Friday, May 04, 2007

Lesson #15 - Know what to In-Source and know what to Out-Source

In a startup (or really any small business) it is critical to manage spending, and keeping overhead at a minimum. Companies that start to experience growth, or have a chunk of new capital hit the bank, have a tendency to over-spend and try to "buy progress" - which is a dangerous game to play. This article is going to focus on what I consider one of the biggest mistakes startups make when it comes to controlling costs - deciding on what to insource (or hire) and what to outsource.

What is the difference? Two key factors - quality and cost. Every time you make a decision that you need to hire someone - first ask yourself - can this be outsourced?

Outsourcing can provide better quality of work for much lower cost and risk. Here is a classic example. Some companies hire a CFO and pay them 7k-10k per month, even though they don't have a large AP/AR staff, and may not even have 1M in revenue - but they feel they need a manager for the financial side of their business. They are probably not wrong - every company should have a financial resource - but to commit 100-120k per year in fixed overhead is ridiculous. A company can hire a Top 5 accounting firm for 20 hours a month and spend less than 40k per year (and you will get not only someone with better qualifications, but an entire company behind that person that can bring expertise and experience to the table).

Here is my breakdown of what I think should be heavily considered as outsourced positions versus hiring:

1. CFO/Controller - Any company that has less then 2-3M in revenue should consider outsourcing their CFO and/or Controller. There are a lot of great firms that offer these services, with people that would normally go for 250k-350k per year in salary - that you can put on retainer or pay as consultants hourly.

2. Legal - I have never seen a startup have on staff Counsel, but you never know. I will state the obvious - there is no reason to have a full-time lawyer on staff.

3. Secretary / Assistant - I have mixed feelings about having an assistant. Depending on how "scatter-brained" the CEO and management are on daily tasks. an assistant can bring order to chaos. However, for a startup with limited capital - I would recommend looking into a Virtual Assistant service to handle incoming phone calls, messages and some basic services.

4. Marketing / PR - For a company that is bringing a new product to market, and trying to orchestrate a marketing campaign for an emerging market - the marketing and PR resource needs to be experienced, smart and very in tune with the market. My personal opinion is that it is close to impossible to hire a top-notch marketing person into a startup. I know what you are thinking - "but our marketing guy is great - he updates the website, and helps with trade shows" - stop right there - that is not a marketing guy. Take my advice - find a consultant, or even a firm that can really help you define and execute your marketing plan. You may have to use a few different firms - one PR firm, one Ad Agency and one Marketing consultant - and it may cost you more than what you are paying on a month-to-month - but once they develop all the marketing assets, plan and give it to you to execute their cost/retainer can be reduced.

5. Technology (Developers) - This is another tough one -especially for software/internet companies who's primary asset is the technology/software that their engineers build. However, I think its always worth considering outsourcing - if the cost/quality equation makes sense.

Lets start with the CTO/VP of Engineering. Most likely the founder of the company fills this role - if not, then you need to hire this person (if you are a technology company). If you are not a tech company this would be the equivalent of your Product Manager or key Consultant, etc. This is the guy who has the vision for the product or service. This is not a job you can outsource.

The next level - Developers and Engineers. Here are my thoughts on balancing insourcing and outsourcing in engineering - if the job is working with the "secret sauce" of the company where innovation and competitive features are being built then it should be in the hands of an internal resource. If the job is working with more mundane tasks or part of the process that is not clearly part of the IP portfolio or expertise - then outsource. An obvious example, is a consumer product company hiring their product developers but outsourcing the manufacturing. For a software company - the internal staff is writing the code of the product, but they may outsource quality assessment and testing of the product before it goes to market.

So , I think that gives you some ideas on how you can outsource tasks to great talented people for certain jobs and actually save money and keep your overhead low.

The success of any company is based on the quality and capability of the people, and the type of people you want to be part of your venture you won't find on the job boards - because they don't have a problem finding a job.

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