Most would agree today that lifetime employment belongs to history.

But it seems that the concept of employment itself is coming under fire, at least in the microcosm I know better: the small to mid size businesses (SMBs).

Non-core functions like HR, accounting or legal services have traditionally been outsourced. However, and until very recently, a vast majority of companies would make sure their core functions be handled by full-time employees.

A rollercoaster economy combined to the ever increasing cost of hiring and retaining these employees is yielding a growing number of companies to question the validity of keeping their core competences on their payroll.

I am participating in a few experiments between “friendly” companies interested in sharing some of their core competences, as workload fluctuates.

There are pros and cons to the model, but altogether I found it particularly hard to manage. In addition it looks like a band aid that does not address the real problem; global competition, shorter life cycle for products and services, and a fast changing economy are calling for radical changes in the way companies handle their HR and therefore on how employees think of their career.

Richard Barrett, a HR specialist rightfully said recently on his blog:

The new employment model is just-in-time, do-it-yourself. Companies now acquire workers just-in-time, shifting their employment burden to independent contractors and outsource service providers. Workers, even the direct employees, are responsible for their own healthcare and retirement planning. Indirect payroll costs for direct employees will climb significantly in the next ten years, so companies will continue to reduce their direct employee base and increase their use of contractors and outsource providers. (http://mappingcompanysuccess.com/2009/03/barretts-briefing-employment-past-and-future/)

Barrett implies that companies are going to outsource more and more in the future. He is certainly right, and that is the problem. In fact, as companies keep externalizing their business processes to a variety of vendors, the line between outsourcing and chaos becomes thinner and thinner.

Companies have to turn to larger outsourcing firms that can handle an entire business process. Large corporations do it all the time, but SMBs cannot afford the required overhead.

What they need indeed are local firms to provide them with a first level of interaction that is local, both in terms of distance and culture. In turn, these local firms can tap into resources that are located either inshore or offshore, it does not really matter.

I see this as a golden opportunity for employees to leave their job before being laid off, organize in groups of small outsourcing/consulting firms, and offer their services locally, and probably starting with their former employers, which are likely to become their first clients. (A word of caution though, think the whole process through carefully before tending your resignation!)

The key to success is definitely not to become a free lancer, but to team up with the right people, both local and offshore, to offer solutions that are tailored to the exact needs of the targeted niche. These “federations of providers” could exist for a given project, or might be formed to tackle a given market.

It is certainly easier to say than to implement. Our business model is based on this concept, and after the first 2 years of operation, I can see the many advantages to all parties involved: customers, employees and shareholders.

That said, it is only the beginning of a long process and a lot remains to be done to create a valid alternative to the current dominant business and employment systems.

If anyone located in the Bay Area or SoCal is having similar thoughts, let me know. I would welcome further discussions or experiments.

Remi Vespa
Venus Software International

Business | 6 Comments »

I recently came across several very similar situations with software start-ups located in the Bay Area.

Venture capitalists seldom invest in software start-ups nowadays, especially if their product relates to WEB 2.0, social networks, or other online businesses. They first want to see (i) an initial product financed by the founders and (ii) some market traction. Market traction clearly means revenue; a sizable number of free users/subscribers is not recognized as market traction anymore.

It might not be that bad after all. We are back to a more traditional business model where entrepreneurs have to contribute their own savings, and turn to business angels, incubators or friends and family to complete their initial round of funding.

Budgeting and raising the proper amount of money required to get a product to market is critical, and entrepreneurs cannot afford any mistake, as these first dollars are likely to determine the fate of their new venture. The equation is simple: the initial funding has to take them to a point where their venture becomes either sustainable, or at least shows a demonstrable revenue model. If this goal is reached, then raising more money should not be an issue; if not, it would be highly challenging to get any extra funding.

And just because delays seem to be an intrinsic part of the software industry, entrepreneurs should always spend wisely and even keep a cash reserve when possible.

Some unnecessary expenses that were the hallmark of VC-funded start-ups have disappeared already, and that is very good: high-end offices stuffed with expensive furniture, company’s catered parties, oversize administrative team, etc.

There is still one area though where entrepreneurs tend to spend too much money, and that is on their development effort.

I can think of 2 major mistakes there, one happening when there is solid funding and the other when there is not enough funding. Let’s illustrate the point with these 2 sentences we all have heard too often:

1 – “We want the best developers, and we will pay whatever it takes to assemble the dream team.”

First, and unless the entrepreneur is the most wired person in the Valley, chances are he/she won’t be able to attract the shining stars. And that is not even the real question; if the very best developers are required to get the ball rolling, then the concept might not be as good as it sounds. The founder’s role is to over motivate his/her team, not to find and hire shining stars; shining stars who by the way are very unlikely to join any start-up, especially during these hard economic times.

2 – “We have very limited funding (=not enough), so our team works mostly, if not entirely, for equity.”

In this case, the developers will become rapidly impatient, or will not give their undivided attention to the project. Bottom line is that precious cash (and precious equity) will be burned away for little result. Remember, getting only 80% of the first version of an application is getting nothing! In most cases, it will be easier to rewrite the code entirely, as opposed to trying to understand the existing stack. How many entrepreneurs have the cash to afford the rewrite of their initial version?

I meet at least 4 to 5 times a month with entrepreneurs who have spent their funding with no results and are turning to established outsourcing companies, offering them to finish the work for equity! Hello??

Remember, the first dollars are essential. If you were unable to deliver, why should anyone take the risk to commit their resources for an equity that is already worthless?

I do not mean to be rude, but I witness these situations too often. If you are an entrepreneur, spend wisely with your developers. My observation is that in most cases, the technical challenges are not as big as many entrepreneurs think they are. Technical problems tend to grow with the success of the company. Trying to anticipate too much at the beginning is just counter-productive.

And remember, turning to an outsourcing company that will work for a fixed price is often the best way to spend less, limit your risks and prepare for the next steps. And finally do not worry, if your business does take off, you will be snowed under by resumes of the Bay Area’s “best” developers.

Remi Vespa
Venus Software International

Business, Technical | 2 Comments »