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Many startups are starting to outsource jobs overseas. But will offshoring help or hurt your business?
Fieldglass, a multimillion-dollar software solutions company, built an offshore outsourcing component right into its 30-page business plan that landed on investors’ desks when the company was first starting nearly five years ago. Four months after opening its doors, the Chicago-based firm began outsourcing parts of its software development to an outfit in Mumbai, India.
“Today’s savvy investors expect a technology CEO to have built an offshore outsourcing model into [his or her] business plan,” says Fieldglass co-founder and CEO Jai Shekhawat, 42.
Based on the half-dozen business proposals that come across Synerzip CEO Hemant Elhence’s desk each month, “2 out of 5 founders are now very interested in outsourcing software development offshore from Day One. Ten years ago, no startup ever thought about doing development offshore,” says Elhence. The Dallas-based firm provides offshore software development services to early-stage companies that typically receive VC funds.
Offshore outsourcing, practically a staple for multinationals, is popping up more frequently in the business plans of startup companies. After all, a key factor in a product’s potential success–or a shareholder’s quick ROI–is how soon the product gets to market. And although a founding CEO is willing to toil 16 hours a day to get that baby off the ground, not every employee will follow suit in this era where work-life balance looms large. Outsourcing abroad appeals to startups and their financiers because it creates a near-24-hour workday–without the overtime.
A February 2005 USA Today study reports that nearly 40 percent of tech startups employ engineers, marketers and analysts in jobs created in India and other foreign nations, and many of them are doing so within the first weeks of the company’s existence.
So what does the uptick in startups offshoring mean for U.S. jobs?
It creates jobs at the senior management level, says Joyce L. Gioia, president of workplace consulting firm The Herman Group in Greensboro, North Carolina, and co-author of Impending Crisis: Too Many Jobs, Too Few People. “These startups are companies that might not exist if they couldn’t tap into the cheap labor force available abroad.”
A peripheral benefit of offshoring is that the initial reduced costs allow startups to dump more money into R&D, sales and marketing, or hiring a stellar management team earlier in the game than they could prior to the dotcom boom. “Being able to hire better management or put more funds into sales is a side benefit of spending less on another function,” Shekhawat says. “We did bring in as our second employee a head of sales who was previously a senior exec at a Fortune 500 firm–maybe we couldn’t have done that if the money [wasn’t] freed up.”
Offshore outsourcing might help a startup hit the ground running, but this tactic is adversely affecting U.S. jobs, says Dawn Teo, founder of Mesa, Arizona-based Rescue American Jobs, an American work-force mobilization nonprofit organization.
Teo cites a commonly quoted statistic that, historically, about 70 percent of new U.S. jobs are created by entrepreneurs. That figure may start to decline if startups continue to create jobs overseas, says Teo.
Forrester Research predicts that by the end of the year, 800,000 service jobs will be lost due to offshoring. The research firm also predicts 3.3 million jobs will be offshored by 2015.
For startups, it’s a gamble, says Teo. “I am seeing companies forced to outsource because investors are worried that the competition will get a leg up on them. But then they complain, ‘Who will buy our products when [consumers] don’t have jobs or are all working at Wal-Mart?’ It’s a Catch-22.”
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