Author: John Kim

Why Developer Marketplaces & Software Outsourcers No Longer Work

About Me: I’ve created 3 software companies: Five9 (IPO), DoctorBase (cash sale) and JetBridge (current co), much of it using offshore software developers. I’ve made a lot of expensive mistakes you should avoid.

TLDR: Adopt something like our Developer Handbook and give it to every developer before the interview. A majority of offshore developers after reading it decline to interview with us, which is nice because it saves my HR team lots of time by automatically weeding out the bottom 75% (marketplaces and outsourcing companies recruit the bottom 50%).

Most customers who go to marketplaces or outsourcers for competent software developers do not get what they are advertised, often leading to expensive failure for non-technical founders and professional risk for enterprise managers. Here’s how the schemes work (and how to solve for them) –

“Hire ex-Googlers on our marketplace!”

Why would a software engineer who makes $250k+ for FAANG companies (and can WFH) lurk on marketplaces to work on an idiot’s idea with no stability or benefits at a fraction of the wages?

They don’t.

This marketing gimmick works because it’s human nature to go online and believe we found a $100 bill for $20, but the international labor market, especially post-Covid, has become extremely efficient. Even average developers get multiple messages from recruiters every week – they no longer need to go to marketplaces. And they’re mostly remote work offers.

So what kind of developers go onto marketplaces looking for work?

The kind that don’t know how to reverse a string (basic stuff) or will pull a bait-and-switch on you (the developer you talk to will not be the one doing the work).

Marketplaces can be very effective for sourcing UIUX designers, graphic design, mechanical turk tasks and more, but increasingly competent software developers are not on them.

“Two weeks free if you’re not satisfied!” is often a marketing gimmick by marketplaces. Two weeks is simply not enough (especially for non-technical founders) to determine if a developer is good.

If you find a developer you like on a marketplace, ask them if they’re willing to take a technical pair programming session with an onshore CTO you trust.

Try it – the response is often amusing.

And if you get an amusing response, walk away with your money still in your bank account.

“We take you from MVP to IPO!”

Almost every software outsourcer I know (except the huge ones) are trying to build their own software apps. Outsourcing can be a grueling business and many SMB outsourcers dream of becoming a SaaS company. If they knew how to build successful MVPs they wouldn’t still be in outsourcing.

Because outsourcing is a labor arbitrage game, outsourcing companies try to pay a 3:1 ratio from fees to wages. Meaning if an outsourcing company charges $75/hour, they’re paying the developers about $25/hour.

So why would a competent developer work for an outsourcer that takes 66% of the revenue created when they’re doing all of the work post-sale?

They don’t.

Enterprise outsourcing companies are places for semi-competent software developers to hide on over-staffed teams (and not give a shit), the exact kind you don’t want. Besides, the large outsourcing companies only take “digital transformation” projects that have $1M+ budgets (just look at the earnings reports of the publicly traded outsourcing companies).

SMB outsourcing companies are a great place for project managers and junior developers to cut their teeth (on your dollar).

This gimmick works because enterprises often have legacy projects that smart, ambitious software developers don’t want to work on (like 20 year old banking applications built on J2EE), and SMB outsourcing companies hire a “Product Manager” that can speak decent english (their developers will mostly not).

Most MVPs do not need a Product/Project Manager, they need a competent Tech Lead (a senior fullstack engineer who has led teams before). Ask any experienced Tech Lead and they will confirm.

If an SMB outsourcing company quotes you for both the developers’ time as well as a Project/Product Manager, walk away. It’s a technique used to hide the fact that they don’t have competent developers.

BTW, most competent developers speak English (since most of the educational content, workshops, conferences, etc are in English). Which also makes sense because good developers are supposed to be good at learning languages.

So what’s the solution(s)?

In my experience, and according to all of our data, anywhere from 3% – 9% of offshore software developers are commercially competent. Since software development is a non-licensed profession that often makes 10x more than most jobs in emerging economies, this makes sense.

Outsource the technical interviews to a highly competent 3rd party.

If you’re a technical manager working in an enterprise, you likely don’t have the time (or risk profile) to conduct 11 – 30 technical interviews for every 1 offer to an offshore developer. And if your company needs to make 2 offers for every 1 accepted offer, obviously double that time-number. There are cost savings to be had going offshore, but the risk profile is much greater.

If you’re a non-technical founder, and if you have the money, first hire a technical co-founder or technical employee onshore (or an elite dev offshore). I get it, believe me, it’s incredibly difficult and expensive, it’s easier to just hire someone on a marketplace and test your MVP idea.

The problem is this – it is highly unlikely your idea is the one with Product Market Fit. According to David Rusenko (sold his startup Weebly for $365M to Square) it will likely take 20-30 iterations of your idea before achieving a product that has any chance of making you money. This requires an in-house technical founder/employee who can then manage an offshore team. Relying solely on an offshore team just won’t work.

In 23 years of being in startups, I’ve never seen a non-technical founder without a technical founder ‘get rich’ by partnering with an outsourcing company. Not once.

