Outsourcing

This MBA Mondays topic was suggested by Aviah Laor, a regular member of this community.

I'll start this post by describing outsourcing and explain why companies do it. Then I'll talk about outsourcing in the context of startups.

Outsourcing is when a company hires another company to perform certain functions. Wikipedia defines it as "contracting to third parties." The term has become synonomous with the transfer of labor/work overseas, but outsourcing is not geographically defined. You can outsource work to the company across the hall.

The two primary reasons one company will outsource work to another company are cost and skill set. The third party outsourcing company can provide the required work at either lower cost or higher quality or possibly both. Sometimes time is also a factor. It is often the case than an outsourcing company can get the job done faster.

All kinds of business functions can be outsourced. I have seen almost every part of a business outsourced at one time or another. But the most common things that companies outsource are software engineering, data entry/data hygiene, customer service, tech support, and financial record keeping/reporting.

Startups are among the most active outsourcers. It makes sense. Typically the founding team has skills in one or two areas and doesn't have the entire set of skills to launch a business. So they outsource the tasks they don't have the expertise in. This can be a good thing but can also be a bad thing.

Specifically, I think it is always a bad thing for the founding team of a software company to outsource software development. We see this a lot. A team will come into our office and pitch us. When I ask how many people they have, they say "this is all of us". Then I say, "who is writing code?" And they say, "we've hired a company to do that for us." That is a very disappointing moment for me because it means we almost certainly won't invest in that team. We believe that software companies must own their most important capability themselves and that is the ability to produce their product in house.

The founding team of a software company should have a strong product manager on it (often that is the founder) and should have at least several strong software developers on it who can write most of the code. It does make sense to outsource some parts of software engineering from time to time. A common thing we've been seeing recently is outsourcing the development of a blackbbery app or some other kind of mobile app. Right now, that is still a fairly nascent skill set but we are also advising most of our portfolio companies to bring individuals in house to do that work because it appears that mobile app development will be a key skill set for our portfolio companies for some time to come.

It is tempting for startups to want to outsource customer service and tech support because these are labor intensive activities that can be fairly easily outsourced to a call center, either in the US or even outside the US. At some point, most companies will outsource some of all of this work. But we do not believe startups should outsource this work until they are "all grown up" (whatever that means). Customer service and tech support are the best way for startups to talk to their customers. Sometimes it is the only way startups get to talk to their customers. And customer feedback is so very important to startups so it is critical for them to do this work in house.

Data input and data hygiene is one area that we do think startups can and should outsource. This is not strategic for most startups and is often costly and time consuming work that can be easily outsourced.

The function that most startups outsource in the beginning is financial record keeping and reporting. And that makes sense. Accounting and bookkeeping is a specific skill that most founders don't have. By outsourcing it, you make sure your books and records are kept accurately and up to date.

I am a fan of outsourcing in general. I believe companies should develop those skills and functions that are their core competency and outsource the skills and functions that are not. I believe that the US should invest in outsourcing instead of demonizing it. I believe there is a lot of opportunity for economically weak regions of the US to use outsourcing to build their economies and grow.

But for startups, outsourcing is a tricky issue. You should not outsource those things that are core competencies or critical feedback points. If you don't have the skills on your founding team to do that work, go find people who do and either hire them or bring them onto the founding team.



#MBA Mondays

Comments (Archived):

  1. Scott Barnett

    Well said. Perhaps implicit in your post but not specifically stated is that outsourcing makes sense for functions that you don’t need full time expertise. Financials in a startup – as you state – doesn’t require a full time CFO. But you should have somebody very credible reviewing your financials, since if you’re going to raise money, you’ll need it. You can pay them by the hour and save a ton of money over even a full time Controller.

    1. Jim Caruso

      Very true Scott, and that’s one of the value propositions I use to develop my FAO business. But the benefits you note still fall within the two reasons to outsource as cited by Fred: lower cost and/or higher quality.

      1. Scott Barnett

        Right – my point was that (with financials, as an example) you can go lower cost by getting a Controller instead of a CFO, but the quality won’t likely be higher. You can get both by outsourcing your financial functions to a CFO – still cheaper than a Controller (in the early days) and very high quality. Same with legal. It’s not an either/or – you can get both lower cost and higher quality, but only for certain functions, as Fred mentions. I would not outsource software development if I were a software company. Ironically, I heard that Nutrisystems actually outsources the development/creation of their food, which would seem to contradict the assumption that you core competency should be in house, but I ramble now….

  2. William Mougayar

    Excellent round-up on outsourcing for the start-up, but you didn’t touch on the issue of “outsourcing destination”. It is assumed that these all can be outsourced within North American where doing business has common elements, but there’s also outsourcing to low-cost countries (offshore outsourcing), but it carries risks and additional hidden costs.The trick with outsourcing is- the farthest the outsourcing destination is, the more management overhead and risk it carries. Goes back to the proximity of the throat to choke and break-downs in communications and expectations. We have outsourced our Admin, but they sit 2 doors down from where our offices are co-located.That’s a luxury. I see them just an an extension of the team. I’ve been wanting to outsource certain other parts of the business, but it’s difficult to find someone you trust out there. Although sometimes you can find the right individual(s), managing them remotely or finding someone locally to manage them is the hard part.

    1. fredwilson

      yes, that is probably worth an entire follow up posti may do that next mondayexcellent point

      1. karen_e

        “I believe there is a lot of opportunity for economically weak regions of the US to use outsourcing to build their economies and grow.” This is the only “new news” part of this post for me. I’d love to hear more — how might we execute that? The recent NYT article on Germany makes the case for the state truly believing in the home country as a way to create jobs. It would be interesting and contrarian for people like you to champion that cause (Republican blocking for sport, let’s just ignore that for a moment).

        1. Dave Pinsen

          Germany has taken a different approach to jobs and industry though. It doesn’t compete for low-margin, low-wage work; it competes at the high end. It’s approach is, essentially, price high and justify. German companies can pay good wages and benefits to their manufacturing workers and still be competitive globally because they produce such high-quality, high-margin products.

          1. Christian Gaiser

            Don’t forget there are not too many web / software giants in Germany…Germany mostly fosters highly specialized manufacturing companies, but apart from a few blue chips like SAP there’s little in the tech space… so it’s hard to compare the US to Germany.

      2. William Mougayar

        Thanks. When you do that, I suggest to differentiate between enterprise outsourcing (which a lot of readers have harped on) and SMB outsourcing which is what I believe you intended on covering here. They are very different in scope, complexity and especially types of providers.

      3. Howard Luxhoj

        I would enjoy seeing the “bang 4 buck” post. We outsourced our book-keeping/financial but control is a big question. When you have a good person who works for someone else, control is hard

    2. Eran Davidov

      I’ve worked with remote teams (employees of the company) that were treated as an outsourcing arm. You have to get them aligned and feeling ownership, otherwise you’ll get what you asked for, which isn’t usually what you need ๐Ÿ™‚

    3. Hemang Gadhia

      William, I think that you’re touching on perhaps one of the most overlooked aspects of off-shoring/outsourcing. People turn to the off-shoring model primarily because of the perceived cost benefits. There’s an argument to be made for the ability to scale quickly, but I’ll leave that for a different post. In terms of cost though, you’re 100% right that the savings aren’t all they’re cracked up to be. As someone who has worked extensively with off-shore IT companies in India, I can tell you that in some of the best situations, we wound up getting maybe a 50% cost savings once all was said and done. In the worst situations, we got only 10% savings. And then on top of that, you add in risk around timelines and quality that are not insignificant. All-in, especially for a startup, it has to make you re-evaluate the reasons you’re off-shoring and if you can really afford those risks given the less than advertised cost savings. I’m not saying don’t off-shore, because there are some situations where off-shoring is absolutely the best approach. But I think people need to be more thoughtful in evaluating their reasons for doing it and be realistic about the outcomes.

      1. Toshi O.

        What’s the balance then?Not just for US/Off-shore, but at what point does a start up say I need to get things done vs. I’m not sure i can pay for all that to get outsourced?The trouble with startups, as Fred has mentioned, is that they are strapped for cash, often to even overlook certain aspects of the business.If you had to make a list of what the top things to outsource for bang 4 buck what would they be?

  3. Will Chapman

    I’d add a third variable which some companies want to outsource: risk. If an eCommerce business outsources picking and packing to a logistics agency, there is clearly an outsourcing of skills; but they are also aiming to outsource the inherent risk of fluctuating order volumes, labour rates, pack times etc. This risk will be priced in to the margins of the outsource provider, and makes it important to renegotiate with them as they get to know your business better.

