Successful offshore practices – let them work on your crown jewels!

The buzz around offshoring has certainly died down over the last year.  For a period of time, you could not pick up a magazine or read a newspaper without a lead article on the dangers of offshoring.  I had dinner tonight with a portfolio company CEO who has managed to shift most of his resources to India.  Today the company has almost 100 employees in India, over 30 of whom have been with the company for 5+ years.  Even more impressive is that the employee churn has been pretty low.  When I asked him about the secret of success, he said it was quite easy.

"Let them work on your crown jewels."

In other words, most software development opportunities are with consulting firms where employees work on a project basis.  So these jobs are usually fleeting and never last very long.  Other software jobs are body-for-hire which, once again, is not that interesting and does not provide real upside for the developer.  Many of the better opportunities have developers maintaining existing code, fixing bugs, and doing low-level programming.  By making a strategic decision early to let the developers in India work on the core technology this company has been able to thrive and prosper and turn its offshore team into a real strength.  All of the main architecture and design is still done in the US, but all of the development is done offshore.  The other reason why this has worked so well is because the company also made a conscious decision to send over our existing VP Engineering and a few other key developers to seed and build the team in India.  It is a wholly owned subsidiary and the employees all work for the company.  The startup costs are obviously higher to do this but if you are looking to do offshore development and do it successfully I seriously urge you to consider building your own team if you can find the right lead project/eng. development manager.  I have seen way too many companies fail in offshore development trying to just work with consulting firms as inevitably the churn and training costs end up being quite high.  In addition, to make it really work, let your team build real product, work on new technology, and not just maintain old code.

Favorite Quotes

Today is Wayne Gretzky’s birthday, the greatest hockey player of all time.  Anyway, as I was looking at Today’s Highlights from, I was reminded of a couple of my favorite quotes from him:

"You miss 100% of the shots you don’t take."

"A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be."

If you have read my blog in the past, I am sure you can understand why I love them so much.  They are apropos for not only sports but business and life in general.  Read them one more time, think about them, and figure out how it might apply to what you have not done or what you want to do!

Google Talk Federation – open vs. closed

As you are probably well aware, Google just announced open federation with other IM services via XMPP (jabber).  It’s about time that someone did this.  Sure, the Trillians of the world are great to have as aggregators of networks but what I really want is ONE identity that is cross network, cross platform, and cross communications (voice, IM, email).  I remember in 1998 when David Wetherall was talking about the future he thought we would all have one identity and that it would be our email address.  Well, 8 years later it is clear that email will not be the one identity with massive spam issues but potentially with federation of networks it may be our IM/VOIM identity, one day.  To date, we have all been on our own IM island where only AOL users could talk to AOL users and MSN to MSN.  While early, Google is taking a step in the right direction as it makes no sense for consumers to have to choose which network to join.  It should just work.  Now Google and others are taking the first step to letting us have one identity and by leveraging open standards and integrating with other services like Michael Robertson’s Gizmo Project and Earthlink.  It will be interesting to see if this forces others to open up their networks to play the open standards trump card or simply remain closed and proprietary. 

The other interesting part of this announcement is that later this year Google will also support SIP  allowing for true interoperability between different VOIP networks that use the open standards SIP protocol.  Cisco uses SIP (proprietary version called SKINNY), MSFT uses a form of SIP in Live Communication Server, and open source telephony software like Asterisk and Pingtel (Sipfoundry) either leverage this protocol for VOIP communications or can connect to SIP-based networks (Asterisk).  In other words, many in the business world who have VOIP services have knowingly or unknowingly jumped behind the SIP bandwagon.  While true interoperability with these services does not completely exist since some hardware vendors have created their own versions of SIP-based technology, this does provide an opportunity for the SIP-based players to potentially end-around Skype by combining networks.  While Skype has been doing incredibly well and has a tremendous network advantage, will the fact that Google is getting behind SIP and open standards neutralize the proprietary Skype advantage over time?  Does open standards win out over time versus closed proprietary systems?  Skype has no reason today to be SIP compliant since it wants to protect its most valuable asset, the network, but will it over time look to offer a SIP gateway?  Whatever happens it will be interesting to see if true open standards will triumph over closed and proprietary and how long that will take.  At the end of the day consumers don’t care about protocols, they just want it all to work seamlessly and easily, and they do not want to be on their own island for communications.  What I want is one identity or phone number that works on any IM network, VOIP network, or even integrates with my PSTN and cell phone identity?  Keep an eye out over the next year for innovative services that will move closer to this reality-dual ringing computer and cell phones, seamless transferring of a conversation between networks, and more control over who connects with us and when.

The Arms Race for Talent

Sure, the next-generation web is cheap.  It is about cheaper bandwidth, cheaper hardware, free software, and better tools.  In other words, you get much more done with much less than in years past.  I have written about this in a prior post, Web as Platform.  Anyway, has anyone noticed the arms race for talent out there?  Sure it is cheap to get a product up and running but to scale any business you need talented employees in engineering and product.  I have heard numerous stories over the last few months about smaller, innovative startups having a hard time bringing on qualified engineers as Google and Yahoo are offering 3 year packages of a $1mm or more in salary, restricted stock, and signing bonus.  I must admit, this is a pretty tough environment to compete against.  In fact, as you look at the landscape, everything that Google and Yahoo is doing is about stockpiling talent.  Let’s not forget that all of those tiny acquisitions of small startups is about bringing on the best talent possible. 

