VCs and Angel Investors: How Outsourcing Protects Your ROI

Written by delaPlex
September 17,2015

How Investors Can Protect ROI With Software Development Outsourcing

Being a venture capitalist or angel investor can be nerve-wracking. Often, you are investing in relatively new enterprises with few tangible assets or proven histories of success. Your money may be tied up for a few months or as long as 10 years. Naturally, you want to receive the best return on your investment that you can obtain. One excellent way to help achieve this goal is by outsourcing software development.

What Exactly is Outsourcing?

In its simplest form, outsourcing is merely contracting with another company or individual to provide services or skills. Although the term is relatively new, the concept dates back centuries. Some of the first U.S. companies to outsource work were the builders of clipper ships and even covered wagons. Without a large pool of skilled craftsmen, these companies found it more profitable to contract with companies in Scotland for the bulk of the work.

Today, there are three basic types of outsourcing.

  • Domestic outsourcing is the use of outside vendors located in the U.S. These vendors might be located in your town or on the other side of the country. Domestic outsourcing is typically the most expensive option.
  • Near-shoring is contracting with providers in countries that are geographically close to the U.S. In recent years, there has been a significant increase in the number of outsourcing firms located in Mexico as well as Costa Rica and other Central American countries.
  • Off-shoring is the type of outsourcing that is most commonly associated with the concept. Off-shored employees may be working in India, Russia, China, Germany or virtually any nation in Europe or Asia.

Why Outsource Software Development?

The first benefit of outsourcing is the cost savings. When you hire an employee in the U.S., your actual costs are much more than just his salary. You must also pay the related payroll taxes, including the employer portion of FICA and Medicare, unemployment tax and workers' compensation insurance. If the company provides a healthcare plan, vacation leave, sick days or holiday pay, those costs must be included as well. The current "rule of thumb" is to add 33 percent to an employee's base salary to find the actual cost of that employee. Thus, if you hire a programmer at an annual salary of $100,000, your true cost will be closer to $133,000. (This is why domestic outsourcing is often the most costly option — the vendor must also pay for the various taxes and benefits.) However, in many other countries, you can find programmers with the same (or better) skill sets who charge anywhere from one-third to one-half as much.

The second benefit of outsourcing involves the availability of people with the right skills for each project. A software product is the strategic relationship between company and customer. It is created and maintained by the evolution of many programs and projects. Every software project can potentially require different technical skills. For example, one project might call for a developer with experience integrating an onsite database with a software-as-a-service provider in the cloud, while another might require a programmer with expertise in writing native code for a mobile device. Hiring a massive staff to ensure that all skills are represented is expensive, even if you were able to find such a team locally. However, you can expect to find outside vendors with multiple programmers possessing the precise skills your project needs.

The third reason that venture capitalists should consider outsourcing is the theory of shared risk. If you choose to develop software in-house, you assume all of the risk. If the product fails to meet expectations, you have shouldered all of the costs. Perhaps of even more importance in a litigious world, if your programmers inadvertently violate a patent or copyright, your company is the one at risk. In most (although certainly not all) courts, if a vendor you hired in good faith commits a transgression, the vendor can be held at least partially liable for any restitution.

The final significant benefit provided by outsourcing is time to focus on supporting or developing the organization's core business. The most important goal of any endeavor should be to produce a profit. When investors and managers can concentrate on making sales, inventing new products or streamlining processes, the company will usually benefit more from these efforts than if they must recruit programmers, order hardware or train and supervise in-house employees. The vendor will bear the cost of necessary hardware and software, recruitment, training and supervision.

The Client's Responsibilities when Outsourcing

When outsourcing software development, you must remember that you have certain responsibilities that you must fulfill for the relationship to succeed. You cannot just send a one-page email with a general description of the project, sign a contract and then sit back and wait for the product to be developed. The following tips can help you make sure that your outsourced software projects succeed, thereby protecting your investment.

  • Provide as much detail as possible when soliciting quotes. At this stage, concentrate primarily on what the software must do, not specific languages or methodologies unless such issues are critical.
  • Obtain quotes from multiple vendors. However, keep in mind that the lowest quote is not always the best. Examine other factors, such as the vendor's company philosophy, verifiable references from former or current customers, amount of experience the people who will be handling your specific project have and the project manager's communication skills.
  • Appoint an in-house project manager (or serve as your own, if you have the expertise) to liaise with the vendor. Ideally, your project manager should be tech-savvy, able to differentiate between reasons and excuses, translate "tech-speak" into plain language and be committed to making the outsourced project a success.
  • Every detail of the relationship should be in the contract. This includes, but is not limited to, ownership of the completed code, cost structure: time and materials versus fixed costs, and to ensure that core developer team members are dedicated to your product and company vision.

In Conclusion

Done correctly, outsourcing software development can be an excellent way for venture capitalists and angel investors to maximize their ROI. It can provide substantial cash savings, while simultaneously allowing the business to refine its processes or increase its market share. However, it is important to take the time to choose the right vendor — and then stay involved in the partnership as projects are completed and the product evolves.

Since 2008, delaPlex Software has built a trusted reputation developing mobile, cloud, and commercial application software for “software-centric” companies that depend on continuous software development to drive revenue and growth. Contact us to find out if we might be the right development partner for your company.