Should startups consider outsourcing as a viable strategy to get the venture off the ground? Like any other vital approach to business, outsourcing has its pros and cons. We will explore these here to give you a better picture of what this strategy can do for your startup. We also want to forewarn you of possible problems it may bring to your company.
As part of the Silicon Roundabout community, we are pushing for the launch of more tech and deep tech startups. In our opinion, it’s the essential response to the economic stagnation caused by the pandemic. And it’s the way forward to pick up and revitalise the economy. So far, the indications are encouraging as we see more and more startups launching. The resulting challenge for these new companies consists of stretching the limited capital that is available and finding the expertise they need.
Outsourcing is hiring a party outside a company to perform services. These services are traditionally handled in-house by the company’s own employees and staff. But the personnel or skills may not be available within the organisation. Or directly hiring people to get the job done may be unaffordable. Companies can then look to outsource these roles.
Why Outsource?
Why should any startup consider outsourcing?
- One of the most compelling reasons is to defer startup costs. The costs of starting up a business include acquiring equipment, overhead and administrative costs, the cost of sales and marketing, professional fees, and employee benefits. Sustaining the business can be very costly, especially when resources are scant. Outsourcing can be a good way to eliminate a big chunk of these expenses.
Take a look at what WhatsApp did. Barely getting by on its seed capital of around USD 250,000, the company decided to hire developers in Russia to take care of building the app. Meanwhile, their in-house employees focused on providing customer support and running operations.
- We already mentioned that the startup may initially lack the necessary expertise to get things done. Outsourcing is a good way to acquire the necessary skillsets so that the founders and the original set of in-house workers don’t get overwhelmed by having to take on multiple roles. “Do what you do best and outsource the rest,” advised legendary management expert Peter Drucker.
Before Alibaba grew into the global ecommerce giant it is today, the Chinese startup outsourced its IT and software development requirements to the United States. They recognised early on that they did not have the necessary skillsets locally. The expertise would come eventually, of course. But outsourcing provided the jumpstart they needed to grow the business until they could develop local talent.
- Outsourcing can help a startup reduce lead times and minimise critical errors in their operations. Taiwan’s Acer computers did it. And the company grew to become the second largest PC manufacturer in the world. Acer were great at branding and marketing, but not at manufacturing. So, they outsourced this, made few mistakes, came up with some great products, and took the market by storm.
Choosing What to Outsource
Startups also need to realise that not everything can be outsourced. There are some areas that lend themselves well to this strategy. These include the following.
- Many HR tasks, including payroll and recruiting
- Data entry and processing
- Digital marketing
- Customer service and support
- Financials and Bookkeeping
- Administrative tasks
The areas in the list above often involve work that is repetitive and are not part of the startup’s core competencies. They do not directly affect the business value that the startup generates.
There are, however, some critical tasks that must NEVER be outsourced. Here are some examples.
- Any aspect of the company that has to do with its core competencies. To paraphrase Drucker, the startup must do what it’s really good at.
- Company culture
- Professional development
- Employee termination
- Anything about the company that even YOU don’t understand
A Final Word (and Some Advice)
Outsourcing is a real and helpful option for startups. It helps lower costs, acquire expertise, and focus on business growth and development. There are many examples that demonstrate this. But like all other aspects of the business, going the outsourcing route requires careful thought and planning.
- It is important to outline all the different business processes in as much detail as possible. Which of these processes and functions will help your business thrive? Identify which ones are key business goals and core activities.
- Analyse the capabilities of each employee and the role they currently perform. Do you have all the critical functions covered?
- Review all the processes that are not core competencies. These are the ones you can outsource.
Also remember: Outsourcing may be a viable strategy for your startup, but you are responsible for ensuring that the outsourced services are delivered on-time. It’s also the startup’s responsibility to measure these, analyse results and performance, and make the necessary adjustments.
Written by our Head of People, Mustafa Shreet