New venture outsourcing blog

The San Diego Software Industry Council (SDSIC) wants to get the word out about its annual “Managing Innovation” symposium May 15 from 8 a.m. to 3:30 p.m. at AMN Healthcare Auditorium.

Technology innovators will present on how they have used innovation to grow ideas, companies and profits. Seats range from $75 - $95 and can be reserved at www.sdsic.org or by calling (858) 793-6655.

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Speakers include:

• Mitch Oliver, Vice President of Solutions and Marketing, Qualcomm Internet Services
• Matt Porta, Partner, Technology Strategy, IBM Global Business Services
• Pete Kronowitt, Open Source Strategist, Intel Corp
• Chuck Davis, Regional Director, Open Innovation Solutions , InnoCentive
• Michael Robertson, Founder, Linspire, MP3tunes, SIPphone, and REEF
• Dmitry Shapiro, Founder/Chief Innovation Officer, Veoh Networks, Founder Akonix
• Dennis Clerke, Co Founder and CEO, Cardiff Software, Managing Director, Daggerboard
• David Merkoski, Creative Director, Frog Design
• Cary Gibaldi, Creative Director, Frog Design
• Chelsea Holden Baker, Marketing Communications Specialist, Frog Design
• Larry Kettler, CEO, Linspire
• Frode Odegard, CEO, Lean Software Institute
• Carl Eibl, Partner, Enterprise Partners

I’m going to be joining my good friends at Clearpoint Agency - it looks like it’s going to be an interesting mix of speakers this year - there seems to be more of a focus on startups.

See you there!

I was introduced to the CEO of Analog Analytics, Ken Kalb, through a mutual friend, Neil Senturia, late last year.  Ken had a great idea for a new company - he wanted to bring the improved accountability & optimization of online analytics to offline advertising.  What was even better, is that he already knew how to do it!

The value proposition is simple:

• Build and deliver a better ad with greater returns
• Measure the ad performance in real time
• Measure the mix of media spend to improve overall advertising returns

How it works

1. The advertiser creates a call-to-action in their ad to text a short-code or call a toll-free number.  For example: “Text COFFEE to 123456 and receive a free cup!”
2. Consumers who hear or see the ad (depending on whether it’s radio, TV, newspaper, magazine, etc.) respond by calling the toll free number or sending the SMS message.
3. Analog Analytics tracks, sorts, and presents the information to the advertiser in real time through an analytics dashboard (think something like Google Analytics).

Do people respond to SMS ads?

According to a September 2007 m:metrics report, the response rates to SMS ads in Europe are between 6%-9% depending on the country.  The response rates in the US are higher, 12%, but our penetration is only 17% vs. 35%-75% in Europe.  This shows that while the US market is still developing, even with significantly higher penetration rates, the response rates are still probably going to be at least 6%.

The people

One of the great things about working with startups is the people you get to interact with.  In addition to Ken, we’ve been working very closely with Tom Buscher and Scott Willson.  Tom worked with Ken at a previous company doing telephone stuff, so he knew just how to get the backend infrastructure up & running in no time flat.  Scott is a “Coder, bike racer, husband, father” who has a great command of both user interfaces and Rails.  Both guys are really smart and it’s been great working with them; we’ve learned a lot from them both.

The future

The product looks great and it’s continuing to get better and better every day.  We’re very excited about being able to help the Analog Analytics team implement the first version of the software behind this fantastic new company.  If you do a lot of advertising, you should definitely check out what they’re up to, look at their report samples, & let them know you’re interested in increasing your return on ad spend!

Daniel Weintraub at the Sacramento Bee wrote an opinion piece today, Silicon Valley Index shows sides of new economy, where he notes that, “Even as much of the rest of California braces for what looks like a slowdown, the state’s best known economic engine - Silicon Valley - is humming along…”  This “humming along” is being reported via the Joint Venture: Silicon Valley Network’s Index of Silicon Valley for 2008.  The economic report is quite interesting, if you’re into that sort of thing (as I am)!

The really fascinating aspect of Weintraub’s opinion piece to me though, was his acknowledgement of contrary economic indicators and how they can be resolved:

• The share of middle-income jobs in Silicon Valley is shrinking
• Share of households earning less than $35,000 has been declining since 2004
• The number of low-paying jobs is growing as a percentage of the work force 
• More households are reporting higher incomes
• Share of households earning more than $100,000 has been increasing since 2004
• The share of households earning between $35,000 and $100,000 has stayed roughly the same
• Nearly 4 in 10 households earn more than $100,000 / year!

