The Thinking Man's Outsourcing

A surprising number of U.S. companies are sending their most complex activities overseas.

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If life as a billionaire technology maverick grows stale, Niklas Zennstrom can always get a job promoting Estonian business development. In 2003, Zennstrom, who is Swedish, and his partner Janus Friis, a Dane, launched their Internet telephony company Skype in Luxembourg, with sales offices in London. But they outsourced product development to Estonia, the same fertile womb that had earlier gestated their music-sharing system, Kazaa. "There is a spirit there that fosters change and advancement," Zennstrom wrote in an essay for the engineering journal EETimes. "This is the kind of progressive mindset that shapes the development of disruptive technologies. This is the mindset of innovation."

The traditional outsourcing model of domestic brain and foreign brawn is changing. For years, functions such as product design, engineering, and R&D stayed in the United States and Western Europe, under the eye of expensive talent. Manufacturing, call centers, tech support, and brute-strength programming traveled to developing countries where they could be done cheaply and well enough. But now "companies are going offshore for the high-end things," says Joe Collard, co-founder of Sumpraxis, an outsourcing management company in Delray Beach, Florida. "I call it 'knowledge outsourcing.' "

Knowledge outsourcing is still about cutting costs, but cutting them in a company's most fundamental activities--those that produce growth. In an ongoing study of 377 outsourcing initiatives by the Fuqua School of Business at Duke University, 73 percent of respondents cited growth as a principal motivation for moving operations overseas, and 71 percent mentioned access to qualified personnel, which is related to growth. The sample ranges from global corporations to start-ups.

Check, Please

Bootstrappers, in particular, are exploiting this turn by outsourcing functions such as R&D from the get-go. Some say it is the only way to find the best talent willing to work at top speed for a reasonable price. And while they acknowledge those who criticize outsourcing as a drain on U.S. employment, they point out that this strategy makes possible the creation of some new businesses--and with them new jobs. "If these companies couldn't do this cheaply and quickly, they would run through their capital before they got to market," says Arie Y. Lewin, a professor of business administration at Fuqua and principal investigator for the study.

Speed was on Devin Green's front-most burner when he decided to outsource most of his start-up's product development in 2004. ESP Systems, based in Charlotte, North Carolina, creates technology that allows restaurant patrons to control the pace of their meals by sending messages directly to the restaurant staff. Success hinged on first-mover advantage, Green believed, but when ESP approached U.S. equipment manufacturers, the company was told to stand in line. "They were interested but not as interested as if we were a large wireless company with an established marketplace," says ESP's COO, Todd Binkowski. "They said they wouldn't be able to put someone on the project for months. For us that was a nonstarter."

"If these companies couldn't do [R&D] cheaply and quickly, they'd run out of capital before they got to market." --Arie Y. Lewin, Duke University

Instead, ESP signed on with Flextronics, a $16 billion contract manufacturer, which for 20 years has been acquiring R&D facilities around the world. Contracting directly with the company's foreign design centers, ESP's founders estimated they could slash start-up costs by almost half, shave months off development, and tap into some very impressive craniums.

A team of eight engineers in Shenzhen, China, figured out a way to triple the number of square feet ESP's radio frequency system can cover. The project took 10 months; at crux points ESP simply slapped more talent in place. Now, tooling for ESP's manufacturing is being done in Shenzhen, although, in a twist on how things often go, the manufacturing itself will take place in North Carolina.

Taking on Tramite

In-country innovation is the logical culmination of this trend. Lewin says overseas employees are already starting to design products specific to their home markets. That's what happened at business software company Colosa. A few years ago, CEO Brian Reale essentially outsourced himself to La Paz, Bolivia, where he hired 16 developers for the cost of two in the U.S. Reale chose to live in La Paz because he likes it--the mountain climbing's great--and because he wanted to be with the talent while Colosa was finding its legs. Co-founder Robert Vernon and one other employee held down the U.S. fort in Coral Gables, Florida.

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