5 pitfalls of outsourcing innovation and how to avoid them – for start-ups, scale-ups and grown up businesses

 In Articles, Business, Case Study

Whether it’s software development or any physical product or service that your organisation is not capable of developing in-house, being able to professionally outsource has always been mission critical for any business, although it is often not well executed in many cases.

About the author

Tom Hughes has over 20 years international business experience at “both sides” of the sourcing table. He has spent the first half of his career in various Purchasing roles from Suppler Development Engineer in the automotive sector to Sourcing Director of a $600m division at Alstom, with hands on experience of purchasing everything from mechanical components through to large enterprise level software systems. Whilst in the last 10 years, Tom has been Commercial Director at a $200m business and is currently CEO of Clicks Help and the software development company 3rd Digital. During that time, he has served a customer base ranging from start-ups through to large multi-national organisations.

It’s not rocket science, so why is it consistently done so badly?

It never ceases to amaze me how poorly most businesses approach outsourcing business critical functions. One could almost expect it in the start up world due to lack of resources but often the same failings are found in larger, more mature companies. From many years of experience, I have found that there are some really common pitfalls that are quite simple to avoid and most of the time with very little incremental expense. One thing we all know, is that the costs of getting these things wrong can be catastrophic for any business.

Pitfall 1 : having nobody on your team who REALLY knows about what you are buying

The worst case that I have seen was a start-up where the two founders came from non technical backgrounds. They were actually quite boastful that they did not have a clue about software development. Not only did they not even have a Tech Advisor, they became friends with their software developer and trusted the people that they were writing cheques to, to be their objective tech resource. Unsurprisingly, they ended up paying 3 times what they should have and wasted much of their valuable seed capital. Not good but Stockholm Syndrome is quite common in Customer Supplier relationships!

This is quite an extreme case because most organisations have SOMEBODY on their team who knows about the thing that they are trying to buy. However, that is not enough.

A common pitfall for start-ups is getting a friend or former colleague who is Head of X, at Big Company Y to be their go to person for Software Development. It’s been years since they’ve touched code and generally they go with the flow on what the developer is proposing, as generally the “what” of the developer’s proposal is fine, it’s more about the “how” when the project is in execution phase. The “my mate” route is generally not too bad for evaluating quotations and proposals but falls over in the execution phase, as the mate often has a full-time job and isn’t able to stay properly involved and support when things go wrong. However, it’s still better than nothing.

For start-ups, the best thing here is to look for a Tech Advisor who can be an “Anchor Man”. Don’t expect him to be omniscient but ask him to be the knowledgeable guy who can pull in low cost or free of charge resource to support the outsourcing at different phases when it’s not his core set of expertise.

Pitfall 2 : having nobody on your team who REALLY KNOWS HOW TO BUY…

The ability to be a Good Buyer should not be confused with somebody who is a hard negotiator, although that trait can come in handy!

What you need is a team member who is aware of basic good purchasing practises, like having a consistent set of specifications (more on this later) that can be used to benchmark quotations from multiple different providers on a competitive basis.

Then, when you want to proceed with a nominated supplier, someone who knows about appropriate contractual frameworks that can be used to avoid some of the further pitfalls!

Pitfall 3 : Intellectual Property Ownership

Avoiding pitfalls 1 & 2, will probably help with this one, but again I’m amazed how badly that this one gets dealt with by companies small and large.

In one of my previous roles, when I was commercially responsible supplying to a large automotive Tier 1 supplier, I was amazed during the contractual negotiations that the Buyer let me get away with getting a clause built into the contract stating that all the IP related to our component was the sole property of my company and had to be treated as confidential. Years later, a new buyer tried to beat me up with much lower prices from competitors. I reacted by threatening him legally for sharing our IP with competitors, as how else could he have got a quotation? That nipped that one in the bud… but school boy stuff from the previous buyer, their company was well and truly locked in.

