Offshoring for Startups

offshoring.jpgIt was bound to happen sooner or later. It was only a matter of time before the subject of offshoring came up here at The Pothole. In today’s ramblings, I’d like to share my thoughts on offshoring from the startup or small business perspective. Do real savings exist, and is it worth it?

No, this isn’t going to be an article telling you how bad the language and cultural barriers can be. That much is obvious. And please don’t post a comment telling me how great offshoring is, and how your Uncle John’s company saved millions of dollars by offshoring his hair-dryer repair operation. I am glad your Uncle John fared well, but that is not the point of this piece.

First, let me throw out a working definition of offshoring. I do this because there are far too many of you who use the words outsourcing and offshoring in a synonymous fashion. Though sometimes related, they are two different things. From Wikipedia, that great bastion of collective intelligence:

Outsourcing is defined as the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) that specializes in that operation. Outsourcing is a business decision that is often made to lower costs or focus on competencies.

Offshoring, on the other hand, is defined as:

Offshoring can be defined as relocation of business processes to another country, especially a country overseas. This includes any business process such as production, manufacturing, or services.

By its very nature, offshored work is usually considered to be “outsourced.” But all outsourced work is not necessarily offshored. This is a key distinction. For example, if I pick up the phone and call Administaff to handle my firm’s human resources/benefits needs, that is outsourcing, not offshoring. Likewise, if I decide to use a local software development firm to build a key new component in a new system, that is outsourcing, not offshoring.

It was supposed to be an elixir for growth and cost control. The theory was that if we exported low-wage manufacturing jobs, we could retrain those blue collar workers to fill “better” jobs. We would have the potential to create newer, better jobs, in the place of everything we were shipping overseas. The Kool-Aid sounded great when we were exporting only those “lower-wage” manufacturing jobs (even though there were mixed results there). It didn’t take long for white-collar America to realize that there were “cost-impacts” waiting to happen by outsourcing things like software development and graphic design. So now we’re burning the candle at both ends. But I digress …

Okay, so one day, you are rifling through your emails looking for a status report from one of your employees. While merrily skipping past the “we can give you a free trial of Viagra, a free vacation in the Bahamas, and a better mortgage rate!” solicitations, you come across someone touting their offshoring expertise. You pause for a moment, and recall that your current software development efforts are running behind. Perhaps you are contemplating launching a new venture and need some technical grunt work done. In any event, you decide to give it a go. Wow – a great way to get high-tech work done, and at a fraction of the cost! What could be better?

Offshoring sounds like a great thing for startups and small companies. The promise of cost savings have certainly tempted more than one business owner over the years. But when you open up the Kimono and peer inside, you may not like what you see.

A while back, I provided some consulting services to a small technology company here in Atlanta. During the early days of their launch, they decided to outsource a key component of their system to a development shop in India. Yes, they saved a boatload of money up front. Yes, what they got back was functional as per the requirements. However, there exists the darker side of offshoring, even when “success” appears to be manifest on the surface.

The quality of the finished product was simply not up to par. For instance, instead of using the now common practice of CSS layouts, all of the markup was spit out in a nasty series of nested HTML tables. Compliance with XHTML was out of the question. While functionally adequate, the aesthetics left a lot to be desired (and if the proper separation of the presentation and business logic layers had been in place, this could have been more easily addressed.) Finally, the entire application was not optimized for SEO (search engine optimization) – yikes.

This company had to spend several weeks going back through this code, cleaning it up, and in some cases, re-architecting it to bring it up to compliance with current standards. Their “savings” turned out to be red ink in the end. More importantly, they lost valuable time. In a startup, time is currency.

As my father, and most likely your father, would have said … “you get what you pay for.”

To play devil’s advocate, and to give the offshoring advocates a fair shake, I should point out that the above scenario could have easily happened here in the U.S. as well. In theory, a proper level of governance should have detected such anomalies early in the cycle, when they can be addressed. However, too many people rush into offshoring without thinking about governance. Would you have someone build a deck onto the back of your house, or install a swimming pool in your backyard, without you checking in from time-to-time to make sure that progress is being made in the right manner?

