The lean start-up movement has been based on a single insight – that the purpose of a start-up is to discover a business model that works. Instead of the “entrepreneur that knows what the market wants”, we move to the “entrepreneur that knows how to discover what the market wants”. This subtle difference has been key to the success of companies like Groupon, DropBox, and Intuit to name a few.
In this paper, we explore the unique challenges of a lean start-up and how Outsourced Product Development (OPD) can be used to overcome them. Specifically, we show that OPD leads to:
Start-ups are very different from established businesses. Established businesses understand the competitive landscape – they know their customers and they know their competition. The primary challenge (ignoring disruption) is to find ways to better serve their customers at a lower and lower cost. The focus of the management team is largely internal – how do we cut cost without impacting the offering?
A technology start-up is very different. Even though the goal of a start-up is to become an established company, its start-up role is much different. The objective of a start-up is to discover a business model that works. The primary focus of the management team is external – what does a customer think about this product/service?
Both start-ups and established businesses need to conduct product development; however, the environment in which each operates necessitates a different approach to this same function. While the established companies’ needs are focused on endless iterations of long-established products, start-ups need the ability to iterate quickly and pivot.
An established company needs long-term technical employees that have deep knowledge of the product, its history, how customers use and value its features and the processes used in its manufacture. Outsiders can often “compliment” this core team, but they cannot replace it.
A technology start-up has very different needs. It does not have an established product, and thus no history to “know”, nor does it currently manufacture anything, or even yet know what technology should be manufactured. This environment makes it difficult to understand the core skills needed in the product development team.
Start-ups also have a high likelihood that things will not go exactly as planned. The insights from the Lean Start-Up movement have led to the assumption that there will be periods in every start-up’s history of significant change (The Pivot). The idea is to develop a product, see how it fails, and then pivot based on this new learning.
The traditional model of largely in-house product development teams is not suited well for the environment that a start-up operates in. Nimble, quick acting, re-forming teams of outsourced product development teams meet the challenges of the start-up environment much better.
Pivot is a lean start-up term that refers to the concept of introducing a product, understanding how customers react to the offering and then changing the offering to better align with the customer needs based on the learning from the product introduction. A basic assumption around the idea of pivoting is that “some things can only be learned by actually attempting to sell a product to a customer”. By no means does this mean a fully refined product is introduced – in fact, Lean has introduced the idea of a Minimally Viable Product (MVP) to our lexicon. The MVP idea is to develop a product “just enough” to understand the customer reaction as compared and contrasted with the established company philosophy of introducing a flawless product.
To established companies, the idea of a failed product launch would be hard to accept let alone actually plan for – and for good reasons. Established companies have a long history of product launches to learn from. Established companies launch incremental products that increase the offering (more features) for less cost and/or introduce products that more correctly align with an ever-increasing vertical niche within the larger market (the “sports luxury” automobile vertical for example). Established companies have enough knowledge about the product offering to take a straight-line approach to product development. This environment translates to a large budget, concurrent engineering/manufacture, and a focus on making the product “bug-free”.
If a start-up were to take the same approach, and the product fails, there would be little runway left on which to pivot. Sure, the product may be perfect, but if no one is willing to buy, it does not matter. Millions would have been wasted on tooling up manufacturing and conducting design verification test. The inevitable lay-off and the downsizing of the company would consume management – leaving few resources left to understand how the knowledge from the failure can be used to introduce the next product.
In a Lean Start-Up, the investment in product development would have been just enough to understand the customer’s reaction to the product – the MVP. Very few resources will be used to “perfect” the product, and the product development team would be temporary. Once the learning has been conducted and the pivot identified, a newly formed product development team would again create a new MVP. This process continues until a viable product (and business model) can be discovered. Then, and only then, does the formation of a “permanent” product development team begin to take shape?
Outsourced Product Development teams are a more effective tool for the pivot than traditional internal product development teams. OPD teams offer several advantages:
If you’re a newly funded start-up, you need to develop the first MVP quickly. Your runway is only so long, and there is no telling how many iterative MVPs you may need before you discover a viable business model. In all likelihood, your team is not large, and may or may not have the skills required to fully develop the MVP. You will necessarily have to spend time recruiting new skill sets, setting up new procedures, labs, IT, CAD/CAM, etc. All of this effort takes time away from your management team. It distracts the management team from the external focus it needs to discover a viable business plan.
