Featured on FORBES: How Outsourcing Is Rapidly Becoming A New Growth Engine For Startups
Outsourcing was once a strategy available only to big multinational corporations that could afford to build partnerships across time zones, language barriers and international borders. Today, technology is making many of these strategic advantages available to smaller businesses. So, can your startup afford to outsource certain business processes?
I believe that, given just how risky it is to start a business in the first place, the real questions are: Could outsourcing differentiate your fledgling business in a fiercely competitive environment? Could outsourcing be an engine for your startup’s growth?
I can’t answer these questions for you. Every new business is different. But I can tell you that a lot more startups are outsourcing today, and there are some compelling reasons why.
Startling Startup Stats
The first reason is survival. Before we can talk about growth, we have to acknowledge some harsh realities. Launching a startup is not for the timid. According to various widely accepted estimates, roughly 90% of startups ultimately fail, and many of them do so early on in the process.
Competition is stiff, success is rare and, with the cost for everything skyrocketing, the stakes are higher than ever. So what does this have to do with outsourcing?
Outsourcing The Danger
A report published by Revista Sistemática calls business process outsourcing (BPO) a “strategic enabler for U.S. startups” and a tactically sound way to overcome the typical hurdles facing new businesses. Outsourcing has become increasingly accessible even to smaller businesses. In doing so, it proposes a multifaceted solution to some of the problems that so often derail startups before they even get the train out of the station. Limited financial resources, shortage of talent and difficulty of scaling—these conditions can all place startups in a precarious position.
Each challenge heightens the risk of startup failure. But what if you had a few sturdy support beams under that precarious structure? This is where strategic outsourcing can come into play.
Offsetting Startup Costs
A recent survey of 200 startup founders from Wilbur Labs notes that 38% of the startups that failed did so primarily because they ran out of money. Reducing costs in these delicate early stages is important to survival. The article from Revista Sistemática notes that “one of the primary motivations for startups to adopt BPO is cost reduction.”
In my experience working in the outsourcing industry, outsourcing non-core activities like data processing, customer service and back-office administration can significantly reduce a company’s need for in-house labor, leading to cost savings for recruitment, hiring and training. Companies that take this route can also save on the infrastructure costs that come with housing these activities, including the space, technology and energy they no longer have to deploy on their own. This, according to a study by ISG, can result in a 15% cost reduction for startups.
Access To A Global Pool of Skills
The survey from Wilbur Labs highlights a number of other reasons a startup might fail, including technology or product issues and hiring mistakes. These causes of failure have something in common: They typically stem from internal personnel issues. Too many startups simply lack the right combination of human capital to carry out their vision.
There is a very real global talent shortage, especially in tech. Medium reports that there will be an estimated 85 million unfilled tech positions around the world by 2030, amounting to $8.5 trillion in lost potential revenue. In my experience, this level of demand typically translates into both scarcity and a higher cost of hiring, which can place top-tier tech talent out of reach for the average startup. That’s why a growing number of startups are turning to third-party providers to access professionals such as developers, cybersecurity specialists and infrastructure experts.
This is where startups can unlock real growth potential. Accessing technical skills that are otherwise unavailable or cost-prohibitive in your market can become a strategic advantage. For instance, adding advanced technical skills to your product development arsenal by outsourcing can potentially improve your product’s speed to market.
A Note Of Caution
This is a discussion about mitigating startup risk, so we also need to acknowledge the risks that come with outsourcing. There are a few things to consider before going this route or choosing a provider:
• Quality Control And Due Diligence: With outsourcing, you no longer have direct oversight. Poor quality in areas like product development or customer service could torpedo your reputation before you ever get off the ground. Make sure you request references and case studies from your prospective vendor’s current and past partners. In addition, you’ll want to verify industry-relevant certifications and audit the vendor’s compliance frameworks.
• Geography: You have a lot of outsourcing options—both offshore and onshore. Choose an onshore partner if your top priorities are collaboration, oversight and quality control. Choose an offshore partner if your goal is to minimize labor and operational costs, but make sure you have a plan in place to manage language and cultural barriers as well as time zone differences.
• Hidden Costs: Be aware of startup fees, software licensing fees and other fees buried in the fine print. Before signing with a vendor, carefully review the terms of your service agreement. Understand the length of your contract, and be aware of automatic renewals as well as annual rate hikes and early termination penalties.
Turning Opportunity Into Growth
It’s important to look to the future when choosing a provider. Eventually, outsourcing must be about more than mere survival. This is your opportunity to grow. Redirect the money and labor you save toward innovation, creativity and strategic initiatives. In short, reinvest in core business activities while you save on non-core functions.
And, just as importantly, choose a provider that you believe will make a strong partner. Revista Sistemática observes that “strategic outsourcing relationships—rather than purely transactional ones—are more likely to yield innovation and long-term value.” Your partnership with any outsourcing provider should be built on trust, transparency and collaboration. This is the key to achieving a sustainable competitive edge through outsourcing.