Non-technology founders will, quite early on, realise that in order to have a technology business, you need someone to build your technology project. In most case this involves commissioning someone to write some software for you, and through some process – which to be honest is weirdly opaque to me, I don’t actually know how this idea arrives at founders’ ears and worms into their brains – you’ll probably end up hearing that you need to outsource that software development job to a software agency.
Now there isn’t anything wrong with outsourcing, but by default founders appear to be told that you should give this work to an agency that is based overseas. When a software project is outsources to an overseas business, this is known as “offshoring”.
There’s nothing strictly speaking wrong with this either, but there are masses of hidden details underneath the surface that you really need to understand when making decisions about outsourcing or offshoring. Over the next couple of minutes, I’m going to give you some highlights.
Outsourcing tends to default to offshoring because you will be told that offshoring is substantially cheaper. I’m trying to decide whether to say that this is a lie or not… it’s certainly not strictly speaking true.
There are three “strata” of agencies that you can outsource to, and they align to socioeconomic/geographic boundaries for the simple reason that building software requires a human to sit in front of a computer and type in code, and the wages you need to pay that human are themselves stratified. A software developer in London earns substantially more per year and someone with the same skills and experience in Mumbai, and this isn’t so much “baked into the price” as it “sets the price”.
You can either outsource to a Western country – so the UK, US, and other “Five Eyes” countries, plsu Western Europe. Or you can outsource to countries in Asia (India is the classic example here), or South America, or Africa. Or you can outsource to countries that sit in the middle – the most developed market of which is Eastern Europe (Poland being the classic example here).
Keeping the numbers rough, you will pay £80/hour for the UK and similar countries, £50/hour for Poland and similar countries, and £20/hour for India and similar countries.
The danger is that most founders stop there and whilst those headline figures are true (to within boundaries of accuracy suitable for illustration), so much detail is missed in those headline numbers.
By far the biggest difference is that outsourcing agencies in Western countries operate on a CONSULTATIVE basis, whereas non-Western outsourcing agencies work on a STAFFING basis.
The analogy that I would use here is that using an agency in, for example, the UK is like if you wanted your house refurbished, you might go to an interior designer who will visit the premises, learn about what you needed, learn about what you like, and design for you the perfect bespoke interior, and then implement that design by sourcing and installing the furniture and sourcing and managing the contractors. That is a CONSULTATIVE process.
The alternative is if you go to IKEA and, whilst the product is good, the objective is “pile ‘em high, sell ‘em cheap”. So you will get a result, but no one is going to hold your hand through that work and the result you may get will be what you asked for – but the result may be crap because you don’t know things that an interior design consultant does.
So that difference in a UK agency costing £80/hour compared to an agency in Poland or similar costing you £50/hour is that you are paying £30/hour for consultancy.
As a founder, you are operating in full on EXPERIMENTATION mode. When you start to build your product, you do not know what product you ultimately will end up with. That is what starting a business is – the core process of finding product-market fit is trial and error around what your product does as you learn more and more about what your market needs. That means a consultative approach – even though you will pay more – is safer. You will manage out a lot of risk.
A STAFFING based outsourcer that operates on a non-consultative basis will just build you whatever you ask for, even though you cannot realistically know what you want at the outset.
This is why so many founders lose all their money when outsourcing their first MVP. The outsourcer will diligently sit there and build you a chocolate fireguard or a glass hammer if you pay them to do so.
Realistically there are a lot of agencies in the UK that offer a hybrid model, where they can provide the consultancy that comes with a slightly higher spend, but a lot of the development work is done through an offshore partner. That might be a decent middle ground.
As for whether if you just want a STAFFING partner you choose one in Asia or in Eastern Europe, sadly that’s the subject or another video… (But if you don’t have time to go and find that one, you should prefer to pay more and “nearshore” your solution in Eastern Europe.)