CAN STARTUPS REALLY LEVERAGE THE BENEFITS OF OUTSOURCING?
Keep it in-house or outsource? It’s a decision that many startups face and not an easy one to decide on. Do you invest in your in-house capability to create your product or do you outsource to a third party developer? There’s definitely an argument to say that product development should be a startup’s core competency. On the other hand, would it not make more sense to get your product to market quickly by leaving it to the experts, saving on the HR overheads and spend your precious resources focusing on growing your business?
Many startups we meet say that although outsourcing seems to be a lower-risk option and a clear trend in the business world, they are not sure whether they can do it successfully. Most of the concerns lie in the fear that outsourcing creates a power imbalance that would put their whole business at risk if things went wrong. Outsourcing your product development could be cheaper, lower risk and a ticket to getting to market quickly but that’s only if things go well. If things go wrong, startups fear that their lack of commercial / legal capability could be a serious hindrance that might jeopardise their whole business.
Sounds dangerous… And it could be.
Having worked in large organisations for a decade, negotiating hundreds of contracts with small suppliers and startups, I’ve seen it all. Startups practically giving away their IP, signing up to obligations they simply cannot fulfill and mismanaging the pre-contract stage so badly that they remove any opportunity for a successful collaboration and damage their relationships beyond repair.
So despite the growing outsourcing trend, is it really a good idea for startups to be following suit?
THE OUTSOURCING DEBATE — TO OUTSOURCE OR NOT
While most companies across industries swear by the advantages of outsourcing, the debate continues over its long-term sustainability. Outsourcing opponents argue that the flip side of outsourcing includes lack of quality control, lack of hold on the project management, and lower prospects of innovation. Outsourcing critics point out that rising salaries, in outsourcing destinations like India, is taking the sheen away from outsourcing and thus it may not be as profitable in the long run.
Despite such perceived negative aspects, outsourcing has only continued to grow. In fact, outsourcing is now being embraced by organizations of all sizes and domains. According to a recent study, companies across the board, from startups to large enterprises, continues to use outsourcing as a tool of choice to gain competitive advantage in the business scenario. And crunch business situations have only helped to build the case for outsourcing further. The recent global economic crisis is testament to the fact that businesses not only need to learn how to survive during a downturn, but also need to look at newer ways of overcoming weak economic conditions.
It’s undeniable. The world is moving towards an outsourced model. And here’s what they say about it.
MANAGING YOUR SUPPLIERS EFFECTIVELY
Depending on the nature of your business, suppliers could play a key role in your success. Your supply chain could be simple or it could be quite complex and include suppliers that you deal with day in day out as well as more remote suppliers who you deal with occasionally and/or you do not have a direct relationship.
The general term “supplier” is used in this blog but there are a lot of terms (e.g., outsourced businesses, tech developers, contractors, consultants and freelancers) used to describe a person or business that you might use to provide goods or services to your business.
FINDING THE RIGHT SUPPLIER(S)
Finding the right supplier can be tricky. There are a number of factors that may be important to you and these can vary from supplier to supplier:
· price/affordability
· value for money
· good relationships
· quality
· reliability/consistency
· responsiveness/speed of delivery
· flexibility/meeting changing demands and urgent situations
· shared culture
· location
For start-ups and small businesses, price and affordability are frequently the key consideration, however, it’s important to bear in mind that cheap suppliers don’t always represent the best value for money. If you want reliability and quality from your supplier, then you may need to strike a balance between cost, reliability, quality and service.
Communication is key to ensuring a good working relationship with your supplier, so from the outset make sure that you and the supplier are on the same wavelength in respect of how you will communicate, who the contacts are and set clear expectations about being open and honest, especially if something goes wrong (or is about to go wrong) and needs to be fixed quickly.
When selecting suppliers for your business, consider whether you need to have a choice of supply sources. Buying from only one supplier can be risky if they let you down, or go out of business. Before you contract with a supplier you may want to run a credit check on them to check that they are in a sufficiently good financial position to deliver what you want, when you need it. Also check that they are a legitimate company by running a company search. If they’re UK based, check them out on Companies House WebCheckservice.
Finally, it’s also a good idea to get references from other customers of the supplier. The supplier should be happy to put you in touch with some of its previous clients, however, remember that they are unlikely to put you in touch with a dissatisfied customer. If you are able to seek references independently, these may offer a more balanced view of the supplier.
NEGOTIATING WITH SUPPLIERS
You may think a good deal is one where you get everything that you want. That might be okay where you have with a one-off transaction with a supplier but is it really such a good thing if you want to do business with a particular supplier again or have an ongoing partnership with them?
If you want to establish a good supplier relationship and get the most out of that relationship then it is important to consider the bigger picture. Relationships can be unsuccessful if one side feels forced into a corner or “ripped off”. For successful long-term supplier relationships, aim to start off on the right footing with both sides feeling comfortable and happy with the agreement.
Before you start to negotiate, here is some “negotiation strategy” homework you can do to put yourself in the best, most informed and confident position:
1. WHAT IS IMPORTANT TO YOU?
What are the key items that are most important to you? What are and aren’t you prepared to compromise on? Be realistic in your expectations — if you’re not prepared to compromise, the negotiations won’t get far.