    1. fredwilson

      great point Will

  4. kagilandam

    You started with “All kinds of business functions can be outsourced” and finally ended with only outsourcing “book-keeping of financial”… does this mean you would want a second opinion on the finance statement :-).I would say for a software start up the only thing you can outsource is “office maintenance (cleaning, dusting and janitor)”.

    1. Rick Bullotta

      Well, at our startup, I’m CTO *and* I do my share the vacuuming, cleaning the coffee cups, and taking out the trash. ๐Ÿ˜‰ I guess it’s just that we East Coast startups are more “capital efficient”.

  5. David Semeria

    Startups should never outsource any activity which involves customer contact.Offering amazing customer service is one of the few areas where a small startup can out-compete an established player — and represents a fantastic opportunity for brand-building.

    1. fredwilson

      word

    2. Colin Pape

      Great point David. Also a great opportunity to learn what the pains of the market really are and validate assumptions – not something you want to leave to an outside party.

    3. Niyi

      I hear you bro.I personally think all the developers (and quite possibly, the CEO as well) should be hooked up to the help desk.

      1. kjcart

        Do all developers have the people skills necessary to interact with the customer? (I know, stereotype, but bear with me please) I think devs should be near the help desk, able to interact with the customer via sales or support, but not always front and center with the customer. My personal experiences with some devs were “Well that’s what you asked for so that’s what I programmed”. This isn’t true for all, but you should be wary. As a customer, it’s great to see the entire team trying to work with you.

        1. fredwilson

          “well that’s what i programmed”good pointgood chuckle

        2. David Noรซl

          Not all have the skills. Try to identify the ones who have and involve them in the process. The more a developer can feel a customer’s pain, the more likely they’ll want to change something about it.

        3. reece

          I’ve seen engineers like that, but when you put them in front of the customer in some capacity, and they hear “i want X” or “Y is broken” enough, then they’ll build/fix it so they don’t have to hear it anymore…

        4. Eran Davidov

          My exprience in big companies says not all developers have that skill. They’re not screened for it either, since there’s formal support organizations. i’ve seen developers tell customers that they didn’t understand the feature or shouldn’t be doing X or Y, when the customer is saying that’s what’s important to them.In startups though, if you hire someone that can’t interact with the customer, you’d better have a plan for who can cover and how to get the developer to really understand the customer’s issue / opportunity.

      2. reece

        If you want to read about outstanding customer service, check out this article about Paul English, the founder of Kayak.com and how he’s got his engineers to do customer service…http://www.inc.com/magazine

        1. Mark Essel

          Fantastic article Reece, when I read it a few months back it really made an impression. Just imagining having all the engineers rotating customer service is kinda cool.

      3. CJ

        Our CTO sat in on the desk one day…it was hilarious. The people on the other end couldn’t believe who they were speaking too. In the end, it proved to be a bigger distraction than anything else but it was fun.

    4. David Noรซl

      I wholeheartedly agree with you, David. Just reblogged that part on my blog and added that in house customer support (human, swift and always taking the extra step) is a key part of our community management.Most times, users don’t expect an answer. If they get one within a few minutes, this can be your best marketing. The challenge will be to scale it in house.If you fancy, these are my thoughts right here:http://david-noel.com/post/

      1. David Semeria

        Excellent post David, bang-on.I wanted to post this link http://blog.asmartbear.com/… but your comments are closed…

        1. David Noรซl

          Thanks David, appreciated! Oh and that post is brilliant, thanks for sharing. “Impressive until he opens his mouth… Maybe like your company.”(tried opening the post up for comments but Disqus wouldn’t let me)

        2. Mark Essel

          Great post by Jason. He’s got a strong perspective and experience of building with paying customers. Great way to contrast VC funded startup forms.

    5. awaldstein

      Well said David.The truism that ‘Customer Service is the new Sales’ can’t be repeated enough.Every time you get the aha moment that a company really cares, the community deepens, the company becomes more human and brand becomes more real and valuable.

      1. David Semeria

        Or, at least, gives a convincing impression of caring…. ๐Ÿ˜‰

        1. awaldstein

          True…but there are folks that have the DNA for cust service just like there are great coders. You need both.A key challenge with building a cust service org in the states for growing companies is to find a way to keep the great people motivated and a management style that keeps these folks happy and excited to keep on helping.

    6. Mark Essel

      That’s also why folks will have a hard time outsourcing communication (curating popular blog sections for instance ๐Ÿ˜‰

    7. Kelley Boyd @msksboyd

      UP TOP SIR! I am in violent agreement with this one. I had an amazing customer service exchange in the last couple of weeks and wrote a blog post to memorialize it. It was with Warren Adelman, President and COO of Go Daddy. http://bit.ly/WARRENAs it relates to start ups and customer service: The noise in the start up space, as Fred pointed out a few weeks ago, is deafening. The litany of “me too” products and companies can make it hard for people to make good choices. After getting the “must have” checks in the box, the next buying criteria should ALWAYS be customer service. I rarely say never, or always, but this is one that will remain in perpetuity. There is no question that things will go wrong in a deal, with a product, with a service.The question one must answer before the buy is who will show up and how when things get sticky. I told a bit of a story on a Charlie’s blog the other day, (encapsulated below) with respect to how to find your right partner, whether that is end user or investment.[….2) When you are looking for an investor, if they can’t make money on your deal how much time can they spend making sure you make money. When I negotiated the price of equipment to WalMart and they wanted 38% off the first machine (which was in the neighborhood of 60K, each. My response was “Do you want me to call you back in 2 minutes, 2 hours, two days or two weeks in support of that equipment, because at 38% points I can’t afford to support you. The response that they would buy 30 units allowed me to negotiate a collective discount that worked for us all…but you get the point.]

  6. Niyi

    Whilst the critics of insourcing in software companies often point out the dangers of falling into the “not invented here” mode of thinking, I agree with Fred that tech firms need to have 100% control of their core software.For example, I run a company that creates SaaS ad managers and at the onset, my cofounder suggested that we build our UI on top of the freely available OpenX ad server instead investing time in building ours. We ended up building it in-house because we believed that the ability to control and innovate the ad server would be part of our long term competitive advantage. So far, that decision has been vindicated because bringing the technology in-house has allowed us to respond to new user requirements very quickly.In summary, outsource as much as you can to increase your focus *but* keep your core competence in-house because the long term benefits outweigh any short term advantages.

  7. Phil

    In your opinion do you see a difference between offshoring and outsourcing?Or are remote based staff (with all the benefits and challenges that go along with them) typically seen as being the norm these days?

    1. fredwilson

      i see them as essentially the same thing with different costs and benefitsit looks like that will be next week’s post

      1. vruz

        Aside from the managerial aspects, I think the cultural aspects of offshore outsourcing can’t be overlooked and they have an impact on the final product.Just look at the software that comes with any cheap chinese hardware breaking every western UX convention. Or how a heavily accented support desk agent impacts your marketing strategy. Or broken english in your outsourced user’s manual.There’s some stuff you just can’t outsource to some particular places overseas, because you have to deliver a cultural product that matches the culture of your target public.For some stuff, Romania may be good where India is not. It’s more complex than it seems.

      2. vruz

        I just thought I’d bring up President Truman’s “the buck stops here” in these situations.http://www.trumanlibrary.or…It’s all about passing on certain responsibilities and deciding which bucks stop with you.

    2. fredwilson

      i see them as essentially the same thing with different costs and benefitsit looks like that will be next week’s post

    3. fredwilson

      i see them as essentially the same thing with different costs and benefitsit looks like that will be next week’s post

      1. Kelley Boyd @msksboyd

        You kids are sure feeling festive today…I don’t know where to put this comment so I will stick it “here”.I think there is a distinct difference between off-shoring and outsourcing. There is currently a small movement to bring customer service departments back onshore. Two benefits: Improved customer service and creating good jobs. There are a couple of companies that are doing this and having good success building centers in Tennessee, Georgia and Arkansas. This work is still out-sourced, but not off-shored. I very much like this trend and hope that it grows exponentially.

    4. vruz

      offshoring is a newer, shorter term for what used to be “offshore outsourcing”.the main difference is the administrative overhead involved in dealing with different timezones, languages, legal, fiscal and financial systems.

