This document compares development services businesses with product businesses. Development services businesses, like software outsourcing consultancies, scale directly with the number of employees and have limited revenue potential. In contrast, product businesses use risk capital to develop products that can be sold to multiple customers, providing leverage and potential for exponential growth. Building an outsourcing business focuses on finding immediate revenue and staying profitable, while building a product business requires perseverance, planning, and financing to develop a minimum viable product and validate the business model before seeking investment from sources like accelerators, angels, or venture capitalists.

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
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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. 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. 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

6. 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

7. 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

8. Issue: Scale
• Business scales with number of engineers
• Can only grow by adding people
• No revenue leverage
People
Revenues

9. 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).)

10. 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

11. 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

12. 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

13. 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

14. 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