9 Outsourcing Lessons Learned from Successful and Failed Startups

Did you know that the United States outsources almost 300,000 jobs every year? Numerous startups are considering outsourcing their non-core tasks to take control over the essential work. Read this blog to understand what worked in favour of businesses and what went against them to chalk out what you should and shouldn’t do.
9 Outsourcing Lessons Learned from Successful and Failed Startups

Are you considering outsourcing some work but are in a dilemma because of several outsourcing failure examples witnessed by businesses over the last few decades?

Outsourcing business to overseas partners has become a common trend in the last couple of years. Here we are explaining to you 9 amazing outsourcing Lessons Learned from Successful and Failed Startups.

As per Statista, the global market size of outsourced services is valued at 92.5 billion USD. ISS World, a Danish facility services company and Accenture, a US-based IT company are recognized to be the global leaders in outsourcing.

The strategy of outsourcing has attracted praise as well as criticism from business owners. So, let us understand why companies adopt an outsourcing strategy in the first place. Followed by this, you will find a list elaborating the lessons learned about outsourcing from successful and failed startups.

Top reasons for outsourcing business

Reason To Choose Outsource - outsourcing Lessons

Outsourcing was first globally identified as a potent business strategy in 1989. The simplest way to define outsourcing would be to say that it is a business strategy of partnering or employing another firm to carry out some specific tasks for the parent company.

These tasks would originally be carried out by the in-house staff of the parent organization, but when outsourced, the completion of the task would become the responsibility of the partnering firm.

As per Deloitte, outsourcing nowadays is key to making change happen. Deloitte’s 2020 Global Outsourcing Survey, indicated that even during the pandemic outsourcing is being treated as a cost-cutting tool.

Here’s why companies outsource their businesses offshore:

outsourcing Lessons Learned from Successful and Failed Startups

  • Companies outsource to reduce the cost of operations which usually include salaries of employees, cost of technologies, software, and equipment.
  • Another plus point of outsourcing is that it enables businesses to focus on key aspects of their business. Thus, it enables the non-priority tasks and projects to be handled by offshore teams.
  • Organizations can also handle a greater number of projects. This helps them attain scalability and offer improved services and offerings.
  • It increases the growth of the organization and improves the overall efficiency of the organization.
  • Businesses get access to a larger pool of talent.
  • Outsourcing also helps to maintain free-market economies on a global scale.

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9 lessons learned about outsourcing from hit and failed startups

Every business organization has its own reasons to outsource work but many companies have not had the most convenient experience. So, here is a compiled list of outsourcing failure examples and success stories experienced by different startups.

Lessons learned from successful startups

According to Larry Elder, Lawyer and host of the Larry Elder Show, “Outsourcing and globalization of manufacturing allow companies to reduce costs, benefits consumers with lower-cost goods and services, causes economic expansion that reduces unemployment, and increases productivity and job creation.”

Below are the top lessons learned from successful startups.

Lesson 1 – Accurate identification of the tasks to outsource

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One of the foremost aspects of outsourcing is knowing what you want to outsource, when to outsource, and most importantly why you wish to do so. Before outsourcing, you must consider all prospects and weigh your pros and cons carefully.

Outsourcing must be considered when your business is scaling fast. It is of utmost importance to identify the part of tasks that you would want the offshore teams to tackle. It is also essential to keep control over the core functionalities and keep track of the outsourced work.

B2C companies might need to outsource their customer support function to third-party BPO providers when they need round-the-clock assistance due to increasing customers.

Lesson 2 – Outsourcing non-core functionalities first

When startups are considering outsourcing as an option, they should remember that outsourcing technical requirements are not always the right step to take.

According to experienced businesses, it is always pragmatic to take the help of external vendors in building integrated implementation teams. This will allow you to steer the business in your way.

As per the 2021 F&A Leadership Survey conducted to find out how much time do CFOs spend on transactional versus strategic tasks, 88% of CFOs responded that they lack time for strategic work. This is because most of their valuable time goes into managing transactional work like AR, AP, and closing books.

Therefore, experienced businesses believe that startups and mid-sized companies should hand over their non-core tasks to offshore providers and focus on strategizing and expanding their business.

Lesson 3 – Outsourcing helps save a huge amount of money

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Slack, a business messaging app is one of the best IT outsourcing examples of saving expenses and overhead costs and generating high revenues. Slack primarily hired a Canadian design team MetaLab to take help in developing the beta version of their app into the final product.

Slack received valuable feedback which helped them design a tool that became a hit among 15,000 users within the first two weeks of launch. Today, it has a clientele of more than 8 million users including IBM, Oracle, and BBC.

