Thoughts on Offshore Outsourcing

A number of my portfolio companies outsource development to India and other locales. When offshoring it is important to think about what can and cannot be offshored, whether management can handle it, and whether or not you open your own office with your own infrastructure or outsource completely. Given that an increasing number of companies that I come across either currently utilize offshore resources or plan on using offshore resources, I thought it would be beneficial to share some of my thoughts and experience related to this matter. Most of us end up using offshore development to work on non-core technology. For example, if you are going to offshore development for management software you may want to have maintenance of agents developed externally or a port from one operating system to another outsourced. When it comes to core architecture and design you are going to want to keep that in headquarters. Some companies make the mistake of trying to own it all and build their own team and own infrastructure from the start-if not done with the right personnel, this could be a disaster. Generally speaking, you may be able to outsource more than non-core development. In addition, for most companies, I recommend that you initially hire offshore development firms rather than build your own in-house staff to develop product. If it works well, you should have an option to eventually buy your partner out and turn your consultants into employees. If it does not work out, you can always end the relationship without incurring any upfront cost.

When accounting for the total cost, you want to make sure that you have your offshore development managed appropriately. Make sure you have the right project lead offshore, preferably one that your management team has worked with before. In addition, make sure your onshore management team can stay on top of the process as well. This will mean someone in headquarters whose prime responsibility is managing the offshore project. Offshore outsourcing will also require some face-to-face time every quarter. The big difference in doing it yourself versus using offshore consultants comes down to managing risks, speed to market and upfront costs. Doing it yourself will take more time and requires an upfront investment to set up an offshore subsidiary, open an office, hire talent, pay for infrastructure and equipment like computers, phones and T1 lines, and pay for benefits. While the monthly difference for making the upfront capital commitment is about $2k per employee (a big difference when you are talking about $1.8-2k in-house vs. $3-3.5k with partners), most companies cannot properly build their own offshore team. In the cases that I have seen work, my fund’s companies ended up sending over a core team of developers that wanted to move back to India. This gave us instant critical mass and the all important transfer of corporate DNA and culture. In general, I am not in favor of having an early stage company open their own offshore office without a number of existing employees making the move or without significant experience from the team in managing offshore relationships. Over time, as you build experience and successfully develop product with your offshore partner, you can think about moving this personnel in-house. Even if you do not have your own offshore resources, make sure that your offshore partner spends significant time at company headquarters (usually a couple of months) to gel with your team and understand your business, technology, and culture.

While the logical resource to offshore is either non-core technology or customer support, some of my fund’s companies have begun to experiment with offshoring pre-sales and back office finance. During the last 3 years, I have had the opportunity to watch one of the fund’s portfolio companies headcount go from 100% US to 70% India/30% US. In addition, I have been able to watch higher value added functions get outsourced. For example, when it comes down to presales, it does not matter where you are if you understand the product and can articulate the need for it. At $6-8k a person versus $40-50k a person here, you can drive substantially more call volume and qualified leads offshore than you can onshore. It may not make sense if the offshore team is not your own as one of the big problems facing companies in India is employee churn. The more educated and higher quality resources that can speak excellent English are also the ones that are most hirable to other companies.

These are just my two cents and will continue to get refined over the next few years. I am curious to hear your thoughts about offshore outsourcing and whether or not you are offshoring more than customer service and technology or if you have any unique model for this process. In the end, it is very clear to me that venture-backed companies that can properly leverage and manage offshore resources will have an incredible advantage moving forward. As more companies take advantage of offshore development over time, this competitive edge will diminish and simply become a necessary way of doing business.