Actors don't outsource their lines
Musicians don't outsource the creation of music
Entrepreneurs don't outsource the thing of value they bring to the world
Recently I was on a panel at Seattle Tech Days put on by the European Business Association (PSBJ captured some of my thoughts on the panel) where the question came up, "What's wrong with outsourcing for my startup?"
All businesses from young startups to mature conglomerates build unique relationships with their customers. These businesses create a unique value that is shared between the company and their customers. Sometimes that unique value is one of branding where customers will buy almost anything because of the brand. Other times that unique value is one of innovation where customers can't replace the innovation with any other because it truly offers a better experience or better productivity. There's loads of different unique things that can generate this unique value creation relationship between company and customer. It isn't the words in the actor's line, it's how the delivery of the line evokes a response from the audience. It isn't the lyric or note in the music, it's how the music is heard by the audience.
This unique value you create is sometimes called a product, a patent (ahem Mylan), a brand, timeliness, affordability... seriously the list is really long.
This is the part of your business that no one else can replicate, the part of your business that customers are willing to pay you for over and over again. This unique value you create in the world is the thing that you can't outsource. Why?
If the one thing your business brings to the world is created by another business, the other business has more pricing power than you.
All startups must go through customer discovery, where the idea or concept is balanced by the practicalities of how customers want to receive and pay for the idea or concept. This evolves as the number of customers grow to a point where the business is sustainable and this evolution can mean a lot of molding and re-molding of the concept until it finally adds value to enough customers for the business to no longer be a startup.
Getting through this stage of the business requires investing time, capital, and labor. How the founding team allocates these three things determines the outcome.If the founding team has outsourced how labor is allocated to another business, they're only able to manage the allocation of time and capital.
- If the outsourcing business needs to increase cash flow, the founders have to pay more capital.
- If the outsourcing business takes on a big new project for a more interesting customer, the founders pay more time.
- If the outsourcing business stops being in business, the founders have to pay both time and capital to find new labor and teach them how to create the company's one unique thing.
Value creation is a two party exercise, I have something that you desire enough to pay me for. Adding a third party is awkward.
Along that customer discovery journey, many implicit and explicit conversations between customer and business are had. The customer asks for a feature to be different because it would be more valuable to them. The business can respond by making the change and including it for free or they can respond by exploring why the different feature would be more valuable. The latter option usually leads to a deeper understanding of their customer, a clearer picture of how the feature change could be made to perfection, and the opportunity to evolve the sales, marketing, and support conversations.
If you're having these deep conversations with your customer and then relaying the 'feature change' message, the people making those changes never have the benefit of asking the right questions to make the feature changes perfect, instead guessing at what would be best for a customer they've never met. The founding team may have a deeper understanding of their customer, but the people creating the only thing of value in the business are none the wiser.
There are a lot of risks associated with outsourcing the one thing your business brings to the world. Risks that decrease the chances of success in a world where the chances of success are already stacked against you.
If you can't outsource the creation of the one thing that makes your business special, how can you reduce the cost of building that one special thing?
Two options come to mind; outsourcing everything else and strategic locationing.
Outsourcing everything else is the most common. If you're a branding company you may outsource the creation of your website or mobile app, if you're a technology company you may outsource Accounting or cloud infrastructure, or if you're a cpg company you may outsource the distribution network. Outsourcing the things you're not an expert at allows founding teams to allocate more time and labor to creating the one valuable thing without losing control on the capital allocation to all of the other things associated with the business.
Strategic locationing is a little less common, but certainly growing in popularity. It usually involves a cost of living arbitrage where you sell your one unique thing in the world to customers in a location where they'll pay the highest amount or adopt earlier (to get your business moving faster) and build that one thing you're selling in a location that has the lowest cost. You sell your product to tech companies in the bay area because there are more early adopters and have your development team located in Victoria, BC or Eastern Europe because the engineers are bright and the cost of living is lower.
Both of these options can lower the cost of building a business without increasing the risks that lead to failure. If you're interested in exploring locating in BC or Eastern Europe happy to connect you with some folks I've met along the way who can help.