Wednesday, February 08, 2006

A New Trend: Early Outsourcing by Start-up Firms

Intense competition and pressure from investors with a stake in start-ups is compelling the latter to off-shore / outsource work much earlier than expected. T.M. Ravi had an outsourcing game plan in place even before his Silicon Valley firm cashed its first venture financing cheque. When, he founded Mimosa Systems in December 2003, he immediately followed up the opening by ensuring he had an off-shore operation in Pune, India. And, Mr. Ravi firmly believes, if he did not have that back office in Pune, chances are his fledgling e-mail data management firm might not have survived to live another day.

While, it is quite the norm to see an IBM, a Microsoft, or an Oracle sends various company operations overseas, off-shoring / outsourcing by newly sprung up start-ups is the rule i.e. a rare occurrence. But, the 2000 tech bust up that turned Silicon Valley, California boom times upside down, made the software sector slowly realise the benefits of early outsourcing. Advising software companies to outsource product development at an early stage, Mark Sherman, a general partner in Venture Capital firm Battery Ventures says, at least 3-firms in Battery’s portfolio outsourced product development as soon as they launched themselves.

And, Battery is not alone, as many venture capital firms ask companies seeking funding about their off-shore / outsourcing strategies from the start: “I have seen a clear trend in the market where venture capital firms, as part of the term sheet want to know what the off-shore strategy is. For small and medium enterprises, their entry into the game in terms of funding is dependent on having an off-shore model.” says David Carpini, Vice president of Commercial and Software Solutions at Symphony Services, a company that helps independent software vendors outsource product development.

According to Mr. Carpini, there have been many instances when his clients signed funding papers and the Symphony contract within 30-minutes of each other. Mimosa Systems was one such company. With its head-quarters in Santa Clara, California, half of Mimosa’s employees are based in Pune, a city 110-miles from Mumbai. Investors in Mr. Ravi’s Mimosa encouraged him to seek help with product development right from the inception stage of his start-up. With that in mind, Mr. Ravi hired Symphony to work on a ‘build, operate, transfer’ basis, leading to Symphony’s India-based unit to work for Mimosa, and gradually become its back office in India.

While, Symphony performs similar services for big league companies such as Hyperion, Siebel, Manugistics and AutoDesk, a third of the California-based company’s comes from small start-ups like Mimosa. And, according to Symphony, the number of small companies seeking its help in outsourcing grows each quarter. “One of the advantages of having an offshore operation is you can chase the sun, reducing the product development time fairly significantly. Another, big advantage is that there is a very rich talent pool available in India, so we are able to quickly build a very strong team.” Says Mr. Ravi.

India is the top destination for outsourced product development for software start-ups, but other emerging outsourcing hotspots include China and Eastern Europe, says Eugene Kublanov, Vice President for corporate development at NeoIT, an off shoring consultancy in San Ramon, California.

Can Soon be Too Soon?
Early state outsourcing can harm a company, says Mr. Sherman of Battery. “In the early, early stage it doesn’t make sense, when the development information is more in PowerPoint than development tools.” he says. He believes companies with less than 20-employees should keep most development in-house. “When, the outsourcing does well is, when some of the volatility is taken out of the system, and that tends to be when the product starts to have maturity.” says Mr. Sherman.

There are cases when outsourced product development goes awry, mostly when people working on the project lack domain expertise, or if the outsourcer is not devoting enough management oversight to ensure project success, or there are significant changes in the product plan or a lack of direction.

Sham Chotai, Vice President of Engineering and the co-founder of DecisionView, a San Francisco based company that makes business intelligence software, specifically for the pharmaceutical industry believes the process works when companies can get past cultural barrier and define lines of communication. DecisionView took the decision to outsource product development to Pune based Persistent Systems, barely 18-months after its launch, at a time when it had only five employees.

Admitting there can be management challenges in the first six to eight months of an outsourced project, Mr. Chotai says things become smoother over time. “Our ability to make an enterprise application, within a year serves as testament to that. In the initial months, problems can include setting up the team structure, understanding the processes, recognizing the culture, and building trust between the two companies.” he says. For DecisionView, the greatest advantage in outsourcing product development is the flexible scalability: “You can grow and shrink your team as you grow or shrink your business.” says Mr. Chotai.

And, a decided plus for DecisionView is to have a dedicated 25-person outsourcing force working on product development in India, without putting them on the company payroll. At Pune’s Persistent Systems, all employees wear DecisionView t’shirts and there is a DecisionView sign at the entrance. “They’re an extension of our team.” says Mr. Chotai, whose DecisionView boasts of only 15-employees.
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The article is sponsored by A-1 Technology Inc, dealing in software outsourcing, offshore outsourcing and offshore software development.