New venture outsourcing blog

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.

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