How does Weintraub reconcile these?  He points to the increasing “free agency” of the workforce.  The Silicon Valley culture is now one of work for hire, specialists as consultants, which of course means companies are doing more outsourcing than ever before.

It’s interesting that the fraction of outsourcing has increased so dramatically in Silicon Valley and that it’s been so good to their economy.  As Silicon Valley’s bread and butter are high technology new ventures, the advantages of outsourcing for startups is apparently clear to them.  Hopefully other startups around the world will continue to follow suit!

I love the Freakonomics blog (as indicated by the link on the right hand side of this blog!).  I wandered into a recent post about click fraud on there by Melissa Lafsky.

Click fraud is a problem under certain circumstances, but for the major search engines who use an auction system for PPC and a performance based CTR to show their ads, this really is not a big problem.

Check out the comments section on this great Freakonomics post and weigh in!

A.T. Kearney compiled the Global Services Location Index (GSLI) for 2007. 

Perhaps surprisingly, most of the 50 countries in the index rated comparably well on financial attractiveness.  What really set India and China apart from the rest of the pack was primarily their people and skills availability scores.  The two mainstay outsourcing destinations were the second and third rated countries for people and skills availability trailing only the US, with Germany and France filling out the top 5.

This is the fourth year the top 50 countries providing IT services and support, contact centers, and back-office support were ranked on 43 measurements that determine financial attractiveness, people and skills availability, and business environment.

This year saw the addition of two additional measurements critical to determining global competitiveness: compensation costs and relative experience of BPO analysts.  The experience of IT professionals and contact center agents were already part of the index.

I decided to dig into the numbers a bit more, why is it that people and skill availability are determining the winners?  It sure seems like having favorable financial & business terms should be super valuable as well.  The answer is that these two other factors tend to cancel each other out.  If you look at the chart below, you can see that countries who have relatively strong cost advantages tend to have less favorable business environments.  In fact, the correlation between financial attractiveness and business environment was -0.81!

This tendency for the business environment & financial environment to cancel each other out, seems to be what tips the balance in favor of abundant supply of skilled people & processes.  The risk of unfavorable business environment obviously impacts the overall financial opportunity for a company looking abroad.  This study seems to support the idea that as policy leaders decrease the barriers for business to be conducted in their country (free trade restrictions, reliable contract enforcement, etc.) the financial incentives to go offshore tend to catch up and offset that gain. 

Given the tradeoff between these two dimensions, the smart money seems to be on the countries with abundant talent supply.

In the December 2004 issue of HBR is an article by Jane C. Linder on transformational outsourcing.  Linder defines transformational outsourcing as, “partnering with another company to achieve a rapid, substantial, and sustainable improvement in enterprise-level performance.”  Moreover, Linder subdivides transformational outsourcing into four categories:

• Rapid start-up: Outsource to rapidly scale up a new business
• Pathway to growth: Outsource to fix a key process that stands in the way of growth
• Change catalyst: Outsource to signal broad change and focus on adding value
• Radical renewal: Outsource to improve core operating capability rapidly.

In the article, TiVo is described as a startup using outsourcing to ramp up to “enterprise-level performance” in no time flat.  TiVo partnered with Sony to manufacture one of their DVR designs, many affiliate partnerships to advance sales & marketing, and Metron North America for their CRM operations (which shocked their clients several years later by closing their office with only 48 hours notice!).

They began most of these relationships between 1998 and 1999 and have grown markedly into easily the best DVR offering available.  Their business model is suspect, but their time to market and product quality have been undisputed for almost a decade.  Outsourcing helped propel them from early stage startup to the top ranks of consumer electronics in just a few short years. 

Nice job TiVo.

Dan Bingham wrote me an email today, presumably in response to Why outsourcing to India works, that began:

I thought you might be interested in the results of a study Deloitte released yesterday which basically found that outsourcing vendors and customers are rushing into outsourcing relationships focused primarily on cost, and because of this the relationships are being structured in a way that prevents them from obtaining additional value from the relationship in other areas, resulting in a great deal of frustration on both sides.

The Deloitte Consulting Outsourcing Report 2008 surveyed over 300 businesses and IT executives who used Deloitte’s outsourcing services.  These businesses were of course not startups, but it raised an interesting issue that does appear when new ventures try to outsource as well:

How do the outsourcing company and provider get on the same team?

