August 22, 2016

How Much Of A Startup’s Operations Should Be Outsourced?


For startups, the ability to focus on what matters drives product development, sales, and happy customers.
Given the importance of focus, here’s a question: how much should startups outsource? What activities can be delivered by external suppliers, and what should be handled internally?
Let’s take a look at a startup’s operations:

  • Product development
  • Manufacturing
  • Design
  • Sales
  • Marketing
  • Customer service/technical support
  • Finance
  • Human resources

So, what’s core and non-core? What can be outsourced?

In some respects, it depends on the core competencies of the founders and early employees, budgets and development plans.
Most startups – but not all – that deliver online services are launched by people with technical skills. It means product development is handled internally because it is a core competence. That said, some development can be outsourced to supplement or augment existing resources.
I worked for a startup that used South American developers to create part of its software platform. It was a way to accelerate development in a cost-efficient way. Some well-known startups to leverage outsourcing. Some well-known startups to leverage outsourcing include Slack, GitHub and Skype.
For hardware startups, manufacturing can be outsourced to specialists. Unless a startup needs ultimate control over the manufacturing process, it’s a no-brainer to let a third-party make their product. Of course, prototypes can be developed internally to provide structure and guidance around product development.
What about design? Again, it something that can be done internally or externally, depending on a startup’s capabilities and resources. Using a third-party brings specific expertise to the table, as well as new ideas and approaches. One of the challenges facing startups is how quickly things change so using a third-party ensures product development stays current and innovative.

If you consider product development, manufacturing, and design to be close to the core, what about the other parts of the business?

Sales, for example, can be outsourced. When you think about it, salespeople are the mercenaries of the business world. They’re interested in products that can make them a lot of money. As much as they may be passionate about a product, the ability to sell it matters more. Using a third-party salesperson or team lets a startup tap into expertise within a specific vertical. The downside is the costs can be high and a third-party is establishing relationships with your customers.
Marketing is another area in which outsourcing works well. Early-stage startups, in particular, can benefit from external marketers to do strategic planning and tactical execution. Marketing tends to be lower on the pecking list for many startups after product development and sales. As a result, they spend money on marketing when and if needed, rather than have a full-time marketing person. Like sales, outsourcing marketing lets a startup leverage a specific skill set or expertise such as public relations, strategic planning, and content development. (Note: I provide marketing services to startups and fast-growing companies.)
Finance is another area where outsourcing makes sense. Rather than having a full-time CFO, a startup can hire someone on a part-time basis or use an accounting firm when needed to do their books or help raise capital. Mark MacLeod, who now runs SurePath Capital Partners, offered these services as StartupCFO. Greg Silas of Dover Consulting currently provides these services to startups.
In the early days, startups usually handle HR themselves by tapping into their personal networks. Given the volatility of startups, It’s a good approach to have friends by your side. In time, a startup can turn to a headhunter or online service to attract key personnel. When a startup is big enough, having internal HR is a good option.
Finally, customer service can be outsourced so questions, complaints, and feedback handled in a cost-efficient manner. This is work a third-party specialist can handle, rather than having a startup allocate valuable resources.
As a startup grows, the pros and cons of bringing more parts of the business in-house should be explored. Some activities such as PR, HR and marketing can successfully happen in partnership with trusted suppliers. Every startup is different so whether or not to outsource depends on variables such as money, time and people.
What do you thinks startups should outsource?
More: Tomas Tunguz believes startups should never outsource their main advantage or skill. He says consultants should be used for non-core, narrowly-defined projects. JobRack provides five reasons why outsourcing makes sense in a fast-paced competitive landscape.

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