  8. Avi Deitcher

    Fred,Good intro, 2 comments:1) You left out payroll. Just about everyone outsources payroll, for obvious reasons. Great way to break into an outsource arrangement (as a vendor) to a company that says, “we never outsource *anything*”. Just ask the guy to pull out his latest paystub with the big ADP (or SurePayroll or Paychex or whatever) logo on it.2) IP issues: First of all, it is really crucial to get the legalities of outsourcing down right, even if it is just a small component. Defining it properly as “work for hire”, as well as other terms a good lawyer will put on, can be critical now and later (viz. Ceglia and Facebook). Second, even with the right legal terms in place, one should be mighty careful about where one outsources. Big companies (at least some) have already learned this the hard way in developing countries; most early-stage entrepreneurs are probably pretty naive about this.

    1. fredwilson

      Great commentBoth points are spot on

  9. BadIdea

    Have had experience in a start-up that outsourced development. It was a (expensive) disaster that paralyzed the company.

  10. kjcart

    Is there ever a point at which it IS acceptable to outsource dev/programming for an early startup?I’m looking at an SaaS opportunity, web based, and while I have extensive experience with technology, system design and implementation, I do not have much in the way of coding experience. (Pascal in school and recently trying to teach myself some OOP (AS3, C#)). The other people involved in the potential founding group are Business Analysts & Project Managers, again with limited coding experience. There is one person who can code, but unfortunately the scope of this project may exceed their capabilities given the 6 month time frame we are looking to have our first release out by.The options I’ve thought of this past weekend are:1. Outsource all coding using the BA’s and PM’s to manage this process & development. (which was clearly not suggested in the above post), can keep founding team to 2.2. Expand the founding team to 3+ individuals to include devs/programmers3. Keep the founding team at 3 and outsource components that can’t be completed locally.Option 1 clearly is the favorite as per FredOption 2 I fear the founding team becomes too largeOption 3 again I fear the founding team may be large for some at 3 people but at least more control of code is local.FYI all of the founding members have dealt with outsourced and offshored dev teams on several projects throughout their careers… for better or worse…While the above context is not the only scenario I thought it is appropriate. I appreciate any thoughts and comments, first time poster, long time reader.

    1. CJ

      From earlier questions I’ve had about the same topic, it seems the best option is to find founders with coding experience and write it all in-house. If you don’t you’re putting your future in the hands of outsourced devs who view you as a check, while in-house you view the code as your life and survival. It’s far too important to entrust to someone with no stake in the business as a whole.

    2. adamwexler

      my commentary would relate to your point kjc…”I think it is always a bad thing for the founding team of a software company to outsource software development.”as we’ve discussed on AVC, one of the most important roles of a founder is his ability to recruit. this in-house development gives startup teams the ability to be agile, and that’s essential because the original plan is certain to veer off course at some point.

  11. chipcorrera

    I’ve had very good success using a mixed model in building software. I retain control over architecture, design and implementation quality by having a small internal team (1 Architect, 1 UI Engineer, 1 System Engineer) and partnering with an outsource team to fill out a full technology organization. This works well, in particular, during the earliest stage since I’m able to accelerate the team build out rather than spending tons of time finding the long term, full-time resources. I am also able to quickly flex team size to match work load and schedule.

    1. Mark Essel

      Great example of a practical case of outsourcing Chip. Appreciate the real life use case of how you made it work. What are the biggest downsides of this setup, is any of your technical roadmap vulnerable to third parties?

      1. chipcorrera

        The biggest downside is that usually the outsource partner wants/needs some duplication of resource at the architect level so that they can play a more integrated role within tight sprints. The effect of this issue usually diminishes after a couple of sprints.I’m not really sure what you mean by our roadmap being vulnerable to third party? But in a nutshell, I tightly integrate the outsource partner – almost no difference in role and responsibilities compared to owning my own full-time employee team – they just get paid by their company. We own and control the IP, roadmap, sprint definitions, etc…

        1. Mark Essel

          Much of what I work on can be deployed on a host of third party servers so your example fills in some uncertainty I had. As to IP, some information is considered sensitive to a business. In technology coompanies source code that could reveal a novel proprietary (un patented) algorithm is an example. I’m not too concerned with this situation but I’ve worked with many who are. If it’s a non issue that’s what I wanted to hear.

  12. Nick Grossman

    There seems to be a clear parallel here between insourcing/outsourcing and the closed/open web. A strategy of focusing on your core strengths and keeping those in house, then relying on others (who can focus on their strengths) to fill the gaps seems very much in line with the notion of the modular open web.

    1. fredwilson

      nice insighti agree with it

  13. awaldstein

    Channel sales or tiered distribution is also outsourcing…putting your product and brand in someone else’s hands to touch and sell to the customer.Might be another topic Fred…when to do and how to manage?

    1. Kelley Boyd @msksboyd

      I don’t see channel sales or distribution “sales” as outsourcing at all. I see those relationships as partnering. You have got to make sure that there is a consistency of message and delivery to keep your brand intact. Of course, I speak to enterprise level sales stuff…though I did have a consumer product I developed in distribution. Messaging and knowledge transfer is tougher at that level.As for distribution as a “vehicle for fulfillment” I can sign up for that as outsourcing of your shipping and handling.

      1. awaldstein

        True…at their best they are a partnership.Good distinction Kelley.

    2. fredwilson

      that may be a guest posti have seen this done plenty but i don’t have the direct experience doing it

  14. Campbell Hyers

    These are all great comments and many are spot on. I’ve been at an outsourcing firm for almost 10 years and I wish I had more time to comment on this thread. In short, I think this article misses one of the fundamental reasons that people outsource – speed to market. I realize that many of the companies in the USV portfolio are “long haul”, 2-guys-and-a-dog, bets that rely on a groundswell of crowdsourced support to create a defensible position and value (sorry if that sounds harsh, just trying to differentiate start up types). In some of those cases, speed to market is not the top priority; instead they focus on being nimble and staying in the game at all costs. I believe in this formula and love it for the right start up. However, there are many startups or new products that don’t make it because they didn’t realize the size of the crowd in their market, nor do they own a crystal ball to foresee the new players that are entering their market and garnering first mover advantage.Speed to market doesn’t have to mean fools rush in. What’s not addressed in this article is that it can often take a lot of time and many trials and failures even for a small team to form, gel, make the right system architecture decisions, and build an application that is scalable/exstensible/etc.On a related topic: often startups, particularly those that are not “software companies” (IOW, they are a marketing company, or a health care company, etc that just so happen to be building a piece of software to support their product) get so focused on the technology that they don’t consider all of the other focal points that are well within their own wheelhouse – marketing, brand position, strategic partnerships, etc.I really wish I had more time to comment here.C

  15. Raj

    This is an issue of scale.One of the biggest mistakes that I made was choosing to rely too heavily on outsourced developers to get my core product written. They werenโ€™t employed by me directly, but they were dedicated to my company — they were essentially mercenaries.I was acting like my startup had scale. Startups by their very definition donโ€™t have scale. Big companies with lots of resources and long release cycles have scale. They can afford to endure the latency associated with offshore product development, but a startup cannot.I should have built a team locally and iterated quickly. Instead I was acting like I had scale.

    1. Ajay Bharadwaj

      Great point Raj. I see a lot of startups ignore this and outsource to companies which are built to address the issues of scale. There are companies which can work as outsourced partner and address complexity, ambiguity, customer discovery and validation. One has to look hard to find them.

  16. PhilipSugar

    If you are a technology company why wouldn’t you want to have a major equity partner that is controlling your most important asset….technology. Seriously, they are your company jewels. There are only three people in our company that can touch the servers in the racks at the datacenter. All are principles. This is like outsourcing marriage, lot of analogies there….you can get what you need for the night quick and easy if you pay but its not fulfilling long term.Here are the reasons it doesn’t work:1. The requirements for a software company are never in black and white.2. The ability to have somebody to hear direct feedback in person from both sales and support is priceless.3. The ability to have somebody tell you that no, you’re wrong, there is a flaw in your reasoning versus yes boss, I’ll code that right away boss is just as priceless.4. Frankly you as small company are going to self select into the bottom quintile of programmers. Think somebody in India for example is going to want to work for Microsoft, GE, Intel, Huge Investment Bank, or you??5. Cost savings in which I do not believe….but I’ll take on anyway…..as the company matures development will be 20% of costs or less. Assuming, and again I totally disagree, that you can shave a bit off that…is saving a percent or two overall worth not having a core team?? The sales needle is much more important.