Recently, at 3rd Digital, we came across a prospective client who had a sole developer build a bespoke Enterprise System that their business relied upon to operate. They had a fall out with the developer and when they asked for the source code were met with the response that they had only paid for his time and that the source code did not belong to them. So even though they had parted with tens of thousands of pounds, they owned nothing.

This pitfall is a lot more common than you might think.

Even if your innovation is in-house, if your team’s employment contracts do not cover IP assignment, you may be in a grey area. Check it out. In all cases, do what is contractually possible to ensure that your IP stays where it belongs.

Pitfall 4 : Poor Specifications for what you are buying

Bad specifications can be extremely painful for suppliers, but in my experience more so for the people doing the buying. It’s much easier to deny something is included in a poor specification than it is to argue that is included, so the exposure is more for the customer than the supplier. Typically, the supplier has more experience of these specific types of specification than the buying organisation so they already have an advantage of sorts.

Poor specifications damage outsourcing at all phases. For example, at the getting quotations / supplier selection phase, poor specifications lead to inconsistent quotations because suppliers are pressed into making assumptions that are often inconsistent, leading to prices that aren’t able to be compared on an “apple to apple basis”. This can then lead to erroneous supplier selection. A recent example that I witnessed was a start-up buying their first scaled up quantity of plastic injection moulded parts. They needed to buy production tooling and had some quotes from different suppliers, with big price variation. They hadn’t specified the number of shots that the tooling was expected to produce, so one supplier quoted one million and another 5. This hardly helps to make a consistent comparison.

More damaging though is when poor specifications lead to project over run. I have witnessed an SAP implementation (that I thankfully didn’t set up!) with a £2m budget go to £6m because the original Statement of Requirements was not built around functional deliverables, essentially giving the Supplier a blank cheque of daily rates until the buying company told them to leave.

I encountered a similar culture of buying enterprise software in a subsequent company that I worked for and there we took the approach of employing a 3rd party consultant to write the functional Statement of Requirements with the clear statement that they are not going to be asked to quote for it. This is an additional cost element, but I reckon well worth it. Then we went out to competitive quote on that basis on a fixed price. Furthermore, because the SOR was so well written, we avoided the supplier blank cheque thinking and got our implementations consistently on time and to budget.

It’s not that complicated.

Pitfall 5 : giving away equity in return for a Technical Guy

One that I haven’t had personal experience of (at least in a business sense!) thank God but again it can be close to an organisation killer when it’s not well done.

A fairly standard route for a start-up is for a founder and a co-founder to get together, maybe add one or two guys to the team and then getting going. In a way, it’s a bit like getting married! However, what happens when there are “musical differences”?

We have seen a Tech Guy hold more than 20% of a company and then find something better to do. This can really cause some serious pain to the rest of the team, as they are trying to move things forward with an unresponsive tech resource. Extricating your organisation from that mess can be expensive, time consuming and a massive distraction.

Meanwhile, another friend of mine had the entire founding team including himself on a vested equity approach where they all earned their equity month by month, over a 3 year period and when his Tech Guy was proven to be a charlatan and got the sack, it really minimised the damage caused.

I’d recommend the latter approach in all start up cases unless there is a significant one time investment by the Tech Guy such as the initial product build that justifies his equity get vested from a higher base.

All of pitfall 5 could be looked at as a form of “Supplier lock-in” which should be avoided at all costs. However, if 1 – 4 are dealt with adequately, that can really help but I think I might leave lock-in for a blog all of it’s own…

To conclude

My focus these days is on growing our unique software development business at 3rd Digital by serving as many high quality customers as we can at all stages of their growth journey. We are delivering reliable products that they fully own, on time and at super competitive rates, aiming for best in class customer service with their products being maintained and developed by us. Our clients pay for the software development but the rest of the advice and support is free and we really enjoy helping them with it.

As well as 3rd Digital, we are working hard at further validating our own product start-up, Clicks Help.

It’s a very exciting time.

Hopefully you found this blog useful, if not entertaining, please drop me a line if you’d like a chat.

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