Product Development in a Flat World

I recently came across two interesting posts by CEOs of startups who have tried offshoring and decided to bring the work onshore. The two used different models and had good things to say about their experiences but in the end realized that the work is better done onshore than continue offshore.

The first one by Munjal Shah the CEO of Riya describes how he started a captive center in Bangalore and just rcently decided to bring the work onshore primarily due to cost differential coming singificantly smaller due to wage inflation. This plus the added cost of overheads of offshoring does not make it viable anymore in this case.

In general this wage inflation is really good for my employees and great for India. I am so proud of the strides forward that India has made. While others have chided Intl companies for opportunistically leveraging the cost difference, I am a true capitalist in my belief that all of the employers rushing to India in the last 3 years has increased wages and provided more opportunity than 20 years of a closed socialist leaning economy ever did. India is a true global powerhouse now. There is no doubt.

However, this huge run up in the wages has destroyed the ROI I referred to earlier. So today we decided to consolidate all of our engineering and research efforts back to our HQ in California. We are relocating many of our key folks back to the US, but there are some that we are not bringing back. Our goal was to keep the payroll costs the same before and after the move. Because wages are still higher in the US we couldn’t bring everyone.

The comments on this post are an interesting read. There has been a trend among startups in the last few years to open captive centers offshore. A lot of this has been driven by VCs. However, from what I hear these catpive centers are struggling and in many cases are an added burden to the startups rather than making things easier and cost effective.

This brings up some questions:

• Are captive centers right for startups? For the reasons sighted in this post, captive centers are likely to be a wrong choice for US startups in the short-term. Offshoring efficiences are typically acheived with scale. And for startups as well as small US companies, starting a captive center primarily for cost reasons is a mistake especially during their new product development stage. In this case however he did start the center with the talent rationale. But if the same or better quality of talent is available locally for even 40% higher cost, the benefits of having a local team will surpass any cost savings achieved through offshoring.
• When/what is it right for startups to offshore?I have worked with startups in offshoring development of new flagship products as well as perifieral non-core add-ons or applications to the core product. In both cases the engagements were a success because we undertook the entire responsibility of managing that product development with the concept and high level architecture being provided by the client. The reason why we were chosen to do the job was our specific technical expertise in the areas where they needed help and where they didn’t have inhouse expertise. To answer the question, well defined products or product modules can be offshore if you are ready to let the offshore team take full ownership of the project and this can be at any stage of your product development lifecycle. Offshoring can be especially beneficial for startups in building applications around their core technology where scaling up resources at a rapid pace is the need and local resources are scarce. Even though cost is the primary driver to choose offshore, identifying the component of the work that can be offshored independent of your core engineering work effectively is key to offshoring success for startups.
• Captive vs. Outsourced Which model is better suited for startups? If you are looking for long-term (5 years + lifetime) efficiences not only for your product development but for support, then a captive center will be the model to choose as long as you have the bandwidth internally to manage the offshore operations during the initial stages of your startup. However, before you opt for this model you need to ask yourself do you have a key person in your management who can own and drive the offshore team? If not, then finding the right offshore partner is the best way to go. Offshore product development companies have the advantage of a) econimies of scale, b) mix of talent, c) experience operating efficiently offshore, d) experience working with clients remotely and manage engagements, e) resources and processes in place to hire talent on an ongoing basis to scale up and most importantly, f) for a partner, ensuring success of your project is essential for their business growth with you as well as maintain credibility in the industry. Therefore, I would argue that your chances of offshore success is increased manifold with a partner vs. captive.

The second post by Michael Cerda, CEO of Jangl outsourced work for his startup and decided to bring it back inhouse. He has listed some the overheads with offshoring.

-The time difference
-The serial approach to working (vs. real-time collaboration)
-Requirements must be water tight
-You have to have resources to manage the resources
-You have to black box things or tightly integrate things (a little of this and that doesn’t cut it)

It is important to keep these in mind before your decide to offshore. The points I described with the previous case holds good in this here too. Startups who select partners for offshoring should be clear on how they wish to engage. In most startup product development, the scope of work is going to be ever evolving (moving target) and your need engage with a partner who has experience working in that kind of a model. Outsourcing partners who have both offshore and local development centers are likely to be a better fit for most engagements unless you have a very well defined scope of work that is likely to have relatively low changes during the course of the project. From my experience, we typically dont engage with startups unless they are willing to pay for a local project manager who can be involved face-to-face with changing requirements and work with the offshore team to translate these changes in as close to real-time as possible.