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.
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.
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.
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.
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.
