Start-ups: Focus on Core Activities Part (3/3)

12 December 2011 by Jinesh Parekh No comments

In this final part of our series we will look at the outsourcing patterns of start-ups in the U.S. and how this has become embedded as part of their business model to boost productivity and cut costs.

Start-ups: Focus on Core Activities

There is a general tendency to think of outsourcing in terms of large companies with a sprawling network of operations. But start-ups also take recourse to aggressively outsourcing activities which are not core to their operations..

“Many of the outsourcing opportunities today are offered by inter-based start-ups..,” says Dr Bensimon of Logtel..

“In a cozy economy these (start-ups) wouldn’t have had the same chance to survive – since the necessity to save on costs wouldn’t be so essential,” he adds.

Outsourcing is no longer seen as a negative term,” says Nati Katz. “It is the mainstream business trend that allows them to operate efficiently under constrained budgets.”

Start-ups look to outsource any core-supporting activity on a variety of areas such as website design, IT, printing, writing, communication services – even having virtual assistants.

“What is left with the start-up is the core business value or skill that is unique to the business and cannot be done through an outsourced service,” Katz added.

Outsource and Survive

Outsourcing is chiefly seen as a way to farm out non-core operations leaving the founders of the company free to pursue their creative ideas and focus on their core competence of creating products and services for their target customer.

SmallBiz Outsource offers outsourcing services for accounting tasks and book-keeping. “The very need of a service like ours stems from the fact that the economy is currently very low,’ its chief Evan Scharf says.

During a downturn the accounting department is one of the first to get downsized – but start-ups usually find it problematic to maintain their books in order. “That’s why with outsourced accounting services they make sure all the books are accurately maintained and managed,” Scharf says.

“The costs are marginal to having a full-time or even part-time staffer and they pay according to the scope of the work needed,” he explained. “I tell my prospective clients – don’t let day-to-day tasks stand in the way of your core business.”

Both start-ups as well as established companies alike need to keep their value-added portion to themselves. “All the rest can be outsourced as long as the service provider is reliable, professional and can process the work to the closest degree of a full-time employee,” says Polnauer of Leibish & Co.

Cost Benefits

The cost trade-off is the foremost driver to outsourcing – the direct costs involved in doing a job from within as opposed to externally. “Outsourcing offers the benefit of savings in employee-related extra costs, insurance and benefits, better time management, which results in a more efficient bottom-line and savings in inventory or machinery,” said Katz.

Bensimon has an interesting angle on this. “With an employee I am most likely to include a variety of daily goals which include the specific task at hand whereas with outsourcing, there is the one specific task that I am expecting to be delivered in X time with Y costs. Very transparent, very clear and very simple.”

Scharf feels that outsourcing produces better results in terms of timely delivery and costs savings while the same job, done in-house, would be slower and delivery may not always be to the satisfaction of the employer.

“As an outsourcing company, I show direct cost savings, much more accurate and timely work delivery, accessibility and a straightforward attitude,” he says.

Leibish’s Polnauer sounds a note of caution to the entire outsourcing debate: “Sometime you save costs in the short run, but end up paying a lot for mistakes, inaccuracies or severe damage made by a negligent external worker – who dealt with your task while dealing with a dozen other customer tasks.”

This makes it important to choose the right partner for outsourcing.

The Low-Cost Debate

Most start-ups would feel comfortable outsourcing some of their functions to companies which have geographical proximity and on which they can keep an eye on.

“I doubt you would outsource your very core business – overseas,” says Nati Katz. “There is still some value to being geographically accessible when it comes to certain tasks.”

Where to outsource would, of necessity, be decided on a case-to-case basis.

Apart from costs, competition is another reason why companies outsource. “Competition does not boil down just to cost. There is a variety of factors and considerations,” Polnauer pointed out.

“Whatever a business does, the last thing it wants to do is compete merely on the price. There should be factors such as time of delivery, quality of work, customer satisfaction, repeat business, and a lot more than goes beyond price,” he added.

Outsources – which are themselves start-ups – show a lot of flexibility when it comes to pricing their services.

“They understand the constraints and so speak the `same language’ as their customer start-up companies,” said Katz.

Flexibility includes post-dated payments, post-work payment agreements, extended and added services for the same price. The work comes down to an agreed amount per hour or universal amount per task successfully completed.

They may not enter into long-term contracts because then it would alter the paradigms of the relationship. As Katz says, “All sides would get too cozy and comfortable – and before you now it the results would be too mediocre to justify ongoing relationships.”

A similar view is echoed by Logtel’s Bensimon who finds that it is counter-productive to get into long-terms outsourcing agreements. Short-term tasks give the best results and the best price.

Some services such as accounting, phone services and office-related tasks have to be long term. “There is a mutual value in processing short-term work,” says Scharf, who says he is able to assess and reassess the value of the customer and the business figures per hour spent working on the tasks. “In a long term relationship, I cannot renegotiate terms and work load may diminish the value.”

In the final analysis the downturn is now a fact on the ground and companies have to learn to live with it. Start-ups, which are launching now or in the recent past, have learnt to model their structure in sync with the current trends.

For those who rely on the internet, while there is a lot of space to explore in terms of how business is done, many operations methods may well not return to the traditional platforms but rather grow in new directions such as internet-based services, cloud platforms and outsourced services.

Jinesh Parekh

Founder CEO, Idyllic.

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