Outsourcing Tips for Start-Ups: Leaping the Valley of Death

Nearly every start-up faces challenges in crossing the “Valley of Death”—that in-between space experienced after a medical device company has received angel or venture funding but before it produces sufficient revenues to become profitable from the sale of products or services.

Along the way, if a start-up is appropriately managing risks, the company will demonstrate success by setting and achieving realistic, agreed upon and obtainable goals. By delivering on promises, the company’s management team can establish credibility with investors and the market to increase the value of their company. As this track record of success continues, investors will gain confidence that risks have been mitigated and are more likely to reward the start-up with additional “up-rounds” of funding or with other beneficial incentives. To help ensure success, one strategic activity the start-up’s management team might consider employing is engaging external engineering and services organizations to fill voids in their capabilities and get their products to market faster.

In the time before the start-up launches its product or service, management is faced with a dilemma: add staff to develop areas of its technical innovation (e.g., instrument systems, medical device hardware, software, and/or manufacturing capabilities) or outsource this work to a quality engineering, service, and/or manufacturing firm.

Both paths offer advantages, but the choice of taking the work outside the company or doing it in-house requires careful thought and planning.

Some planning items to consider include:

 •  Knowledge of and making an honest appraisal of management’s capabilities. This is one of the reasons investors prefer working with teams that previously have demonstrated success.
•  Understanding of the market and the business case. Generally, by the time a start-up has funding, has it demonstrated that its product has a compelling story? What’s the net present value? What happens to these values if the product can be shipped to customers earlier, or worse, if the product is delayed or misses customer expectations?
•  Understanding of the business risks and rewards associated with time (e.g., time to market and overall monthly costs for administrative and engineering [the “burn rate”] whether internal or external) in order to select the process that best fits the organization.
•  Understanding of the manufacturing equation. Does the start-up want to be responsible for manufacturing? What are the ramifications of doing the work in-house versus with a contract manufacturing organization?

In the book “Innovation Design: Creating Value for People, Organizations and Society,” author Elke den Ouden outlines that it is important for start-ups to innovate around their core strengths: “From the corporate perspective … competences make a disproportionate contribution to customer-perceived value; they are competitively unique, and extendable; in a sense they provide a gateway to tomorrow’s markets.”

Companies that focus upon their core strength know to patent or tightly control this area. In order to get to market the fastest and with the greatest return, it is likely that outsourcing the non-core product areas makes sense. Of course, with any situation, there are other factors that can influence management’s decisions. One thing that often can be a challenge with novel technology is when there is only one supplier of a critical component. Sole sourcing of a critical component is a risk, and it tends to make management and investors nervous. To mitigate this risk, the start-up likely will have to add inventory, increase the amount of engineering qualification for incoming parts or develop around the technology in order to compensate for the associated risks.

Factors in Deciding to Design or Outsource
Before embarking on a development project, it is wise to consider management’s capabilities, current and future funding levels given a range of possible outcomes and the status of the product in question. For instance, it may be good to consider what the product needs to be commercialized—robust design, market requirements satisfaction, manufacturability and serviceability. Finally, does management have the competency or “bandwidth’ to complete the project using in-house resources versus using outside engineering services?

Other questions and topics that management might ask of its staff include:
 
•  What are the start-up team’s core capabilities and bandwidth to carry on more projects? What is the core technology/brand? Are company strengths in: the software, chemistry or application, the reading or sensing methodology, e.g. sensing technology, distribution, or automation? Does the management team have the requisite skills and time to focus on areas outside of its key intellectual property (IP) position?
•  Does outsourcing reduce market entry risks? If management selects an outside firm, it could still miss the mark if something in this process fails. Management must establish the qualities they are looking for in order to keep the project on task and on budget. One area that often is overlooked in the rush to develop new products is the need to have a clear set of product requirements that are fully understood by both company management and the outsource partner(s).
•  Time to market. What are the various business risks and costs if market entry of the product or service is delayed by one, three, or 12 months? Does a delay permit a competitor to be first to market? It easily can take three to nine months for internal resources to fully coalesce around a project. The more compelling the technology, the more costly it may be in failing to quickly act to bring the product to market.


–  “Burn versus turn” timing. Is it better to hire a team, coalesce around the product requirements and drive the development effort in-house? What is the time required to attract talented individuals? What does the start-up do with its team after the project is finished?
– Overhead for in-house system designs.
– What is the likelihood of follow-on product development needs?
– Systems manufacturing costs. Will company have any time to focus on cost reduction?
– Does the start-up have the ability to attract the necessary people with skills and the talents required to complete the project in-house?

