The period of huge new global internet brands succeeding may be drawing to an end, so could it be B2B and outsourced internet companies that make up growth for the next few years and provide opportunities for business angels and startup entrepreneurs?
Nic Brisbourne, a London tech VC, has recently written about the increased risk in large scale consumer driven internet startup companies. He quotes Fred Wilson who says that the large incumbent companies (Amazon, Google, Facebook, Twitter etc) are ‘starting to suck up a lot of the oxygen’ making it ‘harder than ever to build a large audience from a standing start’.
Brisbourne advises startup companies that they may be better off to find smaller consumer niches – where the monetisation of the product takes place much earlier – or in business to business services.
Which means that we want to take a look at the business to business outsourced market to see what opportunities lie ahead.
In the early days of outsourcing in the 1980s, this often meant taking a large technical (or software) project overseas – typically to India but also now eastern Europe, Russia or the Philippines.
In fact, India expects its revenue from projects outsourced to its shores to pass the US$100m mark this year. Benedict Hernandez, the head of the Business Processing Association of the Philippines, recently appeared on the BBC quoting that he was confident of a growth of business outsourcing continuing for many years, despite slower global growth.
The software outsourcing market is both huge and ultra competitive. Therefore, it can move to new low cost locations and incumbent companies will work hard to win business – slashing margins if necessary.
However, within software outsourcing, the ability to bring a specialist niche of developers at an attractive price with sufficient quality control is key. This then becomes a mix of the ability to make the best of new communications technology – document and project sharing to free conferencing on skype etc… as well as the ability to pull teams together and lead them. Business Angels and entrepreneurs are getting a lot of success in this sector, but the challenge remains on how to leverage growth without leveraging your costs.
The nature of outsourcing has changed…
In the early days, it was the software project that was outsourced, now-a-days, it is more likely that it is a service – accounting, legal or knowledge based service that is outsourced.
It is simply that technology has become the facilitator of the outsourcing rather than the object.
Specialist niches in outsourcing
A perfect example of this is document translation services. The ability of an agency or service provider to manage many highly specialised language specialists is a perfect example of why outsourcing makes sense. Despite the fact that most successful companies now trade in 100s of countries, it doesn’t really make sense for that company to employ 100s of language specialists.
Another niche area is typically in the area of specialist software knowledge. And, the more a company is set on a specialist set of software – such as Ruby on Rails – then the greater its need for specialists.
As those specialists are more expensive (as there are fewer of them) then the company will typically outsource more of its work.
Typically, outsourcing companies do best when there is a regular need for a short piece of work. I recall a very successful
City of London based printer who won all the work for printing company reports. Despite the collapse of the printing industry, this little business flourished because it was very close to its market and able to deliver excellent customer service (often printing reports within 24 hours) at relatively small print runs.
Employment law as an opportunity driver
Another factor driving outsourcing is employment law. In developed western nations employment law is both complex and expensive to both implement and maintain. By outsourcing, the company can significantly reduce its future liabilities.
You only have to look at the number of FTSE100 or Dow Jones companies whose company pension scheme is under water to understand why these companies need to tackle this issue.
One area that I believe is seeing significant growth is the outsourcing of content generation. In the past 10 years, manufacturers and service originators have shifted from paying to advertise in someone else’s media publication to building their own website, report or running a twitter feed – all of which requires customised content.
This shift is set to increase with more companies looking to generate unique content that can carry their brand messages through sharing and online word of mouth.
Equally, most content generation will remain close to its market because the factor that what makes content valuable is it cultural fit and that can only be tackled by specialists who live and work in that culture.
Business angels and startup entrepreneurs would do well to find a niche, be that in outsourced services or software generation or content generation.
And whilst the opportunity to be the next ‘facebook’ may have passed, there are plenty of successful multi-million pound businesses that are exploiting the technological changes and social changes driven by the internet.