The traditional answer here is a legal one: the contract.  You specify in excruciating detail exactly what you expect to get, what you expect to pay, and when you expect to receive it.  You should also probably pay someone a hefty consulting fee to write you just such a contract by the way!

Contracts are important, I don’t want to minimize them, they are definitely a key item of last resort when settling disputes.  In fact, a lot (most) of the value of most contracts is just the exercise of forcing both parties to go through the motions of being very specific about what they want.

However, they tend to be very much prescriptive and thus cannot accomplish much in terms of really cementing a productive relationship. 

Imagine an employee agreement which specified exactly how much work the employee would do, by when, and for how much.  How effective do you think this would be?

Some of most recent innovations in pay packages are going in the other direction: commissions, profit sharing, stock based compensation, ESOPs, 401(k).  All of these promote shared incentives.  Even union contracts generally do not specify output requirements to the same level of specificity you’ll find in most outsourcing contracts.

Is it reasonable that the way you negotiate and manage employees and groups of employees is not the same way you expect to manage outsourcing partners?  Probably not.

Ironically, we’re lucky here at Inventure Global.  Our relationship with startups has helped us avoid this for the most part.  Anyone who joins a startup, including outsourcing partners, have to be willing to be a real part of the team.  This turns out to be a much better solution.  Creating shared goals, cultivating a shared vision, and having shared values creates shared success.  There’s not as much downside protection than a contract has, but the upside has much more potential.  For a startup it’s all about upside, the opportunity is what everyone is playing for.  Other businesses have something to learn from this, they should consider weighing the opportunity of shared success over the costs of disappointing results.

Even if you think you’ve decided already, the final decision may not be up to you!  Venture capital firms are continuing to push their portfolio companies to outsource, which just another indication of how important it can be to improving valuations, time to market, and productivity of a startup.

Ann Grimes, who now works at Standford, wrote Venture Firms Seek Start-Ups That Outsource in the Wall Street Journal about six venture backed startups in 2004 who were using outsourcing: Solidcore Systems Inc., July Systems Inc., 24/7 Customer, ServGate Technologies Inc. (acquired by Cirond Corp. in 2006), ReaMetrix Inc., and Open-Silicon Inc.

These companies and their investors were all quoted in the article saying that the additional value provided by globalization and outsourcing were on the rise.  They fully anticipated (correctly) that the outsourcing trend would gain momentum as communication & other infrastructure barriers were removed.

John Shinal wrote in VC firms push for outsourcing that the VCs are not just accepting this or monitoring it from the outside, they’re aggressively pushing it on their portfolio companies!

“There isn’t a board meeting that goes by that we don’t ask, ‘Why aren’t you being more aggressive (with software development) in India and China?’ ” said Jim Breyer, managing general partner of the Palo Alto venture firm Accel Partners, which has backed more than 200 companies.”

The majority of startups that receive investments from the Menlo Park venture firm Kleiner Perkins Caufield & Byers have operations in India, Kleiner partner John Doerr recently told a group of Indian entrepreneurs in Santa Clara.

Now, nearly all the business plans that [Peter] Barris and his colleagues evaluate for the firm’s new venture fund include an offshoring component. “It’s not an unusual event anymore,” said Barris.

It should go without saying that a VC who’s got any kind of agenda, including an outsourcing agenda, that the startup firm doesn’t want to explore is a bad fit.  There are very good reasons why outsourcing for startups isn’t appropriate, but for well prepared startups the list is getting shorter every day.

As we mentioned in our previous post about outsourcing providers moving up the value chain, the trend of improved focus on opportunity-oriented outsourcing is likely to continue.  I would urge startups that are inclined to keep everything local to ask themselves why the trend seems to be so strong?  Perhaps your business is different from all the others… but probably not.  Look at this chart from R&D magazine to see that the number of outsourced functions is pretty broad now.  It’s not just customer service and tech support.

More likely, you just haven’t found the right partner yet, and as you look be sure to keep your eye out for firms that specialize in helping startups like we do.  As we all know, startups are defnitely a different breed of company!

McKinsey has put together a Project 360° for outsourcing BPO & IT work, including software development, to India.  The results of this research were a fascinating combination of insights about how companies who use outsourcing benefit, why they benefit, and how outsourcing companies will need to improve to stay competitive in the world market.

First, I’d like to start with expectations.  The study asked outsourcing clients and outsourcing company senior managers to allocate 100% over these five areas which both sides agreed were the primary drivers for outsourcing services:

• Cost

• Quality

• Risk

• Speed and flexibility

• Innovation and productivity

The fascinating thing about the responses from 50 lines of business in a dozen different companies, shown below, was how the differences manifested themselves between outsourcing newbies and veterans.

