Originally published by Frank Lee on Tech In Asia | August 7, 2020
With the recent shift of the business landscape due to Covid-19, tech startups and small and medium-sized enterprises will have to keep a close watch on their outgoing expenses and maintain a healthy cash flow for survival.
Unfortunately, IT labor costs are escalating due to the high global tech demand, which is also causing maintenance expenses in sustaining a good software engineering team to jump significantly. This has led startups to face huge technical debt with only a few software engineers to handle development projects.
So instead of letting this happen, leaders should lean toward a combination of outsourcing and offshoring software development as a sensible budget-friendly solution.
There are four models to scale your teams:
Onshore insourcing: work with an in-house tech team in the home country
Onshore outsourcing: work with a software consultancy firm in the home country
Offshore outsourcing: work with a software consultancy firm in a foreign country
Offshore insourcing: work with an in-house tech team in a foreign country
While there is no one-size-fits-all solution, here are some ideas on which model is best for startups and small businesses from two different angles:
Cost, control, and performance: Which of the three factors are more important to your company?
Growth stage: What is the current growth stage of your company?
Cost vs. Control vs. Performance
If cost is the greatest concern, then offshore outsourcing is the best bet. A trustworthy outsource provider from a lower-wage country can help to reduce up to 70% of a startup’s operational costs. However, it is worth noting that project management will need to be efficient to avoid any hidden costs chipping away from the budget. If founds prefer to keep a good balance between adequate management and sufficient costs, then an offshore team is the optimal option.
There is no doubt that in-house (onshore or offshore) strategies are the king when it comes to gaining complete control of operations. By keeping things internally, there is less exposure to risk. But startups must keep in mind that having an in-house, onshore team is costly to build and maintain. In some cases, IT talent is simply unavailable in the country where a company is based.
Thus, to retain a high level of control without burning through the budget, many firms are building their own offshore teams across the globe, which can save up to 60% of operational costs.
Outsourcing is a powerful strategy when you need to deliver a product on a constrained timeline. However, depending on the performance of the outsource provider, the result can vary drastically.
On the other hand, having an offshore in-house team means greater performance, since coordination and quality control are only second to an onshore in-house team while the costs are much lower. Therefore, if your priority is long-term planning, you may choose the offshore insourcing strategy.
Angel, pre-seed, and seed stages
Having a small onshore tech team means gaining all the beneficial aspects of operating a team efficiently, including high control/visibility and clear communication. However, firms may not be able to afford the cash burn in the early stages.
As a compromise, startups can consider onshore/offshore outsourcing, especially if they don’t have any tech specialists in their teams or need a way to save costs.
Outsourcing allows companies to get their first minimum viable product out in the market before committing more funds to build a tech team and a better product.
However, we need to bear in mind that while this approach de-risks the initial software development approach, companies will have less control over operations and may be subject to high project costs in the short term.
Offshore expansion is not preferred at the early stages due to the time, complexity, and costs of setting up overseas operations. Instead, companies should focus on getting their first software product out in the market to test product-market fit and grow a bigger customer base.
On the other hand, if startups are better funded, have more certainty on product direction and market fit, and have a good tech leadership, setting up overseas operations will be viable and definitely yield long-term success.
Another case of when setting up overseas operations at the early stage makes sense is when founders themselves are willing to travel frequently to (or even base themselves out of) foreign countries together with the offshore tech team. This is pretty challenging for founders but does indeed drive down costs and resolves scaling challenges in the long term.
Series A and B stages
At series A or B stage, companies would already have some internal tech capabilities to manage a small software development team and deliver on a working software platform. At this point, though, startups may have prioritized speedy delivery over performant code and functions, leading to an accumulation of technical debt.
Furthermore, customer feedback and internal business ideation have probably added an overwhelming list of additional functionalities to the product roadmap. As a result, startups’ chief technology officers will need to scale up their tech development resources to keep pace with the business’ growth.
While onshore expansion is still a viable option, this strategy is not sustainable in the long run due to increasing costs. Though companies have likely raised sizable funding rounds and have good customer traction at these stages, the cash from investments must be conservatively shared between sales, marketing, operations, and product development.
At this stage, offshoring to a lower-cost country becomes the next best option, as offshore teams are less expensive to maintain and can work in conjunction with the core onshore team to develop additional functions and modules for the product roadmap.
It’s also worth noting that outsourcing (onshore or offshore) should no longer be done at series A or B stage because a tech company eventually needs to own its tech capabilities and not be dependent on external parties.
Wrapping it up
What we shared above is based on our experience working with many different tech startups at various growth stages. The caveat is that all businesses are unique, and each startup team may have special affinities to specific team scaling models. As an example, if the software development company is a shareholder of the company, it may make sense to strike a win-win bargain by outsourcing to the software development company.
Between outsourcing and offshoring, there is no definite right or wrong answer – it really depends on what’s important to the company and whether it is ready to undertake the offshoring journey.
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