    1. Mark Essel

      “The ability to have somebody tell you that no, you’re wrong, there is a flaw in your reasoning versus yes boss, I’ll code that right away boss is just as priceless.”I think this is the #1 reason outsourcing has trouble comparing to in house technologyIf the person in charge of the outsourcing is the tech lead and they are familiar with why and how work is done, maybe you can get the best of both worlds.

      1. PhilipSugar

        Nope. If you want a classic movie example, see Patton or Hamburger Hill where the generals talk with the grunts. Enough said.

        1. Mark Essel

          Hah, but of course, both great film examples.

  17. ShanaC

    ok, a more realistic question-How do you measure your most realistic timeframes for outsourcing anything. Clearly certain things (we’ve listed them) can be outsourced. What’s a typical timeframe to start with parts of customer support? Data Input and Data hygiene? I wonder if these somehow have a typical schedule of outsourcing? (first you do a, then be, it’s usually when you reach about xyz amount of data, or abc customers)

    1. kagilandam

      ok. a more realistic answer :-)There is absolutely no written rule about outsourcing and time. There are only two things you have to protect in your company development.i) Customersii) IP.rest you can dump anywhere you want (outsource, offshoresource, nextdoorsource etc.,) if you can afford (money).Having said that … as a start up u cannot outsource anything except office maintenance until you have lots of money to throw.I have worked for a start-up where we did everything (R&D, development, data input, clinical trials, patent filing, prototype prove out, marketing, finance, payroll …except cleaning and janitor ) with just 18 people. But once the VC money came flowing in like river amazon … all the developers were gone and now the company outsources everything except marketing (customer) and some !!! R &D (IP).

      1. ShanaC

        That’s a realistic answer

  18. MartinEdic

    Fred, I think your list of commonly outsourced things is quite disturbing from a start-up POV. Finance? You need to know that stuff. Customer service? Very bad idea.We’re outsourcing distribution: inventory, fulfillment and collecting payments. Of course we’re an e-publishing company so those things reside in the cloud, i.e. Amazon and Apple.The point is that you should outsource when you get better results than what you can do yourselves, ‘better’ meaning ‘better for the business’. It should not be a purely financial or resource-related decision. If I hire a high-end graphic designer instead of doing it in-house, it is not because I’m saving money or time, it is because they will create design that raises the bar. That in turn drives sales, increases perceived value of the company, builds reputation, etc. That should be the rational for an outsourcing decision.

    1. fredwilson

      i didn’t say startups should outsource customer servicei said the opposite

      1. MartinEdic

        I didn’t mean to imply that you were recommending those things, you just noted that these are things that companies often consider outsourcing. Sorry if I wasn’t clear on that.

  19. genystartup

    For a lot of the bootstrapped companies still trying to build a customer base, i think it’s common place to see them out source some part of the software development, especially creation of apps. On the other hand, it’s at that stage the company (founder and whoever else they have on board) should personally respond to all emails and phone calls they get. This stage is called the “user base” building stage after all, so not only are you improving relationship with the (few)-totally engage-able audience you have, you can use that opportunity to get feedback. Feedback that in the long run will affect how successful you will be with your target market.

  20. Hemang Gadhia

    We had the outsourcing discussion when we first started building our company eight months ago. One of our co-founders had a lot of experience working with outsourcing companies in China and we had the means to get past the language barriers. We could’ve gotten coding done at $20 per hour had we gone down that path, but ultimately we decided to build it by ourselves. Going through the discussion helped us arrive at one of our core beliefs for how we run the company: anything that you articulate to the outside world as being a valuable/distinguishing facet of your business, you should build it and own it yourself.

    1. fredwilson

      but now you can revisit that decision and possibly use those relationships to get stuff done that is important but not on your core roadmap

  21. Daved

    Our company is betting that future employees of most companies will work remoteand take advantage of new tools that the cloud offers. This model makes outsourcingvery powerful and places the job right back into the hands of skillful people.We manage special teams creating animation and visual effects for all platforms of advertising.brigade.tv

  22. Outsource Magazine

    Some excellent comments here reflecting a very wide range of experiences and perspectives.My tuppence-worth: outsourcing is a key element of a fundamental change in the entire business framework. Increasingly, businesses – especially (if somewhat counterintuitively) large ones – are less homogenous, monolithic organisations than a collection of activities bound together by contracts. If your company makes cars, or shoes, or software, why would you want to spend bucket-loads of cash on in-house F&A, payroll, procurement etc teams – possibly spread over hundreds of offices worldwide – when those are not your core competencies? Instead, you find a relationship with partners for whom those activities ARE core competencies and who can therefore concentrate on delivering high-quality services leveraging economies of scale. A car manuacturer should concentrate on manufacturing cars: very few other activities need to be retained in-house AS LONG AS that manufacturer has reliable partners who can provide uninterrupted high-quality services replacing the previously in-house non-core activities. Contracts are the glue binding the new framework together, of course, because to a large extent it is those which will ensure ongoing service- and delivery-quality once the decision has been taken – a very difficult one for many CxOs – to give up a certain degree of control over processes and transfer it to a provider.This trend is accelerating (and moving into the public and voluntary sectors, which poses its own questions); we’re witnessing what I’ve heard described as the most radical transformation of the nature of business since the development of vertical integration, or the assembly line. For SMEs – which by the comments already posted seem to be well represented in this debate – the big questions are: how to leverage the benefits of outsourcing while not having access to the economies of scale which initially drove outsourcing to the fore for larger businesses; and how to ensure one’s critical partnerships (perhaps with providers much bigger than one’s own organisation) remain equitable, mutually beneficial and innovative. Those interested in a more in-depth look at these issues can check out the latest (autumn) issue of Outsource (www.outsourcemagazine.co.uk) which has now been published and which will be available digitally as of next week. I’m happy to address queries individually by email too: can’t guarantee an instant reply of course! But will get back to everybody.Best,Jamie LiddellEditorOutsource Magazine

    1. Mark Essel

      Wow, almost a blog post worth of answer. Interesting macro look on outsourcing and it’s relation to business evolution Jamie, thanks.

      1. Outsource Magazine

        Thanks Mark – there is of course a lot to talk about (which – plug warning – you can of course read about in Outsource…). The SME element is particularly interesting to me because so many larger organisations have already outsourced a great deal of their operations: the next big, important and transformative wave will occur in the SME space. Can I recommend a couple of interesting contacts for you? Bharat Vagadia, Board Member for SMEs on the UK’s National Outsourcing Association, has a lot of good insights on this topic. On the importance of contract in this trend, check out Tim Cummins of the International Association for Contract & Commercial Management. One of the deepest thinkers in the space in my opinion.I’ve just followed you on Twitter btw.

        1. Mark Essel

          Thanks, I’ll shove this info into an email to myself and place it in my “business outsourcing” knowledge section.What’s your twitter ID btw, I don’t have it automatically let me know when I get a new follower, I usually find new folks by blog pages with twitter links, and mentions.

          1. Outsource Magazine

            We’re @outsourcemag – if you DM me your email I can sign you up for a digital copy of the mag too.

          2. Mark Essel

            Ok, gotcha listed (that’s how I track most businesses/brands).

  23. Brett Topche

    To me, whether or not outsourcing your development makes sense comes down to what your company is selling at the end of the day. If your product itself is software (i.e. SaaS companies, consumer-facing web sites, etc.), then you have to own the code, as it is the heart of your business and fundamental to your competitive advantage. However, if the software is simply a means to deliver what you are selling (i.e. e-commerce businesses, some technology-enabled services), there can be quite a bit more flexibility, particularly with getting v1 out the door. In these kinds of businesses, I tend to think your competitive advantage comes less from your really cool software (as long as it meets a basic threshold of usability) than from price, service quality, selection, etc.

  24. kenberger

    Luckily, these days there are highly-effective models for today’s software startups.With Agile and eXtreme Programming, one doesn’t just hand off the specs to a shop and wait for product to come back as if it was a tailored suit. It’s a very interactive process and won’t work unless someone on the customer’s team is actively engaged.”we’ve hired a company to do that for us” is most certainly a bad answer. A much better answer would be “We’ve hired a partner to help augment, jumpstart, mentor, and/or accelerate our development efforts in the uncertain times ahead while we build a long-lasting engineering team”. Firms such as Pivotal Labs, Hashrocket, and mine attempt to help companies help themselves in this manner. Sometimes the company ejects us once they’ve grown up. Sometimes they keep a minimum of our services around indefinitely, and bump up n down the efforts on-demand when tight deadlines come up.Until reading this post, I thought we were “outsourced” dev shops. Maybe that’s the wrong term.

