Should You Outsource Your Startup’s Product Development?

Many successful startups like Slack, GitHub, and WhatsApp have outsourced their product development at some point in their lifetime. In these cases, outsourcing was done during the early stages of the startups. However, product development can be outsourced at virtually any stage, as there is always a need to iterate and improve your product to meet business goals and customer needs.

Outsourcing product development has a negative connotation in the startup world. Some people claim that a successful startup cannot be built with an outsourced product development team. However, at OAK’S LAB, we believe that outsourcing product development is not the determining factor in a startup's success or failure. Instead, it is the quality of people, their mindset, approach, and the level of autonomy the product development team is given that separates average startups from the best, regardless of whether the team is in-house or outsourced.

We believe in empowering product development teams with a mindset of creating outcomes over outputs, taking a discovery-based approach to validate feature ideas with customer insights, and having the authority to make decisions that serve both the customer and the business.

When product development is misaligned with business and customer needs, it is doomed to fail. In order to make building a startup’s product a success it is essential to focus on aligning product development with the business and customer. This alignment is far more important than whether the team members are on your employee payroll or not. At OAK’S LAB, alignment is our top priority.  

Outsourcing product development is not always necessary, and many startups choose to manage everything internally from the beginning. However, if you are considering outsourcing, this guide will provide an overview of the key factors to consider when making your decision.

Is outsourcing the right path for you and your startup?

The answer to this really boils down to two main questions:

1. Does your startup currently have someone in-house with the necessary skills and bandwidth to carry out the task(s) at hand (product management, branding, UI/UX design, software engineering, and quality assurance & control)?
2. If not, does it make sense to take on the financial and time commitment to bring the role in-house? 

Founders often underestimate the time, energy, and costs associated with making in-house hires. Moreover, at OAK’S LAB, we’ve seen many founders who are often woefully unaware of the potential risks when outsourcing. To help you answer this second question, and make the decision that is best for your startup, we’ve laid out the benefits and potential drawbacks of outsourcing.

Benefits of Outsourcing

• Expert people and know-how — You gain access to experienced and skilled professionals who have already done what you’re asking them to do multiple times before.
• Capped financial commitment — You can have a fixed budget that is in line with your runway and save on other costs that would arise if you had an in-house employee instead (e.g. salary, health insurance, benefits, hardware, and even office space).
• Speed of delivery — Since it isn’t the first time the outsourced team has worked together, they will be able to produce a high-quality output for you more efficiently than a newly formed in-house team that still needs time to create processes, improve their workflows, and get to know each other better.
• Less time spent on hiring and onboarding — You do not have to spend time recruiting new people to your business, allowing you to focus on growing other important areas of your business. For example, in Silicon Valley, it takes 990 hours to hire a 12-person tech team.
• Start ASAP — Since the outsourced partner already has their team fully staffed, you can usually kick off the project fairly quickly, rather than spending months to hire and onboard your own team. 
• Not giving away equity — You don’t have to give your outsourced team stock options and equity in your business, which is something that early in-house employees may expect.

Potential Drawbacks of Outsourcing

• Misalignment between product and business — If you’re lacking a role on the project to drive product and connect the development efforts with your business goals and customer needs, it is likely that the outsourced partner may build a product that is not aligned with achieving your immediate goals.
• Spikes in the budget — If the scope of work, expectations of output, and budget are not clearly defined from the start, there can be spikes in the budget due to more time spent on the project than planned.
• Sunk cost — If you don’t thoroughly vet the outsourced partner and their output is below industry standards, you end up investing a tremendous amount of additional capital, time, and energy to bring the output to your desired quality.
• Knowledge outside your startup — If you don’t document the know-how and don’t maintain all product knowledge in-house, you can develop subject matter experts on your business who are not direct employees in your company, which can lead to loss of information or heavy dependencies on your outsourced partner.
• No ownership — If you don’t set up an environment where you own all produced outputs and don’t have a proper contract that stipulates your ownership, you could lose control of the output your outsourced partner produces.
• Limited commitment and drive — If you don’t prioritize building strong interpersonal relationships with your outsourced partner, they may lose drive and commitment to your project as they may be working on multiple projects at once.

The Successful Outsourcing Path

When startups choose to outsource, the most common path that we’ve seen them take is to outsource the design and/or engineering of their Minimum Viable Product (MVP). Once the MVP is launched and gaining traction on the market, they bring in key in-house leadership hires to help steer the product in the right direction and add legitimacy to the business prior to raising a Series A investment round. Over time, startups then either transition the entire team in-house or continue to grow both their in-house and outsourced teams.

From our experience at OAK'S LAB, we recommend taking the following steps in order to forge a successful partnership with your outsourcing team.

