Outsourcing provides the opportunity for small IT companies to be funded, and ultimately hire Americans. Although, outsourcing in general has been viewed in a negative light lately, because of the millions of manufacturing jobs that have been outsourced, the positive effects of outsourcing are rarely discussed. With the current unemployment problem, it is easy for many to blame outsourcing as one of the culprits; why outsource, when an American is willing to take the job? Nonetheless, outsourcing by small companies is at times necessary for the company to stay afloat and survive, especially in IT and during recessions. The salaries of the most skillful software developers in the United States are much higher than a similarly skillful developer in Latin America or Eastern Europe. Within the United States, it is difficult to get a hold of the most skillful developers, since many of them are already working for large companies, such as Google and Apple. Small businesses and startups are forced to look outside of the U.S. to find skillful and experienced developers that fit their budget.

Small companies and startups often rely on outsourcing, to assure that skillful developers will work on their projects for a lower cost than in the United States. The reason for doing this is that they can get more work done for the project with a smaller budget; otherwise, a small company or startup may not have the sufficient funds to carry out their day to day operations, much less finish projects. These small companies and startups may outsource some work to foreign companies or workers, but by doing so, they also provide the opportunity for Americans to work. If a small company is forced to do every part of a project within the United States, they may not have the funds necessary to survive; employing some Americans is better than employing none. Small companies would still have to hire people within the United States, in order to carry out necessary daily operations.

Outsourcing allows startups and small businesses the opportunity to grow, which can eventually lead them to hire more Americans. For these companies and people in favor of them, outsourcing should not be looked as a job destroyer for Americans, but more of a creator of job openings. Small businesses outsource, not necessarily to maximize profit, but to stay in business and innovate. Small businesses in IT need to use their budget as efficiently as possible, especially in a climate where it is difficult to get loans. This means hiring the most skillful developers for the lowest reasonable wages. What this allows, is a small business to budget for the future, and to continually innovate; innovation leads to success, which leads to growth and the eventual hiring of more Americans. The ultimate goal of a company that outsources some of their work is success. Outsourcing provides startups and small businesses with an efficient way of becoming successful with their budget and few resources they may have.

Companies that are considering outsourcing typically have multiple reasons to do so. Alisa Henley, from Examiner.com, listed a few good reasons that a company may consider outsourcing; among them are reduced costs, improved business focus, unfulfilled needs, risk management, and better employees.[1] Although I believe the best employees are those that understand your company’s goals and culture, directly hiring a skillful American employee, permanently, in IT is expensive; a “better employee” in IT, for smaller companies, is a skillful developer that the company can afford to pay and assure that the project will be finished. The current economic climate does not allow companies to take great risks when hiring, and expenditures are kept as low as possible to allow the company to remain afloat. Current economic uncertainty is assuring that outsourcing will remain a viable option for most companies, regardless of size, as Stephanie Overby stated for CIO.com, “More than 40 percent of corporate IT leaders said that a double-dip recession would lead to increased outsourcing in their organizations, according to an October survey conducted by outsourcing analyst firm HfS Research. Another 46 percent said a second downturn would result in layoffs.”[2] For a small business that is attempting to finish their product and grow, outsourcing is the only viable option that will lead to success.

The majority of working Americans are employed by small businesses. With the current trend of the United States moving towards a service based economy, of which IT is part of, it is critical that not only small IT businesses remain afloat, but that they are created. Outsourcing allows for this to occur, which as a result, also leads to American’s being hired to handle vital roles within the company. If it were not for outsourcing, many companies would have not been founded or would have ceased to exist. Outsourcing indirectly leads to jobs being created within the United States, which is vital for Americans in this economic climate.

Business | 1 Comment »

I recently came across several very similar situations with software start-ups located in the Bay Area.

Venture capitalists seldom invest in software start-ups nowadays, especially if their product relates to WEB 2.0, social networks, or other online businesses. They first want to see (i) an initial product financed by the founders and (ii) some market traction. Market traction clearly means revenue; a sizable number of free users/subscribers is not recognized as market traction anymore.

It might not be that bad after all. We are back to a more traditional business model where entrepreneurs have to contribute their own savings, and turn to business angels, incubators or friends and family to complete their initial round of funding.

Budgeting and raising the proper amount of money required to get a product to market is critical, and entrepreneurs cannot afford any mistake, as these first dollars are likely to determine the fate of their new venture. The equation is simple: the initial funding has to take them to a point where their venture becomes either sustainable, or at least shows a demonstrable revenue model. If this goal is reached, then raising more money should not be an issue; if not, it would be highly challenging to get any extra funding.

And just because delays seem to be an intrinsic part of the software industry, entrepreneurs should always spend wisely and even keep a cash reserve when possible.

Some unnecessary expenses that were the hallmark of VC-funded start-ups have disappeared already, and that is very good: high-end offices stuffed with expensive furniture, company’s catered parties, oversize administrative team, etc.

There is still one area though where entrepreneurs tend to spend too much money, and that is on their development effort.

I can think of 2 major mistakes there, one happening when there is solid funding and the other when there is not enough funding. Let’s illustrate the point with these 2 sentences we all have heard too often:

1 – “We want the best developers, and we will pay whatever it takes to assemble the dream team.”

First, and unless the entrepreneur is the most wired person in the Valley, chances are he/she won’t be able to attract the shining stars. And that is not even the real question; if the very best developers are required to get the ball rolling, then the concept might not be as good as it sounds. The founder’s role is to over motivate his/her team, not to find and hire shining stars; shining stars who by the way are very unlikely to join any start-up, especially during these hard economic times.

2 – “We have very limited funding (=not enough), so our team works mostly, if not entirely, for equity.”

In this case, the developers will become rapidly impatient, or will not give their undivided attention to the project. Bottom line is that precious cash (and precious equity) will be burned away for little result. Remember, getting only 80% of the first version of an application is getting nothing! In most cases, it will be easier to rewrite the code entirely, as opposed to trying to understand the existing stack. How many entrepreneurs have the cash to afford the rewrite of their initial version?

I meet at least 4 to 5 times a month with entrepreneurs who have spent their funding with no results and are turning to established outsourcing companies, offering them to finish the work for equity! Hello??

Remember, the first dollars are essential. If you were unable to deliver, why should anyone take the risk to commit their resources for an equity that is already worthless?

I do not mean to be rude, but I witness these situations too often. If you are an entrepreneur, spend wisely with your developers. My observation is that in most cases, the technical challenges are not as big as many entrepreneurs think they are. Technical problems tend to grow with the success of the company. Trying to anticipate too much at the beginning is just counter-productive.

And remember, turning to an outsourcing company that will work for a fixed price is often the best way to spend less, limit your risks and prepare for the next steps. And finally do not worry, if your business does take off, you will be snowed under by resumes of the Bay Area’s “best” developers.

Remi Vespa
Venus Software International

Business, Technical | 4 Comments »