•  Intellectual Property. IP is near and dear to nearly every start-up that wants to stay in business. Developing a plan and protecting IP is essential. Often, an outside resource can provide a sounding board to better clarify or to uncover areas of possible patent opportunities management might have missed.
 •  It is useful to identify partners who will assign any IP to the start-up. Thought also should be given to partners that want to retain a portion of the IP or where the start-up is using IP generated by a partner so to not end up competing against a competitor with your same product in the market later.
•  Understanding management’s desire for control and visibility into the product development process? A start-up that wants to control every aspect of product development may  create challenges for themselves in a number of ways: by missing opportunities to improve the product via the expertise outside partners can bring, delaying start of the project in order to hire engineering personnel, and severely limiting or interfering with the flow of information to engineering partners, thus causing delays or complicating the development cycle in such a way as to deliver an inferior product.
•  What is the development burden placed on the product or service over time?
•  Carefully consider the manufacturing equation.– What is the ability of the start-up or an outsourced manufacturing company to rapidly scale production?

– What are cash flow needs for manufacturing? Are these needs greater for an outsourced manufacturing company versus internal manufacturing capability?
– How much time will it take to piece together the ISO and regulatory requirements for an internal manufacturing facility?
 
•  Is an earlier time to market worth the up-front investment in non-recurring engineering (NRE) costs? Can long-term engineering costs be mitigated by outsourcing?
•  Your quality system or mine? Most start-ups with an in-vitro diagnostic (IVD) or medical device product are not mature enough in the beginning to have their own regulatory structure. Outsourcing the engineering and manufacturing of products de facto builds a great portion of a start-up’s regulatory system, thus saving time and enabling market launch.
•  Can the start-up derive a superior product by outsourcing? Part of the dance that occurs between management and outsourcing providers depends upon the confidence management has in the supplier. If trust can be established, then there is a good basis for project development to occur.

Outsource service providers often can reduce risks by getting started on a project faster than an in-house crew of engineers. The outsourcing company can do this because it often has a significant percentage of its team intact and ready for the next project. Some companies might add skills as needed, but there is an expectation by the start-up that individuals will have a depth of understanding and expertise in their given fields. This means the time to get up and running or trained should be minimal. Knowing the capabilities and previous project experiences of the outsourcing supplier often becomes part of the most important selection criteria for management in determining which companies are best suited to be an outsourcing vendor.

Outsourcing companies often are better prepared to create new products than their clients. When you develop five to 10 new products per year, you have a natural advantage in speed and adaptability versus someone who sees a new project once or twice every two or three years. Of course, someone who is fully immersed in a project may have a deeper understanding of the nuances of the product, but this understanding may come at the cost in turnaround time and thereby burn rate.

Some start-ups will seek partners for all aspects of the product, but most clients seem to like retaining control of at least one or more key areas of intellectual property. A successful start-up management team usually is good at recognizing its strengths and focusing its attention on the core areas where it can drive a market competitive advantage. During a project, the focus of the start-up often helps to delineate where the teams may divide their efforts to conquer the completed project. These teams recognize the value of hiring partners (i.e., quality-driven outside engineering and manufacturing firms) to help them efficiently manage critical but non-core elements of the project.

A quality-driven engineering firm can help a fledgling company and its investors achieve their goals and reduce risks by offering an independent voice and another set of eyes based upon years of experience that can shorten development times. Outsourcing partners also can provide a level of “due diligence” support for the investors as well as a dose of reality to the project. The service provider can help management and start-up investors assess the effort required to prepare a technology for commercialization. Entrepreneurs, departing academia or seasoned entrepreneurs creating their umpteenth start-up should recognize the value in getting ideas from a number of different sources, especially from people who have commercialized many products. Quality engineering and manufacturing companies want to add value for their clients. They do this by providing inputs and guidance based upon their years of experience and the expertise of their relative disciplines obtained over time.

Using experienced engineering, service and manufacturing firms and applying these inputs to the perfection of the product often results in a superior product. Gaining inputs from a variety of engineering disciplines: project management, industrial design, as well as mechanical, electrical, electronic and optical systems engineering, bring with it a “best practices” mentality to product development that can provide a clear advantage for the start-up client in terms of design simplicity and cost.

Outside firms offer a wide range of services and either can speed product development efforts or rapidly scale manufacturing much better than most start-up companies.

Some services include:
 
•  Engineering and product development;
•  Systems manufacturing;
•  Consumables and reagent manufacturing;
•  Market research;
•  Quality testing;
•  Regulatory guidance and support;
•  Field service; and
•  Product financing.

It may be very advantageous for the start-up to outsource all or certain aspects of their product design. Outsource engineering companies can help companies complete their IP and offer a number of advantages for companies, such as providing expertise in areas that are important to the success of the product or service that are not essential strengths of the start-up.

