Outsourcing for Start-

Ups: Mythbusting
Contents:
Introduction Introduction…………1
Although in today’s business world many start-up companies are
Myth #1……………….2
often put under pressure to reduce operating costs via the
Myth #2……………….2
outsourced software development by their investors and/or venture
Myth #3……………….3
capitalists (VCs), it is still widely believed that only non-core
Myth#4………………..4
development and/or testing functions can be outsourced to a 3d
Conclusion &
party offshore, nearshore or within home country. Since most of Recommendation..6

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.

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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

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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

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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.

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 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

* Own Team Model – an
frequent visits to the vendor’s office are needed.
innovative business model in
Since the distant flights are a way too costly, which, unlike DDC where both
the project execution and
frequent visits to the vendor’s office can exhaust developers are 100% managed
by the vendor, client gets 100%
your outsourcing budget in a very short term.
managerial control of
Innovative business models in outsourcing allow eliminating developers on the outsourced
team and project progress. The
these overheads. For instance, in Own Team model you know
vendor acts as an office space
exactly what you pay for. Your payments are normally and resource provider, while
client does the entire project
composed of a very simple formula: each member’s salary on management, staff retention
your outsourced team plus vendor’s service fee (including
etc.

cost of workstation and local taxes). From month to month

** Dedicated Development
Center (DDC, also referred to
you pay the same amount of money unless you add more as an Offshore Development
Center (ODC)) is a service of
people to your outsourced team. This knowledge will allow
developing and testing custom
you to have predictable budgets and save more operating software/web development
project by the vendor located
costs in a longer term. 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.

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Conclusion & Recommendations

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.

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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.

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 About IT Sourcing Europe

IT Sourcing Europe Ltd is a UK-based research and consultancy company specializing in nearshore
IT/software development Outsourcing. Our services include:

• Independent IT Outsourcing market research and analysis

• Independent surveys of Western European outsourcers and their ITO demand
• Independent surveys of Central and Eastern Europe's ITO services providers and their
factual capability to deliver top quality products and services on time and on budget
• Consultancy and recommendations to companies planning to change their current
outsourcing strategies
• Consultancy and recommendations to companies planning to outsource their IT function
nearshore
• Custom market and competition research and surveys

Our Contact Details:

IT Sourcing Europe Ltd

The Meridian, 4 Copthall House,

Station Square, Coventry, West Midlands,
CV1 2FL United Kingdom
Email: info@itsourcing-europe.com
Tel.: +44(0)2476992505
Web: www.itsourcing-europe.com

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