    1. fredwilson

      i agree that pivotal, hashrocket and others are great at what they domaybe you need to position a bit differently

  25. HowieG

    I think outsourcing is invaluable. I have outsourced most of my non-core competency activities until I have a reason to bring them in house. It also allows flexibility. Often, especially with technology betting on something could make or break your business. The key is to think about what you are making and selling. And to figure out what gives you a competitive advantage in the market place. Saving money via outsourcing is not always really saving money. We see this in Government everyday. It’s not a matter of just paying people less as often is the case (see Call Centers in India or Security in Iraq). You need to find the people who have better technology, infrastructure, or economies of scale yes…but also the passion for what they do or you are in for trouble.That said Flexibility is important. I have a collegiate marketing service I am trying to get off the ground. Mobile Marketing is a major component. I almost paid for an SMS/MMS system that I hosted myself from a 3rd Party. Since I started down that path other technologies have come to market. If I had made that investment I would be trying to sell what I paid for…vs what is best for the client depending on their needs. Now I can offer a client whatever service they want or is best fit for their needs whether its 2-D Barcode, SMS/MMS, Social Media Technology etc

  26. kenberger

    A nuance perhaps easy to miss here is the emphasis on *software companies*.What is and isn’t one’s core competency is guided by one’s self-image, present and future, including whether they right or wrongly consider themselves a software company.I wonder if USV considers their entire portfolio to actually be software companies.

    1. fredwilson

      we do, but we don’t call them that

      1. kenberger

        exactly. and many tech startups wrongly self-classify as not a software company, because they don’t specifically get paid for a software product, etc, and therefore make the wrong decisions about software outsourcing.

  27. Senith @ mba tutor

    Its very important to understand what is strategic or what are the core activities of the firm. Often it is not the software. It may be the ability to understand and leverage data, or it may be marketing, it may be research, etc. That is what must be protected most.

  28. Alan Berkson

    When I approach outsourcing I look for “commodity” services within an organization. If it’s a commodity service it doesn’t mean it’s not important, it just means there is little or no competitive advantage to be gained from it. IT support is a perfect example. You can’t do better than 100% uptime.I also look in terms of tactical/operation vs. strategic. Strategic services should be kept in-house.The last key factor is to keep in mind that outsourcing is not necessarily cheaper. However, it may be more cost-effective in the long run in terms of training, risk management, and forecasting operational costs.

  29. m_johnson

    I’m the CEO and also the support person. I wanted to do this after working 18 years at Microsoft I got away from the customer. And I very, very much care how our games (ItzaBitza and ItzaZoo) are used by our children. There are some customers who treat support people extremely poorly. I’ve been hung up on, told to f’ off….and then on the other hand I spent 4 hours with a great grandfather learning all about his life and his kids.I guess more than anything I’ve loved the human touch of it. Although support costs (as far as my time, etc.) FAR EXCEED our price point of $19.99.

  30. Aaron J. Ruckman

    Fred’s statement here is key: “You should not outsource those things that are core competencies or critical feedback points.”But everything else should be fair game if you a) can control the quality of the work b) be reasonably assured the work will continue uninterrupted.One of the things I like most about outsourcing is that as your business expands and contracts (not all of us run startups that grow every single year) you can easily ratchet up or down the work you’re outsourcing without any disruption to your permanent workforce. This helps creates a stable environment free of HR chaos which can be distracting.

  31. Mark Essel

    Every time I access a third party API with a web app, or pull in OS scripting libraries or database specialists (10gen) I’m outsourcing those duties. It’s perfectly natural to outsource in software, I’m surprised most startups aren’t constructed to function the same way when it comes to early production to make the highest quality product the quickest.Totally agree that early customer/user feedback needs to be fully comprehended by the founders. But even the analytics is outsourced to high functioning third parties (google analytics is free, there are many cost effective options).I think about how incredible it is to have the capability to accurately gauge/estimate an interface’s or feature’s virality through the social web before you even build it. That kind of analytics/testing is like precognition.

    1. fredwilson

      good point, but that is a different kind of outsourcinguse twilio and you’ve outsourced the telco part of your web appbut i think that is a bit different than hiring people who work for someone else

      1. Mark Essel

        Agreed, it’s very different.The choices that each leader makes for what to outsource vs insource, is what defines the startups identity (tech business, media company, service oriented, etc).Web based startups which grow at rocket speed are best served by having core software/technical staff with fully aligned motivation (equity/employees). But if I look closely at twitter’s early creators (thanks David Semeria for pointing this video out a while back), I see faces leave the picture that were integral at the beginning of the project. Where are they now? Early team members don’t always stick around. Even internal team members may not always be around (churn).

  32. Max Ischenko

    Excellent post, as always.I do software development for about 10 years, more often than not from the “outsourcing provider” side. People often get religious and black-and-white about this topic while they shouldn’t. ๐Ÿ˜‰ It is just another important topic, to be with common sense and logic.Outsourcing resembles delegation. It’s hard to delegate what you don’t understand yourself. Same with outsourcing. You want to know what you’re building. If you can trust and empower your partner, convey your vision and goals, keep working together to develop shared understanding and knowledge then outsourcing could work really really well.

    1. fredwilson

      well said Max

  33. Julien

    I love that you think that data input should be outsourced :)Generally, I think a startup should outsource anything for which they’re not making a difference with another company and ‘in-source’ anything which is a competitive advantage. I don’t think any startup is different because they do a better accounting, and I don’t think any startup is better because they built their own project management tool. However, I think UX and design can really make a strong difference between 2 startup which is why I think startups should really make sure they have strong UX and design capacities in-house (it is always surprising to me that so many startup actually outsource this).Since time is the scarcest resource a startup has (way before money), I think any time a startup can save on time (or trade money for time), they should do it.

    1. Mark Essel

      Love the first hand experience backed perspective on time saving. I know you came through like a storm to NYC and the west coast. Hope your trip was awesome, and look forward to catching up when your timeline isn’t so loaded.No matter what it looks like communication with customers /investors is never something you can outsource, although it helps to have a recommendation.

  34. vruz

    I think there’s another core competency which is sometimes wrongly outsourced, or overlooked.Brand management is extremely important. Some founders get it, some others don’t and they leave it to chance. (or worse… to their advertisers)Software and associated original knowledge generated by the startup is some of the most important intellectual property a company can have.If stock prices in the market are any indication, the gap between book value and market value suggests that brand value rules, and makes great companies be great.Software could be then understood as one key component of the company’s mojo: The Brand.

    1. ShanaC

      Shouldn’t brand be written into the product?

      1. vruz

        Not necessarily. I’m talking about the company brand.Product brand and company brand are not exactly the same thing.At least not for the great ones.When I say “Apple”, does one single product come to mind?What distinctive qualities do you expect in any Apple product?Another excercise:The Google product I use consistently every single day is GMail.The Google brand evokes resilent service, observance of privacy, androck solid technology.When they release a new product we expect it to carry these core brand values.So does GMail, even though the Google company is better known for theGoogle Search product/service.(to the point where the ‘google’ word has become a verb and synonymfor ‘online search’)The brand is clearly greater than the product, and in some of theseoutstanding cases,,even bigger than the company that created it.

    2. fredwilson

      yup, so true

  35. W. Michael Hsu

    Great article Fred. Happy to see that VCs like yourself also think it makes sense for startups to outsource their financial record keeping and reporting (confirms that it isn’t just us accountants who think that is important.) Too bad many startups that we come across believe either 1) that they don’t need any financial record keeping until they’ve “all grown up” or 2) they can do it themselves. Hoping articles like this will shed some light on the issue and the benefits of outsourcing non-core functions of a business.Cheers.

  36. mlx

    If the ‘outsourcing’ is narrowed to ‘offshoring’, most small company (e.g. <$100M) shouldn’t bother doing it with development works.First, these companies probably cannot afford to open their own office in a foreign country. Second, in a foreign country (say India), small companies don’t have the name brand to compete for talent. In local society, people feel good working for well-known brands.If you go through a consulting company / partner, it doesn’t make much sense either. For those consulting company to get your business, they normally have to charge you somewhat ‘market price’. Otherwise, the business goes to competitor or everyone just open an office by themselves. From that ‘market price’, taking out the overhead and profit of the consulting company, the real developer may only get a small portion of what you paid for. In developer’s world, it makes a lot of difference in term of the quality of the developer that you can hire. Eventually, that gets into the quality of your product. So, as someone in previous comments said, if you go off-shoring, you better not aiming at the cost or quality.In term of ‘scaling’, I doubt it after witness low productivity and retention rate.

