IT Outsourcing for Startups

Strategic and operative issues of IT outsourcing in a startup situation
Timm Beyer - skilldeal Berlin, 10.12.2010 The Founder Institute

IT Outsourcing for Startups
‡ Situation analysis ‡ Sourcing strategy ‡ Vendor selection process ‡ Vendor handling ‡ Risks and Trouble-Shooting

Situation Analysis
‡ What are your priorities? What is your next and most important goal? Examples:
± Next financing round ± Time to market ± Innovativeness and solution uniqueness

‡ What are your competencies? Do you have all the necessary know-how? ‡ What can you afford? Do you have to adjust your goals depending on your budget?

Sourcing Strategy - Priorities
‡ If your main priority is your next financing round you should ask yourself: What do you need (on the IT/software level) to convince your investors:
± Is a prototype sufficient that demonstrates the general idea of your product? ± Or do you need a fully-fledged application? ± Is there a very specific date/deadline when you want to present anything to investors?

Sourcing Strategy- Priorities
‡ Is IT/ software your MAIN differentiating factor from your competitors? ‡ If YES, your main questions may be:
± Which in-house expertise do you have? ± What should you do in-house? ± If you outsource, who (in your team) is able to evaluate technology expertise and the quality of work of your potential suppliers? ± Can you make sure that your solution will be able to handle high performance requirements?

Sourcing Strategy- Priorities
‡ Is IT or software your MAIN differentiating factor from your competitors? ‡ If NOT, you should rather ask yourself:
± Who has done something similar before? ± What technology/framework did they use? Are there open-source solutions? ± What did they pay? How long did it take? ± What went well/wrong? ± Who can I ask? Who could give me good advice on suppliers?

Sourcing Strategy
‡ A possible outcome of a situation analysis could be:
± Your budget is limited, so is your internal IT know-how ± IT is important but not decisive for your success ± Your next financing round is approaching soon

‡ Your sourcing strategy could then be:
± Find outside help (friend, IT consultant, ) for selection and evaluation ± Optimise price-/delivery ratio by considering off/nearshore ± Build well-designed prototype and rebuild the whole thing after your financing round

Sourcing Strategy Case study
‡ Startup AbraC wants to create a web-based B2B marketplace. Their in-house IT know-how is limited. They assume that their main success factor is sales and marketing. They secured 150.000 Euros in their first financing round. ‡ What do you suggest they should do?

Vendor selection
‡ Long list/ short list: Large vs. Small, Techie vs. Creative, National vs. Offshore (and if offshore: far vs. near) ‡ Specification: Can you judge how good your spec really is? How flexible need it be? ‡ Request for Proposal: Can proposals be comparable? Are risks covered? ‡ Evaluation: Weighted Criteria, customer interviews

Vendor selection
You say The vendor might think What you could do is Our deadline is December We will try hard but you Include sanctions in contract 24rd! know that IT projects are Careful with your payment almost always late. plan! We are a startup we work night and day! We expect that from our supplier, too! Sure guys. Our people have families and their lives. We see what we can do. Make sure they fit to your style, work hours and ambitions! Motivate or adjust? Improve specification (external help?) Or: Use agile methods with quick feedback rounds

Our specification is super- Your specification is crap detailed. You just have to but we will work code it down! something out. We want a 25% discount for the same quality!

Hm - we substitute some Include names/CVs of of the programmers with programmers in your contract younger ones. Be reasonable about prices/discounts

Vendor selection Case study
‡ Startup BetaBarata has sent out RFP to 12 suppliers. They met some of them in person, others were called. They receive 12 offers which vary heavily in price and timelines. Since budget is their priority, they tend to invite the three cheapest and discuss their proposals in detail. ‡ What would you do?

Vendor handling
‡ Apart from basic project management such as
± ± ± ± ± Have a proper project kickoff Establish rules, availabilities and contact data Be on top of things Have regular status updates (And so on)


there are some lessons learnt that are outsourcing-specific ->

Vendor handling Lessons Learnt
‡ Formalism works! Write stuff down instead of just expressing your wishes over the phone ‡ Use tools, e.g. ticket systems, instead of emailing or chat (unless it is just handling day-to-day stuff)! ‡ Make the supplier s project manager personally responsible, as your partner (not your slave)! ‡ Motivation works well with suppliers, too make them feel as a part of the team!

Vendor handling off-/nearshore
‡ Offshoring or nearshoring can be an alternative. Some things might be important to know:
± It requires more coordination (and, usually, more time) than a national supplier ± Language (how good is your English? Or Russian?) can be an issue, on both sides ± Cultural differences depend on country and company size ± Price discounts can be huge, but depend on the region (not necessarily the country - Moscow is more expensive than Berlin)

Trouble shooting
‡ If something is not working well - Change it fast (either processes, documents or people) ‡ Cultural differences may occur Sit at a table with people and speak with them ‡ Change of important team members may require a Re-Kickoff Don t rely on supplier-internal updates ‡ Supplier change often means rebuilding the whole solution Try to bring in an external expert instead

Main risks include: ‡ Quality ‡ Budget ‡ Timeline ‡ Property rights ‡ ‡ To handle these risks, you probably need ->

Risks and how to deal with them
at least these things: ‡ A good selection process ‡ A good contract ‡ And a good project manager

Handling/Trouble shooting: Case study
‡ Startup CesarCity has started an IT outsourcing project with an offshore supplier. The project started well, but the alpha-version shows severe performance problems with the (critical) database/search functionality of their web software. Since their IT know-how is limited, they think about changing the supplier. ‡ What would you do?

IT Outsourcing for startups

Thanks and good luck!

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