1. Start with a clear vision and scope — Come prepared with materials that explain what you want to achieve, why you want to achieve it, and how you envision the final output. It doesn’t have to be perfect, but it will provide your outsourced team with a great starting point to evolve it and make it even better. 
2. Align on desired outcomes — Unite yourself and the outsourced team around the desired outcomes that you want to achieve and define how you will measure the success of the outputs that your outsourced team will produce for you.
3. Host an in-person kick-off — Hosting an in-person kick-off where you fly out to meet your team on-site can significantly influence the success of your relationship. In this meeting, you will have the possibility to clearly communicate what you aim to achieve, get to know your outsourced team, build relationships with each member, clear up any questions to avoid misalignment, and set the tone for collaboration on the right note straight out of the gate.
4. Set up a virtual office — As your outsourced team will not be in your office, it is crucial to try to emulate the in-house office experience as much as possible. Setting up appropriate communication systems (e.g. Slack), documentation tooling (e.g. Notion), file-sharing platforms (e.g. Google Drive), and utilizing a project management tool (e.g. Asana or JIRA) will give you real-time insight into your outsourced team’s workflows and access to all project information.
5. Create a fixed schedule and process — Adding more structure to the relationship through fixed meetings (e.g. daily standups, backlog refinement, sprint planning, and sprint demos and retrospectives) will empower you to ensure your outsourced team is on the right track.
6. Form a one-stakeholder relationship — It is vital to have one appointed main stakeholder on the outsourced team’s side and one main accountable stakeholder on your side of the business, this will allow for a streamlined decision-making process allowing for an effective working relationship.
7. Empower your team — The best product development teams do not blindly build features, but make decisions based on insights and keep development focused on achieving business goals. These teams are hard to find. However, once you find one, give them autonomy to challenge you and make decisions on their own, which will, in turn, increase their motivation and allow them to help you achieve better outcomes.
8. Allow for time spent on discovery — Create an environment where your outsourced team can spend time gathering quantitative and qualitative insights to enhance their understanding of your customer, product, and business which will enable them to make more informed decisions and build a better product.
9. Ensure everything is documented — You always need to count on moving the work in-house in the future, and this is why all output that is produced by your outsourced team needs to be thoroughly documented to allow for your new in-house team to smoothly pick up where the outsourced team left off.
10. Build friendships — You will end up working closely with your outsourced team for months and having a positive friendly relationship with all members can make the experience fun. Taking the time to get to know your team will get them more engaged, accountable, and productive. 
11. Motivate, praise, and reward — When your team does a good job, highlight their achievements. It feels good to be praised in front of others.
12. Optimize the billing structure — Create a billing relationship with your outsourced partner that allows you to budget for the entire duration of your collaboration in line with your runway.

Over the years, we’ve seen startups make mistakes in choosing a purely feature-focused outsourced partner without having the product leadership to guide their outsourced team in the right direction. This leads to a subpar product, misaligned with the business goals and customer needs requiring extended rebuilding efforts, and in some unfortunate cases, the downfall of the startup. At OAK’S LAB, we play a product leadership role to make sure this doesn’t happen.

That said, it is important to note that not all outsourcing leads to bad results. When a startup finds the right outsourced partner, one that is empowered to build the product in alignment with business goals and customer needs, the startup can achieve early product-market fit at a faster pace than if they were to do it on their own.

So, what should you consider when selecting your outsourced partner?

• Expertise — If you have product expertise in-house, you may be able to hire a team of engineers who execute against the strategy you create. If you’re lacking product experience, you should find an outsourced partner with this expertise so they can create the product strategy with you.  
• Language — When working with remote teams, communication is key. Make sure your outsourced team has a strong command of your written and spoken language so that it does not become a barrier.
• Timezone — As you will be working closely with your outsourced team, who might be at various locations across time zones, you will want to make sure that you have an overlap of at least two business hours every day, to keep progress flowing.
• Currency — If your outsourced partner is located abroad, agree on the currency before the project kicks off and contracts are signed. To avoid any risk with the volatility of the currency exchange rate, the best practice is to sign the contract with the billable amounts in your local currency.
• Availability — Make sure you get to know the team members who will be working on your project full-time. Find out ahead of your engagement whether they will also be working on other projects.
• Verified references — Prior to engaging with your outsourced partner, try to speak to at least a few past clients, as well as current clients, to get answers to all your questions from real people that were, or are directly working with, your prospective outsourced partner.
• Capabilities — As most outsourced partners will always say ‘yes’ to any opportunity that comes their way, make sure to see if the output they’ve produced in the past is similar to what you are asking them to do.
• Intellectual Property — Always ensure you have full ownership of everything your partner will be producing every step of the way. In addition, make sure your ownership of all outputs is covered in the contract.

Outsourcing product development is a viable option when you lack the in-house capabilities and resources to hire for them. It can provide a valuable opportunity to quickly build your MVP, gain traction and validation, and secure additional funding for key in-house hires and growth. Once you have achieved these early milestones, you can then evaluate whether to continue working with your current outsourcing partner or bring all operations in-house.

To ensure a successful outsourcing experience, it's crucial to carefully select the right partner, thoroughly vet them, and establish a relationship where they have a clear understanding of your desired outcomes and are empowered to go above and beyond.