2. WHAT IS IMPORTANT TO THE SUPPLIER?
What are the key items you think or know are important to the supplier? Where do you think they be willing to compromise? Where will the sticking points be?
3. HOW STRONG IS YOUR NEGOTIATING POSITION?
Does the supplier have competitors? Are they a new entrant to a particular market? Will you potentially be their main customer? Might they be willing to offer good deals to get your business?
4. POTENTIAL AREAS OF AGREEMENT/COMMON GROUND?
Can you find any potential areas of common ground or agreement that could establish a good starting point?
5. POTENTIAL RESPONSES/SCENARIOS?
What offers or compromises the supplier might offer you? How will you respond so you don’t get caught off guard?
6. RESEARCH ACTUAL COSTS.
Can you find out what it costs the supplier to make their goods or provide their services. It might put you in a good position to know how much wriggle room there is in price negotiations.
7. GET PRICE COMPARISONS
If you are only dealing with one supplier, then it could be useful to get quotes from at least another 2 suppliers, so that you have a good idea of what a reasonable price is.
8. LEARN THE LINGO
Take the time to learn the supplier’s industry lingo and basics, so you know what they are talking about and you at least sound like you know what you’re talking about during negotiations.
9. WHO SHOULD DO THE NEGOTIATING?
Who are the right people to do the negotiating for you? Who are the people you want to deal with from the supplier? It is a good idea to have people at the right level of seniority who have the information, knowledge and authority to make decisions in the negotiation. Make sure everyone from your end is aware and on board with your negotiating strategy and priorities.
10. IS TIMING IMPORTANT TO YOUR NEGOTIATING POSITION?
Negotiating at the right time can be an important strategic tool, for example, if the supplier needs to make targets. However also think about timing from your own point of view, e.g., you ideally do not want to be negotiating when you are under pressure to deliver for a client or customer.
When you start negotiations, the following strategies/tactics can be useful:
1. POSITIVE ATTITUDE
Be positive and confident in the negotiation and always remain calm, professional and friendly.
2. DEALING WITH PRESSURE
Don’t allow pressure to force you into agreeing to a point you’re not happy with. Ask for a break if you need one — don’t get stressed out. If you are getting nowhere on a particular point and discussions are getting heated or bogged down, then suggest putting it to one side and moving on to something else, then return to it later with clearer heads.
3. KEEP NOTES
Each time you agree to a point, clarify that you’ve understood it correctly and write it down. Recap the agreed points at regular stages and clarify what remains to be agreed.
4. BARGAINING CHIPS
Keep some bargaining chips in reserve! Try to hold back a few things that you’re prepared to concede or compromise on until later in the negotiations, so that you can offer them in exchange for the supplier conceding or compromising on other points.
Supplier negotiation doesn’t have to be difficult, but it does help to have a plan so you are prepared to meet any bumps along the way. Good preparation and using these suggested negotiation tactics in your meetings increase the chance you’ll walk away with a good deal and a good supplier relationship for your business.
TERMS AND CONDITIONS
Once all the key points have been agreed with the supplier it is best to get a written contract drawn up and signed by both parties. If you are in a strong enough bargaining position then you may be able to insist on the final contract being based on your own terms and conditions rather than the supplier’s terms and conditions. Sometimes you will end up with a mixture of the two sets of terms and conditions or indeed a completely bespoke new set of terms and conditions. It really depends on the circumstances and the outcomes from the negotiation.
You should consider getting legal advice to draw up your final contract with the supplier, or at the very least ask a lawyer to review your proposed draft to ensure that it covers all the required legal provisions and each party’s rights and obligations correctly.
The basic terms for a business to business contract for goods/and or services will typically contain:
· Details of the parties entering the contract.
· Definitions of the key terms used in the contract.
· Commencement date/duration/termination date.
· A description of the goods and/or services.
· Details of price and payment terms.
· Delivery schedule/dates/arrangements.
· Obligations of the supplier.
· Obligations of the customer.
· Service levels/specifications/minimum standards/levels of care.
· For goods — a clause covering when risk and ownership are transferred to you, the customer.
· Remedies for poor performance, non-conformity, delay or non-delivery, non-payment and other breaches of contract.
· Compliance with laws and policies.
· Liability limitations, indemnities, warranties and insurance requirements.
· Dealing with information — confidentiality and data protection (GDPR).
· For services — ownership of intellectual property rights, materials, deliverables etc.
· Termination rights and any exit arrangements.
· Contact points/escalation/complaints/dispute resolution.
· Boilerplate clauses that appear in most contracts including governing law.
Details of services, prices, standards, policies etc that are lengthy can be set out in Schedules or Appendices to the contract rather than in the main body to make it more easily readable. Reference should be made to each Schedule in the main body of the contract.
Both parties should agree and sign the final contract and a copy retained by both parties for future reference.
The above should steer your outsourced relationship into the right direction.
Stay tuned for our next post on Managing Supplier Contracts Effectively.
Questions on any of the above? Contact me at electra@thelawboutique.co.uk or book some time with me here.
