Software Startups: Live or Die With Globalization

If you are a software startup, and you listen to the media, you are probably wondering if there is life after outsourcing and the recession. Can you compete against low cost third-world alternatives, or is this the time to look for a new business? Before you decide, there are several key elements you should consider:

1. Cost factors. Companies in the US have been utilizing low cost countries in the Far East, SE Asia and Europe for outsourcing for two decades, due to direct cost reductions of up to 80%. Cost will continue to be a key factor, as customers may be cutting their information technology (IT) spending by 40-50% this year. These companies need your solutions to increase their productivity by 100%, to offset the cost argument.

2. Location synergy. More and more, clients are recognizing the value of providers in close proximity for communication, flexibility, and culture. Thus there has been a recent resurgence of local opportunities. At the same time, providers have moved the location of services across the world in what has become a complex delivery system, often referred to as multi-country delivery. Have you capitalized on your culture and distance proximity to your customers?

3. Product or services. Deep down inside the soul of most software entrepreneurs is a desire to build that killer software product that sells millions of copies or has millions of subscribers. This is not surprising. Once the software is written, it doesn’t cost much to deliver it to customers. Software services, on the other hand, can be defined as any activity involving the creation of software customized for a specific situation with a relatively low level of leverage and reuse. Services are more cost and labor intensive. What are you doing to further automate your processes?

4. Enterprise or consumer sector. Large enterprises still want a highly scalable, robust, secure and "complete" solution. Read this as high cost, low volume, with latest technology skills. Whereas in the consumer space, the product has fewer features, more focus on usability, local culture, trendier, and generally younger users. Enterprise solutions have limited offshore potential. Consumer products need to be creative.

5. Creative or operational. Operational products tend to cross sectors, like word processors, project management products, and scheduling. Creative products are deep in the vertical domain, like chip design programs, architectural rendering, or consumer games. What started out as data entry and low level jobs has grown into complex complete business process outsourcing. Are you maximizing the creative skills in your company?

6. Respect for intellectual property. I learned the hard way a couple of years ago that certain countries have little appreciation for software as intellectual property. For example, 90% of the software in China and Vietnam today is pirated. On the other hand, they can very cheaply do maintenance and testing on non-core software, at a very low cost. You should focus on creativity and added value, which is more fun anyway.

Play the game right, and software startups should actually prosper in these difficult times. The typical software startup these days is a one or two person operation, founder and co-founder, who do the work themselves on the first product with no salary. With today’s tools, they can do the work of a six or eight-person team 10 years ago, so they aren’t competing with outsourcing.

Even enterprise startups, who have to build several million lines of code, typically don’t outsource to a distant land and culture, because they need to retain the core competency and intellectual property. Outsourcing is for enterprises offloading their IT work, so don’t go there with your startup.

Thus I believe that the demise of software entrepreneurs has been greatly exaggerated. Future economic growth everywhere depends on new generations of creative, dynamic entrepreneurs, in all sectors, who will drive national economies through the transition. Be one and live well.


Martin C. Zwilling, who resides in the Pheonix area, has for years provided entrepreneurs with first-hand advice, mentoring and business plan assistance as a startup consultant. He has a unique combination of business and high-tech experience, and executive mentoring and connecting startups with potential investors, board members, and service providers. His background includes many years of experience and demonstrated results as an executive in general management, computer software developmen...

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