Companies outsourcing for more than three years were much less interested in the cost oriented benefits of outsourcing (cost, quality, and risk) as they were in the opportunity oriented benefits of outsourcing (speed & flexibility, innovation & productivity)!

This lines up pretty well with our own experience here at Inventure Global.  Our clients tend to engage us for one or more of the cost oriented benefits, but soon end up realizing the tremendous potential available on the opportunity side of the equation.  After the first year, the excitement of a one time cost savings wears off.  The idea of increasing your growth rate year after year never gets old!

Another truly welcome surprise is how far behind the curve most of our competition’s senior managers are.  From the chart above you can see that the vast majority of outsourcing firms focus exclusively on cost oriented benefits to their customers.  This is a great place to start, but in the future cost alone won’t keep them in business.  The study clearly found that the winners in tomorrow’s outsourcing landscape will need to help their customers innovate, get to market faster, and offer their help in a flexible manner - that’s almost Inventure Global’s mission statement!

Finally, the study surveyed a substantial number of companies that do their work in house and offshore (captive) and those that outsource and offshore.  On average a 30% improvement in productivity appears to exist between outsourced service providers and similar in-house departments, even though both use an Indian based workforce.  This dramatic difference is probably due to the increased competition among outsourcing companies who need to continually improve their people & processes in order to stay competitive.  In the long run I’m sure in-house teams will catch up, but the market is less forgiving in the short run.

The survey concluded with some closing remarks about the outsourcing IT industry:

• A company culture of institutionalizing practices separates the winners from losers.  The winning firms have been able to successfully absorb 15%-18% increases in wage inflation through added productivity.

• Despite good customer satisfaction & project outcomes overall, there is still significant variance.  You can’t bank on the results from just any firm.

• Customers are increasingly looking for upstream value added services like requirements gathering & design, but existing companies do not have robust enough offerings to fulfill the demand.

• The industry needs to continue focusing on improving performance and consistency.

Inventure Global operates below the radar of McKinsey right now, but so do our customers!  Startups are definitely a bit different than big companies in quite a few ways, but many of these results mirror our experiences as well.  I think the opportunity oriented benefits are the real takeaway for us, our customers are constantly asking for help innovating and getting to market faster.  You can’t run a business on cost cutting alone, you have to differentiate to survive, so in the final analysis this doesn’t come as too much of a surprise to us - hopefully it’s another two or three years before our competitors notice!

Obviously you know about Digg, the amazingly successful social networking website.  I bet you didn’t know that in 2003, in order to get Digg going, it’s founder decided that the only way to get moving fast enough was through outsourcing!

This is the first in a series of blog entries to profile the successful startups that outsourced some critical aspect of their business in order to succeed.

I’d like to take you back to 2003, when Kevin Rose outsourced some php work to a developer named Owen Byrne.  After an inspiring lunch with Apple founder Steve Wozniak, Kevin set about creating a site to “dig up” news stories burried in the deep recesses of the internet.  Not quite citizen journalism, more like citizen editing, providing users the ability to give a virtual “thumbs up” allows the higher quality content to bubble up to the surface for the benefit of everyone.

On December 7, 2004, Kevin & Owen took Digg out of beta on only one server (two years later, they were over 100)!  In the first week 578 people signed up, registering 923 stories.  The first story to hit the home page was the Google Cheat Sheet, page that lists of all of the esoteric commands available, but rarely used, on Google’s search engine.

There have been many sites that have come up since Digg first launched in 2004 - so do you think outsourcing made a difference? 

Since Digg started Kevin has received multiple funding offers, Yahoo made a $40M acquisition offer, AOL started bribing Digg’s top 50 contributors to switch to their own copycat site, and countless other also-rans have created a stupifying number of Digg look-a-likes.  With all this big money chasing his idea and not catching up - what’s the difference between Digg and all the others?  Digg got there first!

Time to market was critical for Kevin to make Digg a success.  Kevin has mentioned in previous interviews that he started Digg on $7,000 and a rented $99/mo hosted server!Thanks to a fantastic idea, viral marketing via blogs, and outsourcing - Kevin built Digg into an overnight success on a shoestring budget and hasn’t looked back.

Do you have a great idea and just need a jumpstart to get it going?  Contact Inventure Global about getting your idea online today!