Many companies start with an outsourcing model to employ engineers and generate cash-flow. This presentation explores the fallacy of that model.

1. Development
vs.
Products
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. Business Types
Sets strategy, sales, marketing and growth potential
Development
Outsourcing
Product
Companies
Strategy
Employee-based
Leveraged
Sales
Referral
CAC or Viral
Marketing
Local
Global
Growth Potential
Linear
Exponential

3. The Outsourcing Economy
• History
– Traditionally corporations owned, managed and directly
controlled all of its assets and processes.
– In the 1950s and 1960s companies for ways to broaden their
base and take advantage of economies of scale. Diversification
became a popular strategy.
– As competition became more global in the 1970's and 1980's,
organizations found that diversification had actually bloated
their management structures.
– Outsourcing became a way to offset corporate bloat
– Shifting focus to their core processes, they handed off noncritical (non-core) procedures, to be managed by third parties.

4. Outsourcing
• Accelerated in the 1990s
– India, Ireland and others
• Reasons:
–
–
–
–
–
Headcount and cost reductions
Focusing on core competencies.
Gaining access to world-class capabilities
Freeing resources for internal R&D
Requiring specific expertise for functions that are either timeconsuming or are currently out of control
– Sharing risks and costs with a partner

6. Primary outsourcing economies
G20
Mid-size
Economies
Developing
Economies
India
Pakistan
Armenia
Russia
Ukraine
Czech Republic
China
Spain
Romania
Canada
Netherlands
Poland
Brazil
Ireland
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
– Typically by contract for fixed fee or hourly rate
– Occasionally share in revenue upside

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
Engineer
Engineer
Sales
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 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
Can be highly leveraged
cash
$0
time

13. Product Company
CEO
Admin
Sales
Marketing
Engineering
Completely different outlook than “Consulting”
Potential to scale and leverage resources
Can be much higher revenue per employee
Operations
Finance

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
– Angel Investors
– Government grants
• Programs to encourage employment
• Tax breaks
• Free enterprise zones
– Venture Capitalists
• With work, you stand a good chance to make money and scale