Slack managed to raise its valuation to $5 billion in July 2017 and attracted a $250 million investment. This is accredited to its outsourcing strategy where it outsourced website & logo designing and web app & mobile applications development.

Lesson 4 – Run proper project estimates

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When outsourcing projects, it is crucial to set realistic TAT (turnaround time) and make accurate financial estimates. When third parties are bidding for projects and making project proposals, it is equally important for them to put out realistic capabilities instead of making false promises.

Cost-cutting and making random changes to deadlines affect the final product and thereby leads to heavy losses because it may fail to impress the end client.

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Lessons learned from failed startups

While the above were important lessons from successful businesses who have enough experience with outsourcing, below are outsourcing failure examples.

Lesson 5 – Proper planning is important

Poor planning can ruin and cause a lot more damage than you can imagine. To ensure a smooth operation, it is extremely important to etch out every detail of the process and clarify your expected end result.

Predefining all milestones is the key when you are outsourcing your projects to remote vendors. What is more important is the fact that you have properly strategized every aspect of the task you want the offshore team to take up.

Lesson 6 – Adequate technical expertise is a must

technical expertise

Whenever outsourcing work to offshore vendors, it is important to check if they have the requisite skills, supporting technology, and the right workforce. This is especially essential in the case of outsourcing product development work.

Therefore, you should research thoroughly about the vendors to see if they have adequate expertise to take up the projects and deliver them as per your expectation.

Multiple startups have suffered because they outsourced their work to inexperienced teams.

Also Read: IT Outsourcing models: Which is better to use?

An apt example to elaborate this kind of scenario is to refer to what Cambridge University’s NHS Foundation Trust faced when they hired Epic. Epic is a US software development company that was hired to develop an online patient record system for the NHS Foundation Trust. This online patient record system would help staff to access patient records on all portable devices at any time.

But the system designed by Epic for Trust lacked accuracy and was difficult to use. Trust overall faced financial losses of up to almost £200 million.

Lesson 7 – Well-etched expectations and communication is the backbone

While outsourcing some work it is quite essential to define the roles, responsibilities, and expectations to the offshore partner and onshore teams.

The client and company should be able to rely on each other only when they have confidence in each other’s understanding. For proper understanding, it is important to communicate with clarity.

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Lesson 8 – Mustn’t outsource core business functions

The secret of successful outsourcing lies in retaining the core functionalities and outsourcing the non-essentials.

JPay, initially a company of two, faced the threat of extinction when the CIO left. The only founder at that time chose to outsource the engineering team to Israel, Q&A team to India, and for hardware & firmware, he chose China.

As the technology team and important parts of the business were scattered everywhere, JPay faced multiple challenges in integration.

According to the Small Business BPO Survey conducted by Clutch, the most commonly outsourced services are accounting, IT services, and digital marketing. While accounting and IT services, each account for 37% of the outsourced business, digital marketing accounts for 34%. The remaining processes outsourced are development (28%), human resources (24%), and customer support (24%).

Lesson 9 – Going with the cheapest provider is always not a wise choice

Going with the cheapest third-party provider is one mistake that should be avoided even if your goal for outsourcing is to reduce expenses. This is because the cheapest provider may not have sufficient experience, adequate skill set, and access to knowledgeable resources.

For long-term partnerships, it is always essential to choose a provider who is reasonably priced and able to fulfil all your requirements.

Klout, a startup, took special measures when they hired offshore developers for their product. Klout’s founder Joe Fernandez specially travelled to Singapore and remained there for a period of four months. During this time, he personally hired a custom development team and worked closely with the team to develop the beta version of their product.

Concluding Lines

According to Infiniti Research Limited’s Global IT Outsourcing Market 2020 – 2024 report, the outsourcing market is expected to grow by 98 billion USD in the period between 2020 – 2024.

US businesses mostly outsource IT functions besides finances. According to A.T. Kearney’s report, the topmost countries where IT, BPO, and voice services are outsourced are India, China, Malaysia, Indonesia, Vietnam, the US, Thailand, the UK, Brazil, and the Philippines.

Therefore, this article must have given you significant ideas regarding outsourcing. Besides providing an elaborate picture of the outsourcing failure examples, you also learned about what are the prime points to keep in mind when considering outsourcing as an inevitable option.

Harikrishna Kundariya
Harikrishna Kundariya
Harikrishna Kundariya, a marketer, developer, app lover, technology savvy, designer, co-founder, Director of eSparkBiz @Mobile App Development Company where you can Hire Mobile App Developer. His 8+ experience enables him to provide digital solutions to new start-ups based on app development.

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