  37. mcbeese

    We’ve outsourced about half of our s/w to a partner company that we know well. The work they’re doing leverages their expertise, is strategic for them, and is not an area that we want to invest in long term. However, in the short term the work is critical for us so my co-founder has a desk in their office and sits on top of them. So far, it’s working out very well.Both of us have a lot of experience managing geographically dispersed organizations in our previous big-company lives.

  38. matthughes

    I agree with Fred, I’m a fan of outsourcing. I’ve had many great experiences with outsourced services.But one not so great, somewhat humorous experience…My wife works for a procurement consulting company that ironically helped set up the outsourcing of the internal tech support for the sizeable, corporate behemoth company I used to work for – total coincidence, unrelated to me and the department I was in (sales).That said, shortly thereafter I had a laptop stolen and needed to have my new laptop set up with all of the archaic software and programs the behemoth company was using. What should have taken mere moments ended up taking several aggravating days because the outsourced tech support was so dysfunctional. No agility, no foresight. Just a week’s worth of lost productivitySo in fact my wife’s company was outsourced by my old company to set up the deal with the outsourced tech support company. Her company made a killing on it. We ended up taking a nice vacation at the expense of my aggravation.

  39. anthonyonesto

    Where do you see HR in this discussion. I have helped build a bunch of early stage companies and I find that most early stage companies don’t source HR at all. In most cases an office manager takes on the HR duties or a finance person. I understand there is a pivot point, but the early stage companies that get HR from the beginning have a better chance to succeed. Would love your perspective on HR and its impact on early stage companies – when should a startup hire a senior level HR person?

    1. fredwilson

      HR can and should be outsourced until you get to about forty of fifty people on the team

  40. John P Vajda

    What are the opinions on outsourcing the prototype development of a product, or the so-called “alpha” release, then bringing on a developer as part of the core founding team once the initial bootstrapped product is out? That is our approach for my company RedPint. We aim to have our product out by October 4th with a local outsourced dev team.

    1. fredwilson

      i’m not a fan of that approach Johni really believe the founding team has to build the prototype and the product itself

  41. Dale Allyn

    As you mention, Fred, customer service and tech support should NOT be outsourced, at least in the earlier stages of a company. I’m involved in a startup, and although we’ve budgeted formally for these items, all of the team agrees that we will be directly engaged in the process at the beginning. That includes founders, management, kids and cats working the support forum, e-mails, calls, etc. (okay, maybe not the kids and cats). Not at the expense of fulfilling our primary duties, of course, but in addition to them. We’re looking forward to it, in fact. We want the priceless feedback in its purest form, in addition to ensuring that our users/customers get the attention deserved.When appropriate, customer service and tech support seats are then budgeted to be filled in-house with the same goals in mind. Exporting such tasks will only be considered when circumstances grow to such a point as to warrant it (maybe never), and only then with fully meeting or exceeding the customers needs as the mandate. Think Zappos! Customer service should be considered a key element of the product, not an “unfortunate evil” that eventually needs to be addressed.

  42. Mike Su

    Another consideration with outsourcing is the predictability of future demand for a particular service/feature. Outsourcing gives the company the ability to staff up without the long term commitment. Often times a startup will look at a huge feature set to get out the door, staff up for it, and then realize things didn’t quite play out the way they thought it would, and are suddenly left with a huge staff with skill sets that are no longer relevant, and have to either lay them off or burn through cash. Outsourcing can be a good option to help mitigate some of that risk until the future becomes less murky.Another consideration is whether or not the skills and knowledge acquired by working on something add huge value to the company. If so, then you should not outsource so that you can retain the knowledge and skill set in house.If it’s for cost-savings, then one should also consider establishing an offshore development center, which helps reduce costs, while also retaining expertise and value within the company. This is not an undertaking for early stage startups, as there’s huge overhead in terms of operational processes, time zone issues etc that are really hard to overcome UNLESS the team has worked together in the past. For us (Break Media), we setup a game studio in Shanghai earlier this year, and that has been a huge benefit, not only from a cost perspective, but also from a knowledge and expertise perspective. China has been ahead of the US in terms of virtual goods monetization, and it’s no longer just a one way cost savings street, but also about bringing knowledge and learnings from the other side of the world over to the US to improve how we do things.

  43. Dan

    The reason that most tech/dev outsourcing doesn’t work for most people is the fact that they dont know how to do it in the first place. The (in-company) person dealing with the communication should 1) Have the vision of the product they’re trying to build, 2) should have a technical/dev background, 3) knows how to write a technical requirements document, and even better, an interface document.Most people dont do these things. They call up Offshore Company 234, say “Hey, build this great app that does XYZ!”. OC234 will then build the minimal possible application that meets this vague requirement, leading to countless revisions, lost time, lost money, and ultimately end up with an unsupportable piece of crap that they cant fix or update, and are ultimately screwed.If you can code, write a tech spec, and need extra hands to get deep in the dirt, outsourcing IS a possibility. If it didn’t work for you, then you’re doing it wrong.

    1. PeterisP

      For most startups, if you have a strong person who can do the 1)2)3) things you describe, then the same person would able to handle in-house development with a small team as well as outsourcing.So your comment essentially means that even with outsourcing you anyway need a strong core competency in systems development in your founding team – and not having such competency is the most common reason for startups to consider outsourcing in the first place.

      1. Dan

        Oh, I totally agree you need the core competency. My point is only that outsourcing can work when it complements that core, not as a replacement. When dealing with pre-financed situations, the team may not be in place, or you are constrained in hiring due to lack of budget. In those situations, I feel that getting an external team in place could work to provide the technical shortfall.

  44. daryn

    Oh, the stories I could tell about dev outsourcing gone wrong… :)That said, I’ve also seen it work, but it requires significant discipline and effort on the project and product owner side.One case I’ve seen work well is having an outsourced team doing maintenance and improvements on a stable product, where you want your core team members working on something else. That’s the case of a company I used to work at, which now has a half-dozen devs doing what I used to do (along with mobile apps, and some new feature development from time-to-time). Cost is probably a wash, but it is work that requires more grunt time than effort from a senior dev.The other situation is having an outsourced team build prototypes and one-offs. I’m not a huge fan of this, but for the smallest of ideas, that don’t need much long term development, it can be a way to get an idea out of your head and out there. Can be very dangerous if it’s something you want to continue to invest time and effort in.I have mixed feelings about outsourced customer support. I think if you have a dedicated team, over time, it can be just as effective as in-house, but you need to have someone in-house who is aware of what issues are coming up, and making sure you are addressing them in a proactive way, not just mindlessly fielding requests. The plus is that outsourced CS is people who are professional CS workers, where as in the states, it can sometimes be hard to find good, dependable people to fill those entry-level and often thankless positions.

  45. Michael Langer

    Outsource effectively or be effectively outsourced ………..Don’t know who said that….

