In the fast-spinning tech world, startup entrepreneurs are constantly grappling with a multitude of challenges.
From the scarcity of resources to the necessity for specialised expertise, the hurdles can be formidable. However, there exists a strategy that can help startups overcome these obstacles and accelerate their tech development whilst keeping their business lean: technology outsourcing. Don’t shake your head just now. Hear me out first.
Aren’t Startups Supposed to Build In House?
Yes, tech outsourcing does come with big risks. Yes, outsourcing is NOT suitable for everything. And yes, I am the first who advocate startups to build their “secret sauce” in-house and have top technical expertise in their founding team.
However: a) as an investor I invest in deeptech and not all startups are deeptech and rely on mind-boggling technology IP as their secret sauce, and b) even in deeptech, they may consider outsourcing non-critical parts of their product offer to free up time and energy for their top-notch in-house experts.
Recently, I had the opportunity to engage in a thought-provoking chat with 2 outsourcing experts: Alastair Copeland, CEO at SmartDev, and Charlie Russell, Practice Lead at Smart81. The first is an extremely successful international outsourcing company, and the latter is a sister company that doesn’t just build tech for startups, it actually takes on certain startups as a ‘build-for-equity’ co-investor that’s helped startups bridge tech development between investment rounds.
As we delved deep into the intricacies of tech outsourcing for startups, the insights gained from this conversation were enlightening, to say the least.
The Outsourcing Advantage
Outsourcing, often associated with cost-cutting, has evolved significantly over the years. Today, it's not merely about saving money, but about accessing a global talent pool, accelerating time-to-market, and fostering innovation.
According to a study by Avasant, an impressive 60% of companies outsourced at least some of their application development in 2020, up from 56% the year before and on a growing trajectory.
This is a statistic that’s hard to ignore. But what does this mean for startups, particularly those in Europe? Can they leverage outsourcing too?
For European startups, the outsourcing landscape offers a unique proposition. Europe, with its diverse talent pool and technological prowess, isn’t short of technical talent. Yet, the challenge lies in harnessing this potential efficiently. Especially in hubs where tech talent is most in demand. Outsourcing can bridge this gap.
A report by Deloitte highlighted that companies are not just outsourcing to cut costs anymore; they are now looking to achieve innovation, tapping into new market trends and accessing intellectual capital. This is precisely where startups can capitalise.
By outsourcing non-core functions, startups can focus on their unique value proposition, ensuring they remain at the forefront of innovation. Outsourcing can also be useful to quickly scale up or down development power, which can be useful for one-off tasks, such as carrying out a specific integration or developing a specific customer UI.
Diversifying Risk and Accelerating Growth
One of the primary concerns for startups is the risk associated with rapid scaling. By diversifying their operations and leveraging global expertise, startups can mitigate these risks.
Charlie pointed out during our chat that startups could use outsourcing as a strategy to scale faster to their next funding round. It can be great for companies when: “they've got some tech, they've got some customers, they've got people paying for their products, but they need to develop their tech further in order to grow what they have, scale their businesses and keep their customers happy. Why not bring in some outsourced talent, short term, to boost your output and get you where you need to be, then scale it back once the goal is achieved?”.
This approach not only diversifies the risk but also provides startups with a broader perspective, tapping into global best practices.
Access to Specialised Expertise
In our discussion, Alastair emphasised the importance of startups having access to specialised expertise, especially when they are in their nascent stages.
Outsourcing allows startups to tap into a vast reservoir of global talent without the overheads associated with full-time hires. This is particularly crucial for startups that might not have the resources to hire specialists for every tech function.
Bringing in an expert as a full-time local contractor can be a big commitment, it can take a long time to recruit and can be expensive too, with higher European wages, employee equity pools to consider and high recruiter fees. By outsourcing that particular task, the company can overcome specific development challenges without overloading its in-house workforce.
Flexibility and Agility
In the ever-evolving tech landscape, agility is the name of the game. Startups need to be nimble, adapting to market changes swiftly.
Outsourcing offers this flexibility.
With the ability to scale up or down based on project requirements, startups can remain lean and agile, ensuring they are always ready to pivot when necessary.
Challenges of Outsourcing: It's Not All Rosy
While there are all these interesting advantages to outsourcing, it's essential to approach it with a clear understanding of its challenges. Both Charlie and Alastair touched upon some critical points that startups need to be wary of:
Cultural and Communication Barriers: Engaging with teams from different cultural backgrounds can lead to misunderstandings. It's crucial to invest time in understanding these differences and establishing clear communication channels.
Quality Control: Ensuring the quality of work when outsourcing can be challenging. Regular interactions, as highlighted in our chat, are vital to maintaining the quality of work.
Data Security: With increasing concerns about data breaches, startups need to ensure that their outsourcing partners have robust security protocols in place.
Dependency: Over-reliance on an outsourcing partner can lead to a startup losing its core competencies. It's essential to strike a balance, ensuring that the startup retains its in-house expertise while leveraging external resources. Consider looking at a firm that operates a build-operate-transfer model to allow you to retain resources and effectively bring it in-house, if desirable.
The Road Ahead
Europe, with its rich history of scientific and technological breakthroughs, is a hotbed of innovation. Today, the continent is home to a burgeoning tech ecosystem, with startups sprouting in every corner, from Berlin to Barcelona.
Yet, despite the talent and potential, many European startups face challenges in scaling, especially when jumping from one funding stage to the next. And especially in a challenging fundraising environment. Bridge rounds and convertible notes are increasingly common, for instance.
In this context, whilst not a one-size-fits-all, outsourcing can be a powerful weapon in a startup arsenal. Operators such as Smart81 are even bringing out novel products such as their “build for equity” model, which makes it even more interesting for startups to try to use outsourcing creatively.
However, like any strategy, it's essential to approach it with a clear understanding of its benefits and challenges.
The key lies in understanding when to outsource, what to outsource, and whom to partner with. And as always, it's about striking the right balance.