money, especially if the startup's exec team or proprietor is using their own money or if you have limited investiture.

Some things must be outsourced - like payroll, which was mentioned. But generally, most of what needs to be done should be done in-house, with a minimum of outsourcing and contracted help. If you don't know how to do something, get a basic how-to guide - it'll teach you a new skill and it'll be a lot cheaper than outsourcing. If it's too complicated for you to handle or you don't have the time to learn a very involved skill for what needs to be done - site building, server setup and maintenance, programming, and so forth - then I'd say it's time to outsource.

That said, it really depends on the company, and every business owner has to consider their own unique situation and decide what's best for their individual company.

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0

Wayne Miller

Wayne Miller   September 11, 2012

Everyone that's posted has an opinion but most are in the outsourcing industry. Here's my opinion, no one is going to care about your business as much as you do whether you pay them or not. Furthermore in order to run your company you have to know how it runs, when you outsource you lose control of both. To do the best job of running your company you have to be the expert and that means getting the advice of experts, which can in many cases be had for free. Free consultations and or evaluations are still the rule rather than the exception. While it's true you may not be able or capable of doing everything yourself you should still be in control of everything. The most expensive cost in any start up attempt is failure and paying people who have their own best interests at heart to take care of your business is a sure path to failure. If you are going to outsource make sure what you're outsourcing isn't critical because if it is and it isn't done right you'll be the one who pays. Success is determined by hard work, dedication and determination. Those who want to succeed find a way, those who don't find an excuse!

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0

John Plante

John Plante   September 12, 2012

in my opinion, not before you have your business model nailed down, otherwise too many variables

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Alfred Angelici

Alfred Angelici   December 7, 2012

My personal rule of thumb on outsourcing is similar to the last couple of posts, only I view it as follows: If the activity and/or knowledge is directly linked to the "crown jewels" (competitiveness and profitability) of your business then "No", it makes zero sense to outsource those people, or that IP and activity. However, just about everything else can be considered for outsourcing.

Example 1: In the mutual fund industry, the "internal, financial analysis models and investment ratings reports" are the crown jewels of the business; as are the best performing Portfolio Managers. These activites and knowledge will never be outsourced.

Example 2: At software companies (Google, Microsoft, Oracle & Salesforce.com), their development groups and source code are the "crown jewels". They would never foolishly outsource their core development teams or publicly release their core revenue producing product source code.

Example 3: McDonald's has a different understanding of their company's "Crown Jewels". In effect, "outsourcing" (franchising) is the driver of their profitability; however, the "cookie cutter business model" and "product supply distribution" are the core crown jewels behind their continued success. McDonald's heavily regulates and inspects franchises to make sure they are following the business model / process and buying their supplies from McDonald's distribution centers. They want customers to have the same service and food experience not matter where in the world they enter a McDonald's restaurant!

So ask yourself, "What drives my company's competitive edge and profitability?" Once you know that, you know what NOT to outsource.

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0

Dennis Zink

Dennis Zink   September 18, 2012

If its cheaper than doing it yourself, maybe. The second component to consider is control. How much control do you need, or give-up by out-sourcing? Lead times, quality, etc. are some other variables to consider.

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