A Changing of The Guard: Why Startups Outsourcing Has Risen in 2022

Transaction costs.

These two words ended up defining an entire generation of corporate executives, and winning British economist Ronald Coase a Nobel prize. His famous article, The Nature of the Firm, established that transactional costs were the defining key feature when delimiting a company’s bounds. Engaging in activities that escaped a company’s bounds would simply accrue higher costs and end up damaging the organization.

For men like Coase, the cost of monitoring, dispute resolution, and oversight management outweighed any potential benefits that external activities might offer. Internal ones, on the other hand, offered the great benefit of increasing staffing and overall strength for the company. Many startups from earlier eras navigated the corporate world on this logic, focusing on increasing their size through vertical and horizontal integration, avoiding the pitfall of external help.

Needless to say, this perspective’s changed over the course of the years.?

Many different events have occurred since 1937 that have challenged the notion of staying within corporate boundaries. While I’m not aiming to go over each of them, I believe recent economic upheavals provide a good example. Living conditions around the world have worsened over the last two years, giving IT services vendors incredible business opportunities. Cloud technologies, remote work, it’s evident that the tech market has proved itself to be up to the task of dealing with economic turmoil in the post pandemic world.

But that doesn’t answer the question: why should we, as company executives, aim to change our perspective on internal activities? Well, one of the key consequences of this tech boom is that the available talent pool for software devs has been steadily drying up. Hybrid workplace practices have shown that many workers have access for better opportunities, and bigger players take advantage of that, leaving startups in the dust.

Imperfect Aims

One aspect that has challenged Coase’s theory in the last 85 years refers to internal strife. In my experience, managers with the wrong incentives within your own organization end up creating larger problems in the long term. Mismanagement practices end up outweighing whatever costs external activities might have had.?

Additionally, costs for relying on external help have fallen in recent decades. This same tech boom that we’ve experienced over the last two years is proof of that. Globalization, the increasing hold that technology has in our lives - these factors end up creating incentives for a more interconnected business environment. But in the end, it’s the talent pool that ends up becoming the defining factor.?

Bigger companies equate lower talent pools for the smaller ones: tech giants end up becoming small cities, entire communities unto themselves. Paradoxically, these same companies’ size also creates a lack of satisfaction for the workers themselves, with reports of many developers feeling adrift in such a large and impersonal environment.?

Which is why outsourcing began to rise in the first place. Despite numerous setbacks over this past year, companies are still dependent on outsourcing their work to the likes of Latin America and India. Despite numerous reasons being a factor, it is undeniable that external actors offer less risk than simply trying to bloat the internal workforce.

Laser-Guided Focus

There are many reasons why companies opt for outsourcing: the access to rare skills and experience in the talent wars, the opportunity for scaling or downscaling your own teams, and the obvious time and cost reduction, of course. As I mentioned in my previous article, however, investing in a strategy just because the benefits sound attractive is not enough.?

I’ve dealt with many types of clients for over 17 years, but the most successful ventures I’ve had refer to clients who are in it for the long term. This is not only beneficial to us, but also beneficial to the market at large: if outsourcing practices work as intended, it demonstrates we’re all investing in a sound model. This, however, leaves the question of just what the proper outsourcing strategy looks like.?

In my experience, it’s the organizations with defined goals that end up making the difference. Sound business models, plans for scalable apps, and long term vision are some of the factors, of course, but this also applies to their outsourcing strategy. Companies who try to outsource their entire workforce - whether big or small - are rarely effective. Organizations that define which specific activities are the ones that need outsourcing and why they need to do so, on the other hand, end up taking the flag position.?

Just like P&G has outsourced its advertising copy activities for the longest time, our most successful clients have outsourced specific activities. From creation of web portals to information collection, these companies had successful business models, with scalability options in mind, simply focusing on specific tasks that might bring them a competitive advantage in the long run.?

Long Term Goals

The main objective for every company should be, in the end, to ensure that each of these resources have been placed accordingly in order to maximize profits. Sound strategies, and job placements that increase competitive advantage are an excellent place to start. If this means having a more aggressive outlook when seeking partnerships and outsourcing opportunities, then so be it.

Many companies, of course, face the additional challenge of determining exactly where to look for those opportunities. While India has been a long-standing favorite (with good reason), many companies also look for Latin American counterparts due to their similar time zones and closer cultural compatibility options.?

Teravision as a company has been in the market for over 19 years and counting. If you ever want to find out more about what we do, or are in a position where you think you might need assessment of your current staffing problems, contact me. We’ll see how you can allocate your resources more efficiently and gain that competitive advantage - no matter the size of your company.?