And if you can’t find a technical founder, honestly ask yourself – how will you find your first 10 enterprise customers or your first 10,000 consumer users? How will you sell investors or sell your company?

And if you’re an enterprise hiring manager, outsource the professional risk by having a highly competent 3rd party conduct the first round of technical interviews for your offshore dev team.

Feel free to disagree (I’m always open to learning) at john.k@jetbridge.com

Forbes: An Insider’s Guide To Outsourcing And Outstaffing Software Development

John Sung Kim 4 min read

Originally posted on Forbes.com

As many say costs for software developers have soared across the U.S. and Western Europe, outsourcing to arbitrage labor costs has not just become popular but also increasingly necessary.

To build two SaaS companies in the Bay Area, I’ve leveraged offshore development teams to a degree of success. I also had a chance to be a marketing consultant for a leading online marketplace for developers and am the CEO of an outsourcing company, so I’ve become intimately familiar with this industry over my career.

There are many talented, ethical agencies and developers across the world; however, just like in any market, extensive due diligence by the client is a must. Before hiring outsourcers to build your app or hiring recruiters to source offshore labor, here are three insider observations you might consider:

1. Outsourcers, outstaffers and recruiters commonly portray interns as juniors, juniors as mid-levels and mid-levels as seniors. Because this practice has become so widespread, I’ve found there is market pressure on many good vendors to sell their staff this way. So clients should manage their projects intensely on a daily basis to ensure consistency and quality.

2. Failure rates for apps built by outsourcers can be incredibly high. While there is no published data yet, I’ve seen very few examples of outsourcers who have built and launched a commercially successful product on behalf of a client as a turnkey service.

3. I’ve seen some recruiters start to offer research and development (R&D) center services to clients to compete with outsourcers. This new trend of not only sourcing the developers but operating the office and administrative functions on behalf of the client have additional fees. Over time, this could reduce labor costs for the clients, but clients need to make a bigger upfront commitment.

Given the state of the current market, I suggest implementing these best practices before engaging any outsourcing, outstaffing or recruiter firm:

1. For outsourcers building the entire turnkey app for you, ask for the references of at least two software applications they have launched successfully. Code is only one part of what makes a software application successful, so if the response is “we have none” but you still like the firm, you can engage your product or project manager to manage the outsourced staff directly.

Also, ask the references how the outsourcer accommodated change requests. Your app’s scope or project is likely to change multiple times. You want a partner who is adaptive, but being adaptive in IT can be as much about the outsourcer’s culture as it is about their process.

2. If you’re looking to outstaff to add to your existing product and team through recruiters or R&D centers, you may want to intensely focus on the interview questions and test tasks assigned to the candidates. For example, when I ask a candidate, “Why do you want to work for us?” and the answer is something akin to “for more money” and not “I want to work for a ‘product’ company,” that developer never lasts with us for more than a year.

I’ve also learned to ask what local conferences or Meetups the candidates belong to. Voluntary self-education is one of the leading indicators I’ve seen in how much value a developer will bring to our projects over the long run.

But by far, the “marquee” question I ask every developer is, “Have you contributed to any open-source projects?” While not every top developer contributes to open-source projects, I’ve noticed that many open-source contributors are top developers.

It may be harder to find developers who contribute to open-source projects in emerging economies, according to a GitHub open-source contribution map, but we’ve found this is the single biggest determinant (other than cultural fit) of whether a developer will produce at an elite level.

3. Go through a trial period without firm commitments, and if the developers are to your liking, prepare to offer a term commitment of a year or more to the vendor. In my experience, outsourcers and outstaffers often have their developers sitting “on the bench” some of the time, so term commitments mean they don’t have to suffer a margin loss — and you could negotiate some of this savings in reduced fees.

As a negotiating tactic, you can also offer to prepay their wages quarterly or every six months.

4. Look for providers that focus on both a vertical and a software language. I believe the vendors that are efficient with your time and money are so because they focus on a specific vertical — like fintech or mobile games — and have expertise in one or two languages.

I recommend avoiding shops that claim to be experts in “Java, Python, C++, and AI/ML” and that spam you with faces of attractive females representing their agency’s expertise. These are often bottom-of-the-barrel operators. I’ve found that most of the good shops specialize in a vertical and specialize in a language, and they have plenty of work from referrals — so they don’t need to spam anyone.

5. Negotiate the monthly wages and the buyout fee if you decide to make the developers a part of your permanent team. Outsourcers and outstaffers need to charge more than what they pay the developers to make reasonable net margins.

Sales costs, office space, recruiting and bench-time contribute to overhead. In my experience, average buyout fees range from one month of wages to one year, so negotiate — as the market prices range drastically.

As Bloomberg suggests, the demand for talented and experienced tech talent in the U.S. continues to rise, and the BLS reports that unemployment for the professional, scientific, and technical services sector was at just 2.5% in December 2018 — so sourcing labor from other countries may become a necessity, even for Series B- and C-funded startups. Understanding nuances of the regions where you hire and following some best practices should save you a lot of time and money — and maybe some midnight migraines as well.