Is Outsourcing Product Development by Startups a right Strategy?

March 31, 2016 11:12 am | Updated 6 months ago.

By Arup Gupta

The most critical asset of any startup is its IP and usually it is captured in the product or the platform. It, therefore, makes sense to have an in-house team develop the product rather than outsource the product development. At the same time, it is difficult for startups to attract top talents and also it becomes expensive to hire good developers in the initial stages of the startups when they have not had any significant funding. Not having high quality developers, however, may result in poor quality of code which can have long and lingering effect going forward. Also, if the development is outsourced to a good and reliable company, then it not only gives a reasonable assurance of good quality code, but may also result in some new ideas coming from the company that is developing the code.

What then does a startup do?

If the startup has the ability to attract top talent, either by the strength of the concept or by the connection of its promoters and if it has adequate seed money to fund the development, then clearly the decision should be to do in-house development.

If in-house development is not feasible, then a lot of effort and thought needs to be put in to select the right company to do the product development. The criteria that need to be considered are the usual parameters like reliability and integrity, competency, management commitment, reasonable pricing etc. In certain cases, depending on the relationship, even equity partnership with the development partner may be considered as this will give the right incentive to the development partner.

Having looked at some of the basic factors indicated above to decide whether or not to outsource  the product development, let us now look at some of the other factors that may not be as critical but will surely have long term implications from the management’ decision in this regard.

  1. Geographic location: Once a startup decides to develop the product in-house and has recruited a team of good developers, it then becomes extremely difficult to move the location of the company, if the startup needs to do so for reasons like change in location of the promoters or to avail of benefits from some newly introduced government policies etc. The startups will, however, be relatively immune to such restrictions if the product development is outsourced.
  2. Phased development: In many cases it becomes necessary to develop the product in multiple phases with some time gap between the developments of phases. With an in-house development team the ramp-up and ramp-down of the development team becomes the responsibility of the management, whereas if the development is outsourced then the vendor will be expected to manage this. The reasons for such phased developments with intermediate time gaps could be due to:
    • Need to test the market acceptability of the phases developed prior to developing the next phases.
    • Need to test the suitability of the technology used in the initial phases prior to developing the subsequent phases.
    • Need to generate revenue from the phases developed to fund the development of the subsequent phases.

It is, therefore recommended that the management team of any startup consider these and any other factors that may be specific to their needs prior to deciding whether or not to outsource product development and if the development needs to be outsourced then to what extent.