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1.4 outsourcing vs. product


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1.4 outsourcing vs. product

  1. 1. Development Services vs. A Product Business This presentation is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this presentation are the sole responsibility of Rick Rasmussen and do not necessarily reflect the views of USAID or the United States Government.
  2. 2. Outsourcing vs. Product Sets strategy, sales, marketing and growth potential Development Outsourcing Product Companies Strategy Services-based: Scales with employees Product-based: Leveraged Sales Referral CAC or Viral Marketing Local Global Growth Potential Linear Exponential
  3. 3. History of the Outsourcing Economy • Traditionally corporations owned, managed and directly controlled all of its assets and processes • 1950s and 1960s: Diversification • 1970s and 1980s: Organizations found that diversification bloated their management structures. • Outsourcing became a way to offset corporate bloat • Shifting focus back to their core processes – Handed off non-critical (non-core) procedures – Managed by third parties.
  4. 4. Reasons for Outsourcing • Headcount and cost reductions • Focusing on core competencies. • Gaining access to world-class capabilities • Freeing resources for internal R&D • Sharing risks and costs with a partner
  5. 5. Leading outsourcing economies G20 India Russia China Canada Brazil Mid-size Economies Pakistan Ukraine Spain Netherlands Ireland Developing Economies Armenia Czech Republic Romania Poland Hungary Estonia
  6. 6. Example: Software Outsourcing Consultancy • Developing software programs for others by spec – Common in Armenia and other developing countries – Leverages talent and capability of engineers • Done for hire – Contracted fixed fee – Hourly rate – Occasionally share in revenue upside and/or stock participation
  7. 7. Issue: Scale • Business scales with number of engineers • Can only grow by adding people • No revenue leverage People Revenues
  8. 8. Outsourcing Maximum revenue per year is limited to: (number of consultants) x (hours worked per year) x (billing rate) CEO Admin Sales Engineer Engineer Engineer Engineer Engineer Engineer More revenue? Just add more engineers (minus overhead, efficiency, etc).)
  9. 9. Building an Outsourcing Business • Find revenues immediately and stay profitable • Deal flow and sustainable customers • If capital is needed – Bank loans based on: • Revenues • Cash flow • Accounts receivable – Government grants • Programs to encourage employment • Tax breaks • Free enterprise zones • A good “family business” that will likely never exit
  10. 10. Product-based Business • Using risk capital to develop a product or service • High risk and potentially high reward • Works on the principle of leverage – “Develop once, sell many” – Product can be delivered to multiple customers with sufficient resources • Perseverance and planning is required
  11. 11. Product-based businesses are Scalable • Business scales as a function of marketing and sales • Requires cash to get started • Grow by adding products • Works on the principle of leverage $0 time cash
  12. 12. Product Company CEO Admin Sales Marketing Engineering Operations Finance Completely different outlook than “Consulting” Potential to scale and leverage resources Can be much higher revenue per employee
  13. 13. Financing a Product Business • Seed fund through other projects or through Friends & Family • Develop Minimum Viable Product (MVP) and engage with customers • Identify areas of traction and validate your business model • Seek sources of capital from risk-takers – Accelerators – Angel Investors – Government grants • Programs to encourage employment • Tax breaks • Free enterprise zones – Venture Capitalists – Corporate Ventures • With work, you stand a good chance to make money and scale