For example, an engineering firm knowledgeable in plastics and systems interfaces might be able to develop a well-integrated interface between consumables and the system that meets cost targets, drives quality, ensures the quality of results, while enabling manufacturing processes and simplifying the overall product design. Outsourcing engineering brings value by supplementing development efforts and adding much needed expertise and focus to areas critical to the success of the product. Engineering service firms build value not only by helping start-ups get to market months faster, they also can support specific initiatives such as reducing cost. The following is a quick cost-reduction example:

The Non-Recurring Engineering Example
In a recent example of a simple cost comparison for outsourcing, a client wanted to design a more commercial product. The budget for this project was approximately $750,000. For this, the client was to receive a system that cost $50,000 per year. The engineering company suggested that the client could reduce the costs of producing the product by 35 percent with an engineering project of approximately $500,000. In this example the investment cost of $500,000 had a payback time estimated at 27 months. By expanding the project, the client would have a product that not only costs less but would require fewer labor hours to support in the field, allowing the start-up to focus on its core strengths and freeing its internal resources to focus on adding test menu versus field support. A brief comparison of in-house versus outsourced engineering is shown below. Outsourcing services can range anywhere from a simple hourly consultancy where a second opinion is needed, to a complete turnkey project where the product is ready to launch in the marketplace, or to something in between.

Good Marketing Requirements
Good marketing requirements can help speed development and remove ambiguity from the project. In speaking with many venture capitalists in preparation for this article, we heard a number of times that knowing what customers are willing to pay for can be critical. In essence, this also is saying, having clarity of the product requirements and developing what customers value is important and thereby an important point to understand before investing.

Start-up companies often begin with a technology and build on that technology. Scientists and engineers generally are very good at describing their technology and what it can technically do but are not necessarily able to identify the features that are critical to the customer. It is critical to align features with attributes for which a customer is willing to pay.

Adding the discipline of marketing and customer-driven product requirements can be an important start to any engineering project. Knowing what is important to customers also speeds decision-making during product development.

The better a vision of an end user’s needs or problems can be conveyed to project managers and engineers the more likely a product will be conceived that fits those needs. An engineering team that is familiar with customer needs is more likely to present options more closely aligned to the final solution and more likely to present options that create “delighter” features that better satisfy the end user.

Focusing on Requirements
For product requirements to be of value they must be concisely written. Conflicts are inevitable in product design and identifying the optimum fit based upon the start-up’s inputs and needs is like navigating a narrow waterway. The edges of the waterway are full of solid objects that can spell disaster for the start-up company, but delivering a good product is very rewarding to everyone involved.

Planning versus iteration is important. Clear product requirements always trump a faster start time. Requirements must be unambiguous, limited in scope, testable and verifiable and should be best suited for the task. For ISO verification and validation phases of product development to be completed a test plan must be initiated. Test plans begin and end with product requirements. Unfortunately, performance and verification testing can be overlooked during development efforts when the pressure to get started overtakes the teams involved. Not devoting the time to develop clear requirements may mean that a project starts earlier but does not mean the project will be completed any faster.

Testing is the basis by which an engineering team can provide their seal of approval on the product design and the basis by which a regulated product can move through regulatory hurdles. Limiting or avoiding test procedures as a way of shortening the development process can add unnecessary risk to the project and add time to the overall schedule should a problem arise in later phases of the development effort.

Avoid the paralysis of analysis. There is no perfect product marketing requirements document or product specification document and changes are inevitable. So, getting these critical documents to 80-90 percent of perfection likely is good enough. During the development, chances are you’re still going to learn things that will cause you to make modifications. It is generally better to get to market three to six months earlier with a product that has 90 percent of what you need versus a product that has 95 percent of what you need, but late.

It is critical for the start-up to invest in having a strong project manager (PM) representing the firm’s interest. This person should be able to focus a sufficient amount of his or her time to address questions from the outsource engineering partner. Having competent project managers on both sides ensures good communication and keeps projects focused on agreed upon prioritized tasks. The start-up needs to be able to rapidly respond to questions from its outsourcing partner to resolve the inevitable conflicts that arise in the product development projects and the engineering team needs to have a PM who can keep the project on both schedule and on budget.

Engineering as an Art
The process of engineering new products can be perceived as art when processes are not fully understood or where there is ambiguity between well-intentioned features such as the system must perform ABC functions while costing nothing to make. This is a ridiculous example but it helps demonstrate the connection and conflicts between features and costs. The difficult job of the project manager is to bring all of the disparate inputs together and to plot a course to achieve the overall goals of the project.

