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By Gaurav Bhasin
Engineering talent exists everywhere in the world, not just Silicon Valley, and I have worked with several global companies including some based in Silicon Valley that have successfully built and sold products leveraging an outsourced software development team.
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I also expect the use of outsourced software development teams to grow with the rise of remote work due to the pandemic and companies rethinking the traditional work model of being in the same physical location.
Below, I discuss some implications for entrepreneurs to consider when using an outsourced software development team.
There are clear benefits in utilizing outsourced development teams such as:
Hiring software professionals in cities like Austin, New York, San Francisco, etc. can be expensive and tough to retain given their options from other employers who are competing for the same talent.
Companies can leverage talented software professionals in geographies where costs are lower and skill sets are equivalent. The cost savings here can be used to grow in a capital-efficient manner. I have worked with several clients who have successfully used an outsourced software team and exited to Fortune 100 buyers and Private Equity firms.
A recent buyer of one of our clients noted the costs of hiring one local software developer was equivalent to having five-plus developers of similar skill set in our client’s outsourced software development team which made the transaction attractive.
With software teams in different time zones, work can be done around the clock, allowing for acceleration in product development.
Companies can build a highly competent, low-cost engineering team that can work on “following the sun” on an agile, rapid turnaround schedule.
Companies should take care to develop the tools (Slack, Jira, Collaboration, and video-conferencing software etc.) and procedures needed to stay aligned given the geographic, linguistic and time zone dispersion.
Some areas of software development are core to the business; these aspects can be done at the headquarters while lower-end tasks can be outsourced providing operational leverage.
Keeping your future financing or exit in mind is key when using outsourced software development.
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Transfer of outsourced software development personnel upon change of control: Often it is easier to go via a third-party agency for hiring personnel vs. setting up a captive team in another country. Upon change of control due to a financing or exit event, the investor or buyer will likely want the company to have a direct relationship as an employer or contractor vs. working with a third-party agency.
Tip No. 1: Care should be taken to ensure that the outsourced software development personnel can contractually be transferred to the company from the third-party agency.
Ownership of IP: Buyers want to ensure the companies they acquire own their IP completely.
Tip No. 2: It is important to ensure the outsourced software development professionals involved in creating IP sign an assignment of inventions agreement else this will cause a transaction to crater.
Geographic preference of buyers and investors: Our firm was involved in a situation where a well-known buyer wanted to acquire a client of ours. However, the location of the majority of the outsourced software development teams caused the buyers to pause, given their focus on keeping their workforce in certain geographies only.
Luckily, we were able to get another buyer interested who preferred the location given it had substantial presence in the region. In addition, investors–depending on their fund strategy–invest in companies incorporated in certain geographies, and may be generally OK if some of the outsourced software development is done correctly with some of the considerations noted.
Tip No. 3: We would also suggest avoiding having outsourced development teams in multiple geographies and focus on a particular location where there is a pool of software talent to source from. This is the practical approach for most companies unless they are large.
Developing Culture: An organic team tends to enjoy companywide social activities that create a company culture or “DNA.” This is often not the case with outsourced development teams who are usually left out, which may impact their potential transition into the company upon exit.
Tip No. 4: Consider including the outsourced development teams in as many team-building events (virtual or in person) and sharing successes and milestones to give them a sense of ownership and belonging. This will go a long way in building rapport and higher quality engagement, and help in transitioning the outsourced development team to the buyer upon exit.
Depending on the type of company buyers are looking to acquire, outsourced software development teams may have an impact on valuation.
If a company is being acquired for a premium revenue multiple as they are further along their growth journey, buyers might be less concerned with outsourced engineering teams. However, if a company is being acquired for its engineering talent and technology (ex. Google’s purchase of artificial intelligence start-up DeepMind for more than $500 million, with high-quality engineering talent being a primary deal driver), outsourcing the majority of the engineering team can impact valuation and bring additional scrutiny by buyers.
Outsourced software development can be beneficial to companies if done correctly. It is important to keep risks in mind which can impact a financing or exit.
Gaurav Bhasin is managing director with Allied Advisers, a global technology-focused boutique advisory firm focused on investment banking for entrepreneurs and investors. The Silicon Valley-based firm, with a presence in Los Angeles, Israel and India, serves entrepreneurs and investors of technology growth companies on strategic advisory including M&A and capital raises.
Illustration: Dom Guzman
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