  46. Tereza

    This is an interesting one, regarding the outsourced development, in the context of the women-in-entrepreneurship opportunity.I’ll share my experience and then turn it into a sweeping generalization.If you’re older — like moi — it’s a little weird to bring in a full-on partner whom you don’t have already have direct experience with, and yet weirder if you come from literally different generations and an asymmetry of about 20 years of work experience.To me it didn’t feel fun or fair to either party. A young partner would feel ‘mothered’ by me, and I would be “managing” my partner and spending a boatload amount of time explaining things about the marketplace and tactics, etc. Basically I decided — and not everyone may agree with me on this — my true business partner is someone who is as good at what they do as I am in what I do. That means he’s put in his 10,000+ hours, been there done that. Because I’ve been there, done that. When I was looking I talked to dozens and dozens of prospects. There were some potential hacker-partners whom I would comfortably classify as a Peer. But the ones that emerged at that time were geographically undesirable. Seemed great on paper and really nice guys. Generally they had a day job either as senior hackers in a large company and were doing this nights & weekends, or had an agency and it would be slotted into their agency work. But I was not going to spend my precious money to fly and meet them and I wasn’t going to give equity and create a longstanding partnership with someone I never met before in person! And also they wanted, say $20k cash PLUS a large chunk of equity, and my sentiment was, it’s one or the other. In fact my partner should put money INTO the business. Because *I’m* a great asset (dare I say).Since every developer said “wow– this is going to be totally easy to build”, I decided the initial beta was not going to be a technical challenge, but rather, differentiated via strong UX. So I brought in the best UX person I could find, and built around that. A local developer (whom we are paying cash and hope to bring in) supplemented by an overseas one, plus outsourced the iPhone. (note: not to underplay the technical problem. Scaling will absolutely be a technical problem and certainly we are getting familiar with the technical hot spots) Eventually I reached a moment when I felt I’d gone as far as I could without a partner on the inside who deeply understood the inner workings, and how to make it happen. Everyone told me it would be impossible. I can’t tell you how discouraging this was. Consistently it was — you are looking for a needle in a haystack.In a stroke of luck I found “my guy” (i’ll keep him anonymous at the moment because if his day job). Actually we “re-found” each other. He is an engineer by background, used to hack but hasn’t in a long time. Would if he had to…but that’s not his real goodness.This is a startup veteran who’s taken half-dozen products from product to launch and then scale. Exited multiple times. We are the same age, went to the same school. He “gets” me and I like to think I “get” him. And he really believes in me. To me that is priceless. We can buy preliminary development while I cannot easily replace that trust. He frees me up to do what I do best; and hopefully, I’m creating a market opportunity that enables him to spread his wings and fly like he can.Fred’s said in the past that when they invested in Foursquare, Dennis said they’d need to re-build all the code because he said it was dubious. So effectively USV invested in a front-end with a huge and growing audience, and a back-end stuck together with spit and tape. At some point you just need to get the damn prototype or beta built, otherwise you’re masturbating about a concept. And if you look and smell like I do, there aren’t so many options for a technical partner.So based on where we were and what options were available (after doing a HUGE amount of talking around), I’m not sure I could have or should have done anything different. I LOVE the guy I’ve got and count myself very, very lucky.Even if that means USV views us as undesirable despite our incredibly massive audience base and all the money that’s flying out of our ears. ๐Ÿ™‚

    1. RichardF

      Nice comment Tereza. If you are an entrepreneur with an idea that you want to get off the ground then fundamentally you will do whatever it takes to move it forward. Period.There’s a degree of romantic idealism in the idea of two young guys hacking away in a garage and then poof…the next Facebook is born. I understand from a VC’s perspective that they like to back that type of model but as you’ve already pointed out @dens has admitted his coding was far from the best. If your core competence is not coding then you have to find another way, which to get to proof of concept may include outsourcing or what’s the alternative, give up?….I don’t think so.

    2. fredwilson

      “So effectively USV invested in a front-end with a huge and growing audience, and a back-end stuck together with spit and tape.”yes, that is true

  47. Daniel Andrei R. Garcia

    >>> Which really brings “outsourcers” to an advantage. It is now more viable to have startup operations outside the US and here in the Philippines or in India – only leave marketing in the US – Put operations here in the Philippines to save on costs. The best software Developers here get a monthly salary of $900 USD to $1200.Entry level and college graduate positions start at $340 USD a month including taxes.What’s best is that you’ll not only save on costs, the cost of living is drastically lower when compared to that of Manhattan or Silicon Valley.I have several friends who have incomes derived purely from outsourced web development jobs to the US. I also have friends who reside here but remain US citizens and derive their income purely from online revenue streams.

  48. Outsourcing Philippines

    If you outsource your work you can save significant amounts of money on labor expenses to an equally qualified professional in a country where labor costs are much lower.

  49. Rohit Nallapeta

    @Fred: The question is what about lone rangers “Who have the vision and may lack all the technical chops” required to execute the vision? Why is not hiring a team of contractors for a short time until he reaches funding stage a bad idea? Of course I do get that there are IP issues involved and this core idea behind the vision must not be sold and driven from the implementers vision.

    1. fredwilson

      it is not the IP issues that concern meit is the culture of the teamif it is a tech company and has no tech on it, then is it really a tech company?

  50. Toshi O.

    “We believe that software companies must own their most important capability themselves and that is the ability to produce their product in house.”I see and have heard this from countless serial entrepreneurs, VCs and Angels, but I wonder if its always justified.What if, what they produce is ideas and products (physical and not) – and that is their core skill. Is it still necessary to keep the development in-house?

  51. roshandsilva

    Hi Fred, Interesting post and I’ll try and weigh in with my comments. Firstly a question for some context:-Does having your own offices count as outsourcing – so for instance if you have most of the company in NYC and the engineering team sitting in Boulder or else Estonia or even Bangalore?My view having seen many outsourcing deals is that success primarily boils down to three things:-1. Quality of the person leading the effort in the remote office2. The amount of time, effort and commitment put behind the effort.3. The conviction of senior management that the guys sitting in the remote office are actually part of the team and cost savings are great but they come naturally and are not something you really need to fret over.Can an outsourced relationship work? I firmly believe it can but it cannot work on the model which most startup founders want to try – i.e. I will send you this Functional Spec, send me back a time estimate and cost and let’s look at a transactional relationship. For this relationship to work, the founders need to realize a few facts:-1. Talented developers are a company’s biggest asset. When they leave the office, your assets leave and when they come back in the morning your assets come back. Getting top quality assets and ensuring they remain with you should be the number 1 priority for the company. 2. Product Management talent in offshore locations tends to be scarce. It may be wise to take one of the best to take one of the best you have and ask him to move for a year or two to build culture and ensure that nothing is lost. The person should also be comfortable flying frequently between the remote location and HQ. 3. R&D and feature enhancements are an ongoing process. Experimentation is key and so it is best to have a set of people working continuously on the product as opposed to trying to spec out new features and go back and forth with the whole quote, timeline business every month.Again, I respect your views but I do feel such relationships have worked and will continue to succeed when led by the right leaders who have experienced the benefits and have a little bit of courage and conviction.

    1. fredwilson

      almost half of our portfolio has remote development offices, often in other countriesthat works very welli do not believe that is outsourcing

      1. roshandsilva

        Hi Fred, I feel there should be no reason why a remote office should work better than outsourcing. The fact is they do – my experience is that it usually is because of the lack of commitment and an approach that is transactional rather than long term to the relationship. I don’t believe startups should not outsource. I just feel they need to do it with the right attitude.

    2. kenberger

      definitely not outsourcing. that’s “remote development” at most, or simply a distributed team.can work great, or not, depending on how it’s executed, as with any company work model.

  52. baba12

    Wonder if your timing of this post has anything to do with the NBC sitcom “Outsourced” coming this fall.

    1. fredwilson

      didn’t know about it

  53. Chris De Kok

    I have been staying in asia for some time now.. and worked on some outsourced projects and most of them fail or end up taking way more time then expected because of cultural and communication problems.you don’t want to know how many people actually use google translate for most of their communications ^_^

  54. Paulina

    Fred, you write, “We believe that software companies must own their most important capability themselves and that is the ability to produce their product in house.”, but you don’t really explain why. What is different between outsourced software development and in-house?

    1. fredwilson

      the team works for you, not someone elsei like this comment from above:”The ability to have somebody tell you that no, you’re wrong, there is a flaw in your reasoning versus yes boss, I’ll code that right away boss is just as priceless.”

  55. Jim Caruso

    Great post Fred. I’m glad you mentioned that outsourcing is erroneously seen as synonymous with offshoring, but obviously the outsourced services provider can be anywhere. Even if labor arbitrage is the primary goal, lower-cost regions of the US may be a solution.I head a finance-and-accounting outsourcing (FAO) business that serves start-ups and emerging growth companies. I’m glad you highlighted the wisdom of outsourcing this function, which is generally not a core competency. Such specialized skills are neither affordable nor necessary for entrepreneurial companies to have on payroll full time. Yet credibility in financial reporting and projections is critical if the company has, or hopes to raise, outside capital. Outsourcing is not always a lower-cost solution, but it provides better quality and value: Instead of hiring one person to handle all financial roles, from bookkeeper to controller to CFO, why not spend the same money and get the right mix of skills at the right times, appropriately changing as the company grows? Unfortunately, many entrepreneurs do not understand the broad spectrum of financial skills that are needed, and they are often fixated on the idea of building their own team.How many companies, large or small, process their own payroll anymore? Outsourcing to third-party payroll firms such as ADP or Paychex is almost the default business practice, and I imagine in-house “payroll supervisors” are a dying breed. My vision is to see the same thing happen with the broader accounting function, making the role of controller similarly obsolete in start-up and emerging growth companies.