A similar analogy to the role of a project manager might be described in mathematical terms as a linear programming optimization problem, where there are multiple variables of inputs arranged in a multiple equation problem. The key is finding the optimum client-driven solution. The program manager’s art is to solve the linear programming problem and find the best solution for management where the variables are feature inputs for the constraints that can be in conflict. The art lies in the ability to develop a constrained design solution that meets a specified set of product features at a given level of investment and time, for a product to be made at a given volume and cost.

Perhaps nowhere is engineering perceived as an art than in industrial design (ID) engineering. A good industrial design can save an average product from the trash bin, reduce the cost of manufacturing, or enable servicing, but an industrial design that is not well integrated with the mechanical aspects of the product can be counterproductive and lead to an increase in long-term costs. Integrating the ID early can save a great many heartaches and cost overruns later. Unfortunately, some start-ups think of ID as an afterthought, a shell to go around the device and lose the advantages of an integrated system. Start-ups can also fail by not enabling the interaction between the ID outsource and the engineering outsource partners, and this can lead to mismatches.

Engaging both partners can greatly help to clarify product requirements which can greatly speed developments. Sometimes a solid industrial design team can help integrate disparate or inconsistent ideas and bridge the gap between non-aligned product visions. Developing a solid industrial design often is overlooked by start-ups due to the perceived costs. Similar to the NRE Chart examples above, there is a clear payback for industrial design, especially where the design matches the volumes of units produced and the costs of producing, servicing, or shipping the product can be demonstrably reduced over time.

Fail Earlier Than Later
Failing early can buy management time to pursue other paths to get to the market. Many savvy engineering firms take a targeted approach to product development. These firms focus on product risks up-front as a way of improving project success and as a means of delivering a successful project in the time specified. If a group sets off on a development effort without managing risks early there is a proportional increase in risk that the project will take too long to develop or that the final product will fall short of the market need.

In software programming, for example, a personal rule of thumb is one week of concentrated workflow analysis and product definition within the core development team is worth one month of programming time.

The better job the project team participants do to identify the process workflows and identify timing conflicts between events the more likely they are to have a successful development effort.

Intellectual Property
Outsourcing engineering services, especially those that retain no IP, can be a great way to expand the IP portfolio. A good portion of quality engineering firms that support product development for clients do not retain any intellectual property. In addition, good firms constantly are looking for ways of enabling IP for their clients as a value add. Sharing IP may be one way vendors occasionally reduce engineering development costs. Sharing is rare and only works if there is a second client who can take advantage of the technology within a specified period of time. Should there be a provision for a sharing of intellectual property it is important to ensure that the investments the start-up is putting into the product will not return as a direct competitor.

Focus on Quality and Cost
Per the discussions above with regard to having clear product requirements, balancing the needs of quality and cost are essential to products and the ability of the start-up to meet the needs of its defined market. A quality engineering firm wants its client to be successful so product quality and production costs should be aligned with customer expectations. Quality and cost are two of the key metrics that must be answered before beginning any development project. Quality is a metric that needs to be tested. If quality is not quantifiable, it is very difficult to judge the value of the work that the service provider brings to the table. Likewise, volumes drive cost considerations. It is possible to adapt to changing volumes over time. Having the perspective of the timeline is critical to success.

* * *
Quality engineering and manufacturing companies want to add value for their clients. They do this by providing inputs and guidance based upon their years of experience and the expertise of their relative disciplines. Using experienced engineering and manufacturing firms and applying these inputs to the improvement of the product or service can lead to a superior product. The goal of quality services firms is to make the start-up and its products viable, otherwise why go through the effort to develop the product? A start-up company is a risky venture for the management team, start-up investors, and those partners who will assist the start-up in growing beyond its current stage.

The old adage  “time is money” holds especially true for start-up companies where missteps and delays in product development can mean delays in getting to market and an untimely death through financial starvation to a company attempting to cross the Valley of Death.

A quality driven services firm can help a start-up company achieve its goals by delivering a cost effective customer-focused quality product to market faster. Entrepreneurs should consider outsourcing for those areas where they lack expertise and the resources to hire long-term employees, and use outsourcing suppliers to demonstrate to investors their ability to deliver quality products and services to the market in a timely manner. 

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David Hagebush is a product commercialization, strategic marketing, and business development consultant with more than 25 years in the biomedical field. In the roles of project lead as well as an engineering services provider, David has directly contributed to more than 20 projects involving life sciences, in-vitro diagnostics, and medical devices. In addition to his entrepreneurial work in start-ups, he currently advises clients on outsourcing engineering services and marketing to enhance their efforts to bring innovative technologies to market.