The New Rules on Outsourcing

Outsourcing product development is an attractive option for many start-ups. But as the services industry matures, entrepreneurs face new challenges in the way they manage their business partners

If you're wondering how to tap into the Indian skills markets and take advantage of the huge IT talent pool in Eastern Europe, it may be worth taking a quick trip to Richmond. Just along the Sheen Road you'll find the UK sales offices of GlobalLogic, a software engineering services company. With a global HQ in the US and development centres in India, China and Ukraine, it provides early and mid-stage software developers with a range of outsourced services, from help with initial design through to usability testing.

Given that the ratio of people costs to infrastructure has become so heavily-weighted in favour of the employee in the UK and US, it's no surprise that the idea of outsourcing parts of the product development cycle is becoming such an attractive option. Finding the right skills at a reasonable price can be a real challenge in some sectors, both geographically and in particular specialities - and finding the right combination of talent, price and personality can be even tougher, particularly in start-ups where team dynamics matter so much. Tapping into offshore skills, where the cost base is so much lower, definitely has a lot going for it.

One of the many challenges with offshoring, though, is that you have to know where to start. You might have a vague idea where Kiev is - you might even have an in-depth understanding of the nuances behind the explosive economic growth of India. But it's not as if you can just turn up in a hotel and start interviewing the locals. Companies like GlobalLogic, which has a bank of recruiters in India and clams to be the largest IT employer in Kiev, do have something of an edge in terms of brand, reach and hiring clout.

GlobalLogic operates as an offshore partner, working closely with client teams and handling the heavyweight coding and management of software development projects. Providing these kinds of services takes you several steps higher up the value stack than traditional infrastructure outsourcing, which tends to focus on providing infrastructure and tools to work with - these types of services, by contrast, are core to your business proposition. But ultimately, the principles underpinning any kind of outsourcing arrangement are the same. It's all about drawing a line to work out where you're comfortable collaborating with third parties, and where you feel functions are so critical that you have to run them in-house.

The problem start-ups face, of course, is that working in this kind of partnership is often unfamiliar territory. Many entrepreneurs have limited experience working alongside third party suppliers, and there's inevitably some level of friction as they muddle through the business processes and communications issues. In the future, this gap in experience may well broaden, because service providers' own expectations are now evolving.

Take GlobalLogic itself. When I met Tarun Upadhyay, the company's chief software architect, at a recent conference in San Francisco, he argued that what GlobalLogic offers is 'second generation' outsourcing. Early forms of outsourcing, particularly in the IT sector, tended to be characterised by arms-length relationships - put crudely, the idea from the customer's perspective was to get rid of a problem and wait to get the results. But that's not a particularly strong basis for a business relationship. For one thing, it's adversarial - so when problems crop up, they tend to erupt in bouts of finger-pointing rather than a combined effort to put things right. Given that blame usually lies on both sides of the fence when things go wrong, especially when it comes to communications breakdowns or missed commitments in complex collaborative tasks, it's not particularly helpful to start totting up who made the biggest number of screw-ups.

Upadhyay argues that start-ups need to approach the outsourced business relationship on the basis of building a single team - and this has some radical implications. To begin with, he believes entrepreneurs need to treat outsourced contractors in the same way they do their own employees. If you give your in-house technical people an unscheduled bonus when things go well, count the outsourced staff in as well. In fact, he says, some customers go as far as taking part in joint performance appraisals of GlobalLogic employees, and one or two of them have even handed over stock options to outsourced staff.

This kind of collaborative model isn't going to work for everybody, of course, but it may be one more indication of how working patterns are shifting - and of the opportunities and challenges that lie ahead as they evolve. Entrepreneurial companies of all sizes are having to work out how to partner and collaborate with independent individuals and third party organizations as they bring together the different skills they need. Treating outsourcers as collaborative partners rather than mere service providers is just one more piece of that puzzle.

By Keith Rodgers, Webster Buchanan Research