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To Outsource Or Not to Outsource?

Updated: Apr 19

Should you outsource functionalities or keep them all in-house? This question has bee highly debated for as long as the startup world can remember. An even better phrasing of this question would be … as you start and grow your business, what functions do you do internally (i.e., build a team for) and what functions do you outsource? The answer to this question will depend on what the high-priority items of the startup are and what strengths the founder can most lean into. In short: it depends. 


Having founded three companies myself and worked with about 120 other startups to date, I know firsthand how founders suffer from decision fatigue. So, for all you founders out there, I am writing this article to make your life a bit easier. Before you begin reading, let me warn you: this article will not provide you with the answers (as we determined earlier, the answer is subjectable), but it will serve to help you ask the right questions.  I should also note that my background is (almost) entirely in B2B technology companies. So, while the fundamental principles should translate to consumer technologies, I will likely inadvertently use the context of B2B businesses in my analyses.


To start, let’s look at the top three pros and cons of outsourcing functionalities vs performing functionalities in-house: 


Do Internally

Outsource

Top 3 Pros

  1. High agility: you can make changes to processes very rapidly.

  2. Greater ownership: your team will often make improvements to their processes, or other processes within the org.

  3. Development of organizational culture: as you build your team, they develop their unique dynamic, intuitions, and knowledge base. These are hard to document and even harder to quantify. But I have seen them work wonders for a growing business. 

  1. Much more efficient in startup costs and timeline: you can often get started instantly and benefit from the economies of scale of a service provider (or freelancer that has “done this before”).

  2. Much better suited for sporadic needs: an example are, “projects” that are required only once in the lifetime of a business or once per business cycle.

  3. This option is only a feasible option for low-volume functions.

Top 3 Cons

  1. High startup costs, both in money and time.

  2. Inefficient for sporadic needs (and in a startup, most there are a lot of functions with sporadic needs): Teams don’t perform well when they are hired for a “project” that they know will last only a few weeks or months.

  3. Not feasible for low work volumes: as a general rule of thumb, it is best to hire employees only for functions that require at least the full-time engagement of two individuals. Hiring a single individual to work on multiple functions is quite inefficient.

  1. Little to no agility: outsourcing providers work on contracts based on somewhat well-defined functions.

  2. Stunted ownership: contractors/agencies have limited incentive to help improve business processes.

  3. Does not contribute to the development of organizational culture (at all)

I chose to present my views above in a table for a reason; you will notice that the two modes of executing your various business functions have almost no overlap. You outsource things that: (1) don’t require much agility, (2) are required only sporadically, and/or (3) are required only in low volumes. You do things internally when (1) a function requires agility, (2) is needed regularly, and/or (3) requires ownership (such that the team contributes to continual improvement of processes).


Insourcing vs. Outsourcing By Job Function

Now that we have somewhat established a conceptual framework to figure out what you need to outsource vs what you should be building a team for, let’s use this to evaluate a few common business functions.


Executive Leadership

In a startup, the acronym CEO is better interpreted as “Chief Everything Obsessor.” As a Founder/CXO, you need to be obsessed with your business. Nothing short of this will do. You need to be agile, take ownership, and build a culture as the leadership team. Executive leadership CANNOT be outsourced.


I should make a side note here; the terms fractional CXO or fCXO are becoming more common each day. I feel like this is somewhat of a misnomer. A fractional CXO is an advisor/consultant, they can be very valuable because they bring a wealth of knowledge and experience to an otherwise inexperienced executive leadership. But, they are not a part of the executive leadership itself.


Marketing

For most startups, marketing consists of two components: (1) creating content for awareness and consideration, and (2) delivering such content to its intended audience.


Content creation is typically low-volume work and doesn’t require much ownership as it doesn’t have much bearing on other business processes and can be done sporadically. Thus, it can be easily outsourced. This is why most founders outsource this to marketing agencies and a thriving ecosystem of digital marketing agencies and freelancers exists.