An OPD team is already in place and ready to start work. In all likelihood, this team has been working together for years, already has a lab, CAD/CAM, procedures, etc. They are, in essence, ready to go the day you call them. Your management team remains focused externally on the customers and development of the viable business model.
Many argue that since their goal is to become a large company, they might as well hire the team early – because they will be needed down the road. However, if you buy into the concept of “lean” and that you do not know your business model/product until it is discovered/proven, then hiring early could be hiring the wrong person. If there is a possibility of a Pivot, the person you just hired may not be the right person after the Pivot.
If you have been around product development activities for any amount of time, you are likely to have heard about NIH syndrome. NIH stands for “Not Invented Here”. This is nothing more than the engineering term for “group think”. It is well documented in the business journals as occurring to any type of team. Teams develop specialized knowledge and skills, and they do so at great cost. Managers are trained to maximize invested capital, which explains why businesses often miss disruptive technology that cannot be produced with existing invested intellectual capital. Similarly, product development teams resist changes away from existing specialized knowledge because they have so much invested in the existing knowledge.
OPD teams often have a similar culture of preference to existing technology. Indeed, one of the primary reasons to use an OPD team is the team’s base of experience in specific technologies. Many suffer from a similar affliction of “if you’re a hammer, everything looks like a nail”.
The reality is that it is rare to have a culture of change – and one of the primary qualities of an entrepreneurial team is its ability to embrace change.
However, since OPD teams have no expectation of continued employment, there is less effort to switch to a new OPD when new technology needs are identified by the management team. There are no legal issues with not continuing to engage them, as there would be with laying off employees. Additionally, the new OPD team comes equipped with an entire team of engineers that have worked together for years and have the tools, processes, and experience in place to quickly design the newest MVP.
This switching cost is greater than it may first appear. Full-time employees have almost unlimited access to the management team – especially in a startup, and thus a greater influence on management decision-making. It is important for managers in general to understand the inherent bias of a knowledge worker. Just as brick and mortar retailers resist online retail because of their preference to maximize the deployed capital, a knowledge worker’s capital is the time and effort spent obtaining their knowledge. They too have a deployed capital blind spot.
Startups need to maintain their culture of change at least until the organization has found a profitable business model. Hiring full-time employees who are not entrepreneurs will inevitably erode the culture. Using OPD companies for the development of MVP helps to maintain a pure entrepreneurial culture.
By its definition, a start-up has no existing revenue. Even when it does start to produce revenue, it is often not profitable revenue. A startup has a limited amount of time, or a limited amount of money (often both) in order to produce profitable revenue. This limitation is often referred to as the runway. There is only so much of it available.
Reducing time to market and lowering product development cost will extend this runway. The cost of developing a product is almost entirely a people cost. Reducing cost is a function of reducing the time necessary to design the product. OPD companies are particularly adept at this cost reduction largely because they “recycle” design elements from project to project. Because they generally start “half done”, cost and time are reduced.
Most products are composed of several subcomponents. In a large company, these subcomponents are highly optimized – you may spend $50,000 reducing the cost of a subcomponent by $0.50. This makes sense because it is almost certain that the $50,000 investment will be returned in a few months. In a start-up, you will likely only make a few MVPs and then pivot to a new MVP. Optimizing a sub-component makes no sense, as the investment will not likely be returned – ever.
The Lean idea is to produce a few MVPs in order to test the market’s response and learn what the next MVP should be. Optimization comes after the business model has been discovered.
An OPD company may not have the optimized technology for the final product, but they are very likely to have something good enough. In the lean start-up environment, getting the MVP done quickly and for a reasonable cost is more important than producing an optimized product.
A start-up operates in a different environment than an established company and has very different needs when it comes to product development. Start-ups should avoid extensive hiring until it is clear what the final offering is, that is, once the business model is known and proven. Instead, they should utilize OPD companies to do the heavy lifting of product development activities. Utilizing this strategy increases runway, allows the management team to maintain the required external focus and decreases the time to market.
About the author: Steve Owens, Founder, and CTO of Finish Line Product Development Services has over 30 years of successful product development experience in many different industries and is a sought-after adviser and speaker on the subject. Steve has founded four successful start-ups and holds over twenty-five patents. Steve has worked for companies such as Halliburton and Baker Hughes. He has experience in the Internet of Things, M2M, Oil and Gas, and Industrial Controls. Steve’s insight into the product development process has generated millions of dollars in revenue for start-ups and small businesses.