Silicon-valley legend and current venture capitalist, Guy Kawasaki, is known for his infamous “top 10” lists. [ And yes, Guy, to answer your email question, you were very consistent. ] ;) In his recent “Top 10 Lies of System Engineers“, he serves up this gem at number eight:

8. We can do this faster, cheaper, and better with an offshore programming team in India. Rank and file engineers usually don’t tell this lie; it’s the CTO who does. Somehow we’ve got it in our heads that every programmer in India is good, fast, and cheap, and every programmer in the United States is lousy, slow, and expensive. My theory is that for version 1.0 of a product, the maximum allowable distance between the engineers and marketers is thirty feet.

For a host of reasons, offshoring is not something you rush into. Before jumping into the ocean with both feet, think things through a bit first. If you do make the decision to offshore, keep these tenets in mind:

  1. Only offshore things that you don’t mind losing a bit of control over. In the end, you could have very little of it.
  2. Only offshore things that are not mission-critical.
  3. Mitigate your risk – don’t put all of your eggs in one basket by offshoring everything you do.
  4. Offshore only those processes that can easily be repeated elsewhere.
  5. Never, ever, ever, ever, ever offshore a core competency.
  6. Never, ever, ever, ever, ever offshore sensitive information or tasks. Always remain security conscious!
  7. Whenever possible, offshore only discrete tasks. Remember the KISS principle? Keep it simple for the folks overseas and save yourself some headaches later. I am reminded of one of my favorite UNIX philosophies (courtesy of Doug McIlroy): write programs that do one thing and do it very well. Same concept.
  8. Don’t be blinded by the savings – play the role of realist – consider the opportunity costs if things go sour.
  9. Whatever you do, get relevant references for your provider (i.e. someone in your industry, metro area, etc.)
  10. Finally, if your friend runs an offshoring company, and you are contemplating using them, keep in mind that your friend isn’t the one who will be doing the work; instead, it will be some guy making $3.75 an hour. ;)
  11. Bonus: think governance, governance, governance. But be careful – you could end up spending a ton of money trying to “govern” your offshore team. Those savings can shrink considerably if you aren’t careful.

On the flip side, I should point out that there are some very real savings that can be attained via offshoring if you just exercise common sense. A good friend of mine outsources a lot of data processing work to Russia and Indonesia. The work they do is very discrete and isolated. The vendor does one thing and they do it very well. Additionally, the tasks they are performing could easily be transferred to another vendor. Ergo: the offshore vendor is not a single point of failure.

One interesting story to share regarding #4 above. I read an article the other day about a Japanese company that offshored quite a bit of software development to China. Due to the fact that software piracy and intellectual property theft are so rampant in China, this Japanese firm was hesitant to give the entire project to one Chinese firm. Instead, they offshored many smaller pieces of the project to several different Chinese firms. No one firm had the full visibility into the project. Great way to mitigate your risk, right? Wrong … think about it for a minute. If the word “inefficiency” isn’t slapping you in the forehead, call me up so I can come over and slap you vigorously for about half an hour.

Steve Jurvetson, of Draper Fisher Jurvetson fame, had a timely piece on his blog the other day. In his post entitled Keep on Booming, Steve points out that “baby boomers” could be a viable alternative to offshoring:

Aging boomers are numerous and qualitatively different. Compared to an older generational cohort, the average boomer is twice as likely to have college degree and 3x as likely to have Internet experience.

Envision a future where many aging boomers are happily and productively working, flex-time, from home, on tasks that require human judgment and can be abstracted out of work flows.

In short, the boomers could be America’s outsourcing alternative to off-shoring. The Internet’s latest developments in web services and digital communications (VOIP and videoconferencing) lower the transaction costs of segmenting information work across distributed work organizations.

An interesting thought, for sure.

On a final note, I read the other day where certain technology investors are now openly proclaiming that they are only seeking to put skin into those games that have an offshoring component to them. I’m all for cost savings and efficiencies where it makes sense, but using offshoring as part of an investment profile makes little sense to me. What happened to investing in innovative ideas? Investors have enough risk to deal with when planning their investments …. why in the world would they want to introduce more of it?

I wonder what would happen if I offshored my blog posts?



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