Content delivery, on the other hand, requires agility and ownership, at least in the early days. You have to come up with various ideas on how to deliver the messaging and continuously monitor them to figure out which ones are working and why. While agencies and consultants are great at advising and executing on certain routine tasks, in my experience it is best to build an internal team for this function.


Lead Generation and Qualification

The next logical step in business is lead generation. This is likely the most foundational element of your startup - it helps you determine who your customer is, why they are your customer, and what they like about you. It requires utmost ownership and agility. This would be at the top of my DO NOT OUTSOURCE list.


Sales

Sales is your first “physical” contact with the customer. First impressions count. Further, there is a lot of learning to be had from these interactions. And this learning shapes the most valuable form of organizational culture and knowledge you can build; it is the very foundation on which the rest of the company is built. Thus, my approach has always been to build this team internally.


In all three of my startups, I have been pitched to by sales outsourcing agencies. Their value proposition is simple, “You build your tech, we will sell it for you.” Somehow, this never appealed to me, I build my tech in response to what my customers want, not the other way round. So, I never relied on a sales outsourcing agency.


I should make a note here: when I speak about outsourcing sales, I am speaking of sales agencies and not distributors. In certain businesses, distributors are very effective, and often the only feasible path to market.


Product Development

I could write an entire Ph.D. thesis on this one, but I will keep it brief. There is already a great article on this topic here, which surmises that unless a product relies on very unique technology, its development can be outsourced. Let’s extend this to ask the question, “Should you do it?”


Product development comprises two complementary functions: product management, (the function to determine what a product must do so that customers will buy it) and engineering (the act of making a product that does so).


Product management is a continuous process and requires considerable ownership that can improve several lateral processes (e.g., sales and marketing) and is key to organizational culture. It is difficult to outsource. Engineering, on the other hand, is sporadic, and follows a specified scope. It is very expensive to have an in-house team for sporadic needs. So, it is typically best outsourced. 


An important caveat here: as you grow, you will likely need an inhouse engineering team for operations, maintenance or customer support. This function is very difficult to outsource.


Finance

Finance typically comprises three functions: (1) financial planning and strategy, (2) day-to-day accounting, payroll and book-keeping, and (3) reporting, audit, and tax filing.

Financial planning is a tricky one. Every company I have ever run had a somewhat sophisticated financial model behind it so I could predict cash-flow, set targets and run scenarios. My co-founders often thought that was overkill, but I suppose that is a consequence of having an Engineering Ph.D. run a company. I need a certain degree of precision in my models. 


My take on this function, however, is quite simple. If your financial strategy function is core to your business (e.g., for high value raises and IPO on the horizon), it is best to have a CFO as a part of executive leadership. If not, I would suggest to still keep the process internal, but under the supervision of a seasoned “fractional” CFO or consultant.


In regards to the other two roles finance can play - day-to-day accounting and reporting -  in a startup phase, it is almost always best to outsource these. There are well-oiled accounting and bookkeeping firms as well as freelancers that will do this for you at a fraction of what it would cost for you to have a team that runs payroll, receivables, payables, and tax filing. At some point in your growth, it may become more cost-effective to have an internal team, but that is typically large company territory.


So… what does this all mean?

If you are in the stage of planning a business, now would be the best time to write down the various functions you will need to operate it. Then, ask yourself and your co-founders the question 


  • Does this function require ownership? 

  • Does this function require considerable agility? 

  • Is this important to organizational culture building.


If answers to at least one of these are yes, then I suggest you not outsource that function. In the early days, it is best that someone from the founding team take over that function. If they don’t have the skills, then hire a consultant/advisor.

If the answers to these are all no, then ask yourself:


  • Is it very expensive or risky to do in-house?

  • Is this function sporadic?

  • Does this function require low volume effort?


If the answer to either of these are yes, then your best bet is to outsource.


At FYELABS, I have built an entire business model around the sporadic but high intensity needs of complex product development. This stemmed from my sufferings of the high cost and uncertainties in developing complex products in my previous two startups. So far, we have served 120 happy customers. If you want to see how this works, please pay us a visit: www.fyelabs.com.

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