Blog: How To Get There Quicker with Outsourcing
Outsourcing has taken a different tone than when it all began in the technology world. Because of the tremendous need for labor in the second half of the 20th Century for manufacturing, American companies turned to Asia for help. As the industry moved to Internet services and applications, new product cycles were shortened and the bulk of the labor force in nature changed. Today the majority of products are Internet and application orientated. The development skills needed are now in America and in abundance from recent generations who are growing up with them. As a result, startups have more options for the basic organization requirements in the structure. Now we even have!
The Virtual Company
In recent years, at the very start of inception, it’s was not unusual to find a company outsourcing all of its operating functions, including marketing, engineering, finance, and manufacturing. I have made an investment in a virtual company where everyone except the president is an outsourced function, making it possible to get the most talented and experienced people and resources in place almost immediately when the company is formed. Long-term employee commitments can be limited by going outside or by just paying for the service for the time needed.
Based on my experience as an Angel Investor, coach, and mentor of startups, from day one I review the situation to see if the company is better served by outsourcing a function (e.g., sales distribution). There is of course, the entrepreneur mentality not to give up any/all control. In fact, the ultimate in outsourcing is to find an experienced partner to take the “idea” for a product or service and help make it a success. In my experience, however, most ideas are just that, ideas—not a foundation for building a successful company.
An Angel organization I belong can support 80-100 entrepreneur presentations per year and (on average) funded one per month. There were many others Entrepreneurs that never even reached the presentation stage.
With a partner from day one, the founder’s idea can: (1) cost less as far as their personal investment is concerned, (2) get to success quicker, and (3) create less stress from the founder’s family and friends who invested. The probability of success can be increased and should weigh it against losing a degree of control and perhaps even less of a reward. To succeed, the alternative of going it alone is a future of 80-hour weeks for a seemingly countless number of years. In my recent experience with investors/ groups many ere planning on success 5-7 years out. Outsourcing as many functions as practical can provide those partners.
Today it is normal that a startup with need for a manufactured product will be considering doing the manufacturing in an Asian Country at the start. The recent three companies with a manufactured product I had contact with, all had Asia partners.
In the beginning
The manufacture of the computer and telecommunications industries exploded over the last half of the 20th century, with the manufacturing part starting in the 1960s with the transistor radio and hand-held calculators. When the numbers were in the hundreds and some in the thousands, U.S. manufactures could handle, but when they stated reaching millions, like PC’s in the 1980’s, Asia became the source.
I had the opportunity to start an operation in Asia for a parent company in Southern California. The company was a manufacturer of labor intensive ferrite core memories for computers (before semiconductor memories were even born). It required lots of labor in the assembly operation in Southern California. We only had 50 direct laborers assembling these items and the work was tedious and, frankly, as we grew, we would not, in Southern California, be able to hire the numbers thousands of people required.
Early in the 21st century, I served on the board of directors for a Southern California company assembling flexible circuits for cellphones. I don’t believe that we could have hired the 20,000 people in Southern California that we had in China. At first, we started utilizing the labor in Asia by providing the material and detailed manufacturing procedures. Over time, however, our Asian partners were able to perform all of the manufacturing steps and then, eventually, the engineering and even some of the marketing requirements.
In manufacturing, the advantages were clear and beyond just the mass numbers of labor available. In Asia the overhead requirements there were lower costs for manufacturing engineers, purchasing, testing, and operating personnel; therefore, we were able to give purchase orders for the finished product to our facilities/partners. The advantages included in the U.S: fewer in house employees (by being more efficient), less infrastructure, a greater control of inventory, a reduced number of skills required in-house, and far better cash flow requirements. But most importantly, to produce our products, the need and cost for equipment was greatly reduced.
I have often said that I believe there would be no computer and telecommunications market as to size and availability of products as we know them today if it weren’t for outsourcing to Asia.
Of course, there could be disadvantages if outsourcing is not done properly, including less control of the process and IP as well as disclosing and exposing the company’s customer base, but outsourcing is a good option that should be considered from the beginning.