Since writing our view on outsourcing, we’ve received a number of questions.  While most people indicate that the article was useful, the most common question is “Why can’t I just outsource everything?”  Here’s your answer:

You absolutely CAN outsource (or even purchase) everything.  The consideration of whether or not to outsource, as we’ve indicated earlier, is roughly the same as whether or not you should buy something.  The two differences are cost and the ease with which someone else can do the same thing you do.  “Buying” something (I mean off the shelf, packaged software, software as a service, etc) means that it’s available to just about everyone today – potentially with some small modifications to fit their business needs.  As such it usually costs less than outsourcing but is also more easily accessible and implementable by your potential competition.  “Outsourcing” something means that you are going to have someone else implement (code) your idea or run your servers (in a hosted rather than a SaaS model), which usually implies higher cost and a bit more difficulty in transferring technology.

In either scenario, you must be willing to say that you are willing to be like “everyone else”.  In other words, you are willing to give up the competitive differentiation that a homegrown solution might offer such as creating a higher barrier to entry, lower barriers to exit, switching costs, etc.  If an outsourcer can develop your code they will take that experience and apply it to someone else.  They may not use the actual code they write for you, but they simply can’t help but use the past experience.  This means that the job to copy you just got a little easier, which in turn means that you lowered the barrier to entry for competition.  And of course if you purchase a solution, then you are also making a decision that you will not differentiate yourself in that particular area.

None of this is bad.  In fact, there are many cases where you SHOULD outsource or purchase software or services.  Most companies and organizations tend towards isomorphism, which means that over time they all look (or should look) to leverage the best known practices to increase efficiencies and reduce costs.  It’s hard to imagine that you are going to differentiate yourself in your accounting systems, customer support systems, sales lead systems, etc.  You might add a unique set of routing rules, etc – but these systems are so standard that the best practices are built in to most pieces of software.

From a product perspective, if your business objective is to be a “low price leader” rather than to compete on technology or to simply “run with the pack” and use standard features while maintaining good margins then it also makes sense to buy or outsource.

But what if you want to have the world’s best product, stock, or media recommendation engine?  By definition you can’t “buy” that as everyone else would have the same thing.  If you outsource it, everyone else might not have your code but the firm that develops it for you can’t help but add it to their experience; they might not copy it but it certainly will influence their future activities.

As we’ve described before – don’t outsource or buy those things that you feel should or will differentiate your business.

Our clients very often have questions over Why, What and How to outsource software development efforts, infrastructure, hosting, etc.  Readers of our book or frequent readers of our blog will notice that the questions are similar to those we ask in our “Build v. Buy” analysis.   The decision of what to outsource isn’t significantly different than determining when to buy rather than build.

Why outsource?  There are three very good and common reasons to outsource engineering efforts.

1)      You want to reduce your average cost of engineering and outsourcing may provide a way to do that (especially “offshoring”).  The right kind of outsourcing can reduce your unit cost of labor for engineering efforts.  But before you outsource, you should understand the full cost per unit developed of your engineering efforts so that you can measure and validate your cost benefit.

2)      You have near term capacity needs to increase engineering capacity that you cannot meet with current hiring practices.  If you need to 3x the size of your engineering team in 2 months, you probably need outside help.

3)      You fear that the engineering capacity need will be short lived and do not want the risk of hiring W2 employees.  Sometimes (2) and (3) are bundled together.  If you don’t have follow on work for some new system or product, you probably don’t want to hire and then fire employees.

The “What you should outsource” is very often mistaken as “why one should not outsource”.  There are almost always things you can outsource, and very often there are things you absolutely should not outsource.   We typically discuss 4 areas with our clients to help them understand what can and what should not be outsourced.

1)      Don’t outsource things that create strategic competitive differentiation for your company.  Having a third party develop the thing that differentiates you from your competitors is giving away the secret sauce.  It’s hard enough to protect intellectual property – if you simply give it to someone else you might as well just give it away.  Now probably not everything you do differentiates you from competitors.  For instance, if you run an ecommerce site you might determine that your product proposal system is a differentiator while search is not.  Outsource search, keep the development of your product proposal and analytics system in house.

2)      Don’t outsource product definition.  If you are in a product business, you really can’t outsource the definition of the product that makes you money.  We’ve seen customers try and it’s not pretty.

3)      Don’t outsource your architecture or standards.  Tightly coupled with product definition is the need to set the standards and architecture by which the platform abides.   You may believe that the beauty is in the idea or the specification of the product but if it takes off it will need to scale.  Few outsourcers are adept at defining scalable platforms because the largest and best companies simply don’t outsource that – ever.

4)      Don’t outsource areas where you need rapid response and flexibility.  These things might not be competitive differentiators – but if you expect a turn on a dime response in specific areas you aren’t likely to get those with a contractual relationship.

Finally we come to “How you should outsource”.  Here again, we have three common rules for our clients.

1)      Manage the outsourcer.  That means that you need to add employees to manage the outsourcer and the projects, which in turn means that the actual cost of outsourcing is higher than what the outsourcer has quoted.  Keep this in mind when considering outsourcing to dollar average costs down.

2)      Expect conflict.  Rarely do we see outsourced projects that don’t have conflict between internal engineering teams and the outsourced team.  Expect it and be prepared to manage it quickly.

3)      Deliver standards with specifications.  If you expect something to be 99.99% available, scale to 10x the current volume and deliver new functionality be very specific and demand proof.  We’ve even helped negotiate contracts where payment happens after proof in the production environment rather than delivery.

Summary:  Look to outsource when you want to manage the risk of growth or contraction and to lower your engineering costs.  Always expect that you will have to aggressively manage your outsourcer and always deliver specific standards of operation with your product specifications.  Never outsource areas that strategically differentiate your company or product offering or where you need strategic or tactical flexibility.