Should Tech Startups Outsource Product Development?
When I wrote that BusinessWeek piece, Peter Harrison, CEO of outsourcing services provider GlobalLogic—who happens to be a good friend and someone I have mentored over the years—tore into me. He insisted that I was wrong and offered to prove it by introducing me to his customers. I ignored him (as I often do). But Peter is persistent. Last week, he roped me into his customer conference to have dinner with Mike Moritz of Sequoia Capital, who is a GlobalLogic investor. Peter also had me meet some of his customers.
Despite this, I remain unconvinced that outsourcing core development is a good strategy for startups. During my tech days, I outsourced R&D to St. Petersburg and Novosibirsk, Russia. But as you can read in this FastCompany article, my technology was conceived there, and that’s where my entire development team was located (and I was able to hire brilliant ex-KGB mathematicians who had skills I couldn’t find anywhere else). Having development teams working on a single product but being in different locations makes innovation much harder to achieve (yes, I know this is how open source works, but that’s different). I’m going to detail my reasons and let GlobalLogic CTO, Jim Walsh, tell us all why he thinks I’m wrong.
Here are the reasons I’ve cited for outsourcing not making sense:
2) Components must fit together. Complex software is more like a Swiss Army knife than a meat cleaver. The blade, bottle opener, and screwdriver have to work in an elegant manner and can’t be developed independently. In a similar way, members of a software-development team need to work closely together.
3) Management bandwidth. It is a lot more challenging to manage diverse teams at multiple locations and in different time zones than to manage them together. Additional layers of management are often required.
4) Fewer developers can often produce more. In the tech world, scaling up development teams doesn’t always lead to greater productivity. Small teams are often the most innovative and productive.
5) Skills scarcity. The specialized skill and mindset that tech companies look for are hard to find. For example, India doesn’t have programmers who have grown up to understand the intricacies of computer-game development, because few can afford the high-speed Internet connections needed. In India, the best developers gravitate to prestigious companies like Infosys and Wipro, not to small startups.
6) Intellectual-property protection. This is a particularly strong concern in China, where it is almost impossible to protect trade secrets and where piracy is rampant. Employees often leave to start ventures that compete directly with their foreign employers, and the laws provide little protection, because they aren’t enforced.
Here is Jim Walsh’s response. I must warn you that this may read like an ad for his company, but I need to be fair, because I’ve just trashed GlobalLogic’s entire business model. So take this for what it’s worth:
1) Communication: I completely agree that building great products calls for a deep understanding of customer needs and great communication. We believe in creating small agile teams where the product owner is an integral member. If this team is distributed, then it’s essential that you either (a) separate the scrums and have product owners in each location or (b) have the product owner overlap with the engineering team for several hours every day to review deliverables and provide constant feedback. Although in the old days this was hard to do, modern communication and development platforms have made collaborating across distance easier. In some cases, they can improve the quality of communication over co-located teams.
2) Integration: While building tightly integrated products with distributed team members might have been hard in the past, modern development tools and architectures have made it increasingly straightforward for even the most complex products to be built by distributed teams. Most open-source projects are living proof of this progression.
3) Management: Managers who have distributed teams do need to learn new skills; however, once proficient, a manager with a distributed team can often outperform a centralized one. Take for example the opportunity to follow the sun by developing during the day and testing the same code line at night (i.e., daytime in a second location). Or consider the opportunity to leverage specialized skills that you simply don’t have in one place or to have a larger or more skilled team than one could assemble otherwise. If you’re struggling to overlap enough hours a day, one can always leverage teams in Latin America that work in US time zones.
4) Talent: I’m well aware that one great developer can often outperform many mediocre ones. That’s why I’d never compromise on the quality of team members – particularly for new product development. However, it’s possible today to get developers in Argentina, China, Eastern Europe and India (i.e., locations where we have innovation hubs) who are just as talented—and in some cases just as experienced and innovative—as those in Silicon Valley. The key is to set your bar high and hand-pick your team in the same way that you would if you were doing the development right here at home.
5) Skills: While there was a time when specialized skills were hard to find abroad, this is simply no longer the case. When I started in this industry 25 years ago, the skills in the U.K. were about 10 years behind those of the U.S. Today, there is no longer any skill lag. Indeed, it’s possible to get skills in cities like Bangalore and Kiev that are in advance of what you can find in many U.S. cities.
6) Intellectual Property: For all but a handful of products, IP risk is a red herring thrown out by firms to defend the status quo. In our history of building more than 1000 products for more than 200 product companies, we’ve never had an incident of IP theft. There is simply too much at stake for our firm and our employees for this to be a meaningful risk. Finally, many firms have concluded that the only true defense for their IP is moving faster than the competition, and we can certainly help them do that.
Lastly, we would argue that the day has come when even a startup needs to think globally (i.e., become a micro-multinational) and seize the opportunity to create products that can be used around the world. Therefore, it’s not enough to focus only on what American consumers want. Having a global team is a great way to ensure that you’re creating a product that can address global needs.
The last part, on globalization, is exactly what Mike Moritz said in his talk. I agree with this. But Jim hasn’t convinced me about the other issues. It could be, though, that things have changed from the time when I was a CTO and CEO, and that my information is dated. So I look forward to reading your comments on what has and what hasn’t worked for you, and what you think about this topic.
Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.