  56. David Bloom

    My experience is very limited but I wonder if others have found the same. In planning, my CTO and I realized that there was too much and too much specialized coding for him to handle solo. Even if he tried it, the business was moving pretty fast and the product would not likely keep up. We also wanted organizational flexibility to add/subtract resources and evaluate talent and fit. We went with on-shore individual contractors.Each contractor reported to the CTO so we had a good handle on their day-to-day and watched every check in to our git. When questions arose, we had to answer it. I am not sure we would have been so involved with a formal outsource agency, here or overseas.This has been a mixed bag. Some contractors were great, others, uh, less so. But the ability to manage our development team with flexibility has been a terrific asset. We now have a core group of developers on a short list to hire when we close a funding round and a better network to recruit others. But the best part was that it allowed us to learn about our team style before committing to people. Startup staffing with training wheels. I did not even think about this issue before we settled on the path.

  57. Emmanuel Bellity

    “Then I say, “who is writing code?” And they say, “we’ve hired a company to do that for us.” That is a very disappointing moment for me because it means we almost certainly won’t invest in that team. “Well…It does not mean it is a disappointing moment for users and clients if the product is great :)I agree it’s preferable to have developers in the founding team, but if you know that what you would code yourself would not be optimal, and that you can’t find great partners, it could be better to start getting things done by someone else. Especially in the mobile app world, I came to the conclusion that there is too many demand for talented mobile developers, and too little supply of talent ==> cash is king, little interest for equity and ideas.But then again, it depends who you hire. And I think it’s better to hire a great mobile dev startup than a not-so-great founder. And if you get traction you can maybe hire one of your contractors ๐Ÿ™‚

  58. Robert Hacker

    It should perhaps be pointed out that critical skills change over time and may no longer be a constraint on outsourcing. Sprint outsourcing network operations is a prime example http://bit.ly/91gCQi

  59. Ellen

    I think it is very short sighted to assume a non-coder can’t think up a great product. In fact, to solve a specific problem in an industry, category experience is far more valuable than the ability to write ROR code. It is too bad that so many decide that there is only one way to establish a successful startup. Imagine the great business ideas that are not realized because of that small-minded approach to evaluating potential.

  60. Dale

    I know that this is probably a stupid question, but what do you consider the qualities / skills of a strong product manager?

  61. Razin Mustafiz

    Great post as always, Fred. What do you think of founding team members being located in different parts of the world?

  62. Rob Rawson

    If you hire people in any country and any city working from home, then you don’t need to “outsource” as much because you can usually get cheaper and better talent than a company that you would outsource to (with some exceptions).Basically I think anything that requires a long term full time team is better done in house, it’s usually going to be cheaper to hire someone directly. Instead of paying the outsourcing company $120k per year for the equivalent of person X, you can hire the same quality person directly working from home for $80k. You cut out the margin, the office costs and you could even get a better quality of person, you retain control and have more stability. Or you hire someone from a lower cost country for $25k and save even more money.If you have a shorter term project or something that needs a very high level of expertise, then you might want to outsource it, but even still it’s probably better to hire directly on a short term contract basis rather than outsourcing to a company.Outsourcing is often just a “middle man” with not so much extra added value. So if you can’t see directly the added value then why bother outsourcing? If you can see the added value then quantify it and see if it justifies the extra costs compared with hiring a person directly.

  63. MicroSourcing

    In terms of establishing relationships with customers, it’s advised that your company’s social media accounts should never be outsourced, since it gives direct and immediate contact with them. If you really have to outsource customer support on a large-scale, do so, but don’t outsource your Facebook or Twitter.

  64. promissory note

    very well said David. outsourcing activities involving customer contact may prove to be foolishness at times.

  65. Luis Perez

    I am in a similar situation right now. I was once a programmer but that was 10 years ago so I definitely do not qualify as a tech person any more. I started out looking for a technical co-founder but found it difficult to attract a “top” guy given that this is my first startup. I debated back and forth the benefits of waiting until I could find and get to know the right co-founder (after all, the relationship is like a marriage) and getting that first iteration done as quickly as possible so that we could start getting user feedback.I’ve decided for the latter. I am planning to build a very basic MVP to validate the idea and with that I the plan is to find the tech co-founder. It was either this or waiting who knows how long until the right person came along and I was able to convince them of the idea’s potential. Once the tech co-founder is on board we’ll bring development in-house. Even if we have to re-do some of the outsourced code I think with a valid business model and some user feedback it’ll be easier to build the second iteration.

  66. Jakob Truss

    Great post. The suggestion with the US focusing on outsourcing as a way to build the economy of weaker regions in the country is truly excellent. After all, much debate has been executed about outsourcing stealing jobs from the US. However, legislators and government officials cannot take away from the companies the need to opt for business strategies that allow them to compete and obtain profits.As for outsourcing for startup businesses, it is all about recognizing where your strengths are and identifying areas of weaknesses to optimize your decision to outsource and gain more value out of it.

  67. karen_e

    Ok, Charlie. Back to work. Aren’t you already running like 4 startups or something? Maybe you need something else to do?

  68. Aaron Klein

    See, there is a use for this awesome Disqus bug that only Fred apparently knows how to exploit. It creates a great laugh for the rest of us! Thanks, Disqus… ๐Ÿ˜‰

  69. PhilipSugar

    Datacenter yes…..servers I would say no.

  70. Kelley Boyd @msksboyd

    Tru dat!

  71. fredwilson

    yes, up to a pointif you get to facebook’s size, that won’t work

  72. Campbell Hyers

    Hey Charlie,Your right, my comments are a bit anecdotal. I wish I had more data to give you…if I can get some time though I might work on it.C

  73. Mark Essel

    Dam Charlie, now I want that kind of overall data on outsourcing and startups.

  74. Sebastian Wain

    In my case applying all your constraints I think we had only one customer fitting in those parameters.

  75. Ajay Bharadwaj

    Charlie, there are specialized companies who have had a great success working with startups. I don’t want to name any here. But one needs to apply that filter when looking.

  76. Lawrence Sinclair

    Data for this is going to have substantial selection bias.Startups that outsource are much less likely to ever need to work with a VC firm. Or they may need fewer rounds of funding. And those are not signs of failure.And it is not always a failure if a startup does not move forward. If outsourcing allows an entrepreneur to implement an idea for $20k it is not such a bad thing if it does not work out and that person can then move onto the next thing a few months later. If outsourcing were not used, a greater investment in time and money is needed. That generates a certain momentum that pushes everyone to hammer at the flawed idea for several months, or even a couple years before giving up. By increasing the speed of execution, and reducing the cost of failure, outsourcing, done properly (agile) can allow for more creativity and experimentation in a way that falls outside the entire VC universe.Another reason why outsourcing data may be hard to come across is because it really does not read well from a PR perspective. From a business perspective, one should be proud of making smart organizational decisions; but most tech startups take pride in their tech excellence (and maintaining that spin is often important if they are to be taken seriously) so letting it be known that they outsource can be a bit embarrassing. It shouldn’t be that way. My firm, eastagile.com, has helped a lot of cool firms get to next rounds of funding (twitter.com), or get to their launch (Jibe.com last week) when they faced challenges finding big pools of expertise.

  77. Mark Essel

    “UI–many of us think we build great-looking stuff, but it will SUCK LESS if you hire a UI person AND a strong nav/app flow person (outsource initially, but locally if possible).”hah, I’ve been a victim of trying to muddle my way through those things before. I figured it was important to understand for anyone trying to set a direction.ps: if you need help with c++ and it’s not a device driver or something I can probably help out

  78. fredwilson

    great comment Charliei’m thinking of asking you to do a guest post one of these mondays

  79. Mark Essel

    hahaha, crap I gotta get back to making a pretty movie.

  80. David Semeria

    Busy, busy bee – bzzzzzzzzzzzz….

  81. Mark Essel

    What makes you think I wouldn’t move in if you were funded :D? Only half joking, I’m knocking on doors of the trailblazing startups in NYC first. If I can’t find a fit, I’ll talk to some San Fran startups. Speaking of SF, Disqus rules, but I’d need to be fluent python for their openings (if it comes to it, I damn well will be).I figure if you can’t beat ’em, join ’em. The big foot note on that, Gary Chou (of USV) rocks, he pointed me to a fantastic job search system.

  82. ShanaC

    You owe me software to test…..

  83. fredwilson

    “dumb, dumb, dumb”i can remember so many times i’ve uttered those words to myselfin every case, it was a valuable learning experience

  84. fredwilson

    it has been happening to me the past few days

  85. ShanaC

    ๐Ÿ™‚

  86. Outsource Magazine

    Actually Charlie I think I’m probably more of a jockey…