Strategic considerations when outsourcing your software development – Crunchbase News
Through Gaurav Bhasin
Engineering talent exists all over the world, not just in Silicon Valley, and I have worked with several global companies, including some based in Silicon Valley, that have successfully created and sold products by leveraging an outsourced software development team.
Subscribe to Daily crunchbase
I also expect the use of outsourced software development teams to increase with the increase in remote working due to the pandemic and companies rethinking the traditional working model of being in one physical location. .
Below, I discuss some implications entrepreneurs should consider when using an outsourced software development team.
There are obvious advantages to using outsourced development teams such as:
Capital efficient model
Hire software professionals in cities like Austin, New York, San Francisco, etc. can be expensive and difficult to retain given their options with other employers competing for the same talent.
Businesses can take advantage of talented software professionals in geographies where costs are lower and skills are matched. The cost savings here can be used to grow capital efficiently. I have worked with several clients who have successfully used a team of outsourced software and have grown to Fortune 100 buyers and private equity firms.
A recent buyer from one of our clients noted that the costs of hiring a local software developer were equivalent to having more than five developers with similar skills on our client’s outsourced software development team, which resulted in made the transaction attractive.
Sun tracking model
With software teams spread across different time zones, work can be done around the clock, helping speed up product development.
Businesses can build a highly skilled, low-cost engineering team that can work “following the sun” on an agile and swift execution schedule.
Companies must ensure that they develop the tools (Soft, Jira, collaboration software, videoconferencing, etc.) and the procedures necessary to remain aligned given the geographical, linguistic and time zone dispersion.
Focus on the core competency
Certain areas of software development are at the heart of the business; these aspects can be carried out at headquarters while low-end tasks can be outsourced, thus providing operational leverage.
It is essential to keep your future funding or exit in mind when using outsourced software development.
Four main considerations:
Transfer of outsourced software development personnel during a change of control: It is often easier to go through a third-party agency to hire staff than to set up a captive team in another country. In the event of a 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 entrepreneur rather than working with a company. third-party agency.
Tip # 1: Make sure that outsourced software development staff can be contractually transferred to the company from the third-party agency.
Intellectual property ownership: Buyers want to ensure that the companies they acquire fully own their intellectual property.
Tip # 2: It is important to make sure that the outsourced software development professionals involved in the creation of the intellectual property sign an invention assignment agreement, otherwise it will crater the deal.
Geographic preference of buyers and investors: Our firm was involved in a situation where a well-known buyer wanted to acquire one of our clients. However, the location of the majority of the outsourced software development teams caused buyers to pause as they focused on keeping their workforce in certain geographies only.
Fortunately, we were able to interest another buyer who preferred the location given that he was very present in the region. Additionally, investors, depending on their fund strategy, invest in companies incorporated in certain geographies and can generally be okay with whether some of the outsourced software development is done properly with some of the considerations noted.
Tip # 3: We also suggest avoiding having outsourced development teams in multiple geographies and focusing on a particular location where there is a pool of software talent from which to source. This is the practical approach for most businesses, unless they are large.
Develop culture: An organic team tends to enjoy company-wide social activities that create a company culture or ‘DNA’. This is often not the case with outsourced development teams who are typically left out, which can impact their potential transition into the business upon exit.
Tip # 4: Consider including outsourced development teams in as many team building events (virtual or face-to-face) and sharing successes and milestones to give them a sense of ownership and belonging. This will go a long way in building better relationships and engagement, and will aid in the transition from the outsourced development team to the buyer at the exit.
Depending on the type of business buyers are looking to acquire, outsourced software development teams can impact valuation.
If a business is acquired for a higher revenue multiple while further along on its growth journey, buyers might be less concerned about outsourced engineering teams. However, if a company is acquired for its engineering talents and technology (ex. Googlepurchase of an artificial intelligence start-up DeepMind for over $ 500 million, with high-quality engineering talent being the main driver of the deal), outsourcing the majority of the engineering team can impact the assessment and bring scrutiny extra from buyers.
Outsourced software development can be beneficial to businesses if done correctly. It is important to keep in mind the risks that can impact a fundraising or an exit.
Gaurav Bhasin is Managing Director of Allied advisers, a global technology-driven, investment banking-focused advisory firm for entrepreneurs and investors. The Silicon Valley-based company with operations in Los Angeles, Israel and India provides entrepreneurs and investors in technology growth companies with strategic advice, including mergers and acquisitions and capital increases.
Drawing: Dom guzman
Keep up to date with the latest rounds of fundraising, acquisitions and more with Crunchbase Daily.