Outsourcing Tech Development: Weighing the Pros and Cons for Startups
How can outsourcing help startups succeed in their tech development and avoid common pitfalls that lead to failure?
Wednesday March 29, 2023,
4 min Read
Entrepreneurs often encounter the dilemma of deciding whether to outsource their technology development or keep it in-house. Outsourcing technology development is often seen as a cost-effective way to quickly bring a product to market and access a larger pool of talent. On the other hand, it can be risky if the startup does not have proper oversight or control over the outsourced work. Therefore, it's important to weigh the pros and cons carefully before making a decision.
Some successful companies, like WhatsApp and Alibaba, have achieved significant growth by outsourcing their engineering work. WhatsApp founders hired a development team in Eastern Europe to build the first version of their messaging app, and today it has over 2 billion users in 180+ countries. Similarly, Alibaba outsourced site development to US engineers and today has a market share of ~47% of the eCommerce market share in China, $120 billion+ in revenue, and a market cap of $220 billion+.
One of the most obvious benefits of outsourcing is cost savings. By working with providers in countries with lower labor costs, startups can save a significant amount of money. This can be especially beneficial for cash-strapped startups looking to conserve their resources. Additionally, outsourcing provides access to a much larger pool of talent than would be available if the startup only hired internally. This can be especially helpful if the startup is looking for skills that are in high demand or hard to find.
Another advantage of outsourcing is increased efficiency. When done correctly, outsourcing can help startups increase the efficiency of their operations. This is because startups can focus on the core aspects of their business and leave the non-essential work to their outsourced team. Outsourcing can also provide flexibility to scale up or down as needed, which can be helpful for seasonal businesses or those unsure of how much help they'll need in the future.
Jason Goldberg's Fab.com is an example of successful outsourcing. Due to affordability issues in NYC, he outsourced to a team in Pune, India. His deep inclusion in the project with his offshore team lead to his success. He believes that startups should save money in the long run and increase effectiveness through an onshore and offshore mix.
Jason Goldberg says, "A few notes about working with an offshore team. If you’re gonna do it, do it right. What I mean by that is that I’ve seen it done wrong so many times it’s sickening."
However, there have also been numerous instances of outsourcing failures. One of the main reasons for these failures is the lack of control and oversight that startups have over their outsourced work. This is why it's important to carefully vet providers and put quality control measures in place. For instance, PatientDox, a cloud-based startup's software as a service (SaaS) solution for healthcare providers, failed due to the lack of technical expertise among its co-founders, who decided to outsource their product development. They faced issues such as a lack of speed and the inability to make changes on the go based on customer feedback, as development teams were engaged in simultaneous other projects. Mark McGuire, founder of Nextt, experienced entrepreneurial triumph, decided to collaborate with a development firm to build his product but ended up burning a lot of money and time.
Communication difficulties can also arise when working with an outsourced team, due to language barriers or time zone differences. This is why it's important to have a clear and concise way to communicate expectations.
In a nutshell, outsourcing technology development can be a double-edged sword for startups. While some have achieved great success by outsourcing their engineering, others have faced challenges, delays, and losses. Ultimately, the decision to outsource should be based on a thorough evaluation of your startup's specific needs, resources, and goals. Outsourcing can be a tool that can save you money and access talent, but it's important to weigh the pros and cons carefully before making a decision. As Jason Goldberg, CEO of Fab.com, suggests, "If you’re gonna do it, do it right."