So then the next question you may have, is how do I compete for this talent?  It goes back to selling the vision of your company, the ability to make a huge impact in a small and thriving organization, and outlining the equity opportunity.  Those seeking the comfort of a nice paycheck at an established company need not apply.  All that being said, despite the next generation web about being cheap, the costs are rising quickly as the big dogs with hordes of cash are not afraid to spend it to stockpile their talent.  As you look at the bulk of your costs over the next couple of years, it is clear that your budget will reflect a huge percentage of cost in bringing the right people on board.  No matter how you slice it, despite this mantra of cheap, it is not as cheap as we all want because personnel costs are rising, not decreasing.  This next phase of ramping up companies is not about how much you spend on marketing as most services today are spread word-of-mouth.  It is not about technology spend as it is way cheaper than years past.  It is about finding and hiring the key people who know how to scale a back end infrastructure, who can create and deliver innovative product, and who know how to leverage word-of-mouth to create a huge opportunity.  And you must do this when Google and Yahoo are not afraid to be the George Steinbrenners of the web.  The good news is that just because you spend the most on your payroll, you don’t always win.  Just remember Billy Beane and his Oakland A’s.

Where’s your plan to manage your most important asset, your team?

I remember when I first got into this business over 10 years ago and one of my partners told me that the secret to success is about the people, not about the technology.  All too often we are enamored with how cool or sexy a technology is, invest lots of dollars to create that killer product, and sometimes forget that it is all about the people.  We spend lots of time on product development plans, sales plans, and financial models and not enough time preparing and thinking about how to continue to motivate and inspire your team.  When your assets go up and down the elevator everyday you must constantly remind yourself that you need to care for that asset if you ever want to have that killer product.  The end of the year is always a great time to reassess and plan for the next one.  As I spent the week before the holidays on a few compensation committee calls, I thought I would share with you some of my philosophy on compensation and how to take care of that ever precious asset, your employees.

From a philosophical point of view, I view compensation as the combination of salary, bonus (if any), and equity.  For cash starved startups, having management and employees believing in the opportunity and team and being motivated by equity is key to success.  From a cash perspective, you have to pay market to slightly above market rates to attract good people, but I prefer to see the employees with above market equity compensation packages to align interests.  You never want anyone worrying about paying their mortgage but at the same time, given similar backgrounds, I prefer the employee who will take less cash and a higher equity package. 

The next question you may have is what is the definition of market.  On a public company board, for example, I look at other companies that we compete with and other businesses that are in a similar stage of revenue growth and financial numbers.  On a private company board, there are surveys out there that you can get a hold of that outline compensation for different positions based on venture capital raised, geography, stage of company, and revenue.  None of these numbers are scientific but they certainly help you ballpark market compensation.  Of course, any active venture capitalist can look into their existing portfolio of companies to determine what market really is.  Taken together, you must decide if you want to pay market, below market, or above market compensation.  As I mention above, I like to pay above market on equity and at market or slightly above market on cash compensation.  Of course, there are certain cases where you have to be flexible and pay up for the right person.

In terms of bonuses, I am not a huge fan of cash bonuses for companies losing money, especially in the early stages of development.  As a company matures and hires additional executive talent cash bonuses become more important to retain top level executives.  With respect to bonuses, there are no guaranteed bonuses, only performance-based ones.  In addition, I prefer a performance-based bonus over just paying an executive more salary.  As far as bonuses are concerned, it is really important to have clearly defined goals and metrics to measure performance and subsequently pay out cash.  For most of the key management, I like to tie much of the bonus number 70-100% (depending on which function) to overall company numbers like revenue goals, number of new customers signed, and cash balance related numbers.  These metrics should be simple Yes/No metrics – it should be quite clear if someone realized their goal or not.  Of course, these metrics depend on the stage of company and predictability of the future, but overall it is good to see all of management working together as a team, succeeding or failing together on overall company goals versus measuring performance against individual MBOs.  Of course, this means having a clearly defined budget that is put together and agreed to by all stakeholders including management and the board.  This must be put in place by the end of the prior year so you are ready to measure and manage performance for the new year. 

As I look to the new year, it is important to have an option forecast just like any financial forecast.  In order to do so, you should have a general range of options that you will give to each employee based on their level such as staff, manager, director, VP, etc. so that each employee at each level is relatively the same.  The range is to obviously give a little more or less to a certain level employee based on performance and other factors.  From a company perspective, you then look at your hiring needs for the year, put in the number of estimated options for each employee, and you have just created your option forecast for the year.  These compensation bands are important as your employees talk to each other, and whether you like it or not, employees end up knowing how much each person makes and what their equity package is.  In fact, I have seen several instances of VPs asking for salaries and bonuses similar to their peers out of respect.  This is obviously how I do not want to compensate employees as each function adds a different level of value and each VP starts out at a different time in a company’s life.  That being said, it usually becomes an issue at some point in time so it is imperative to have a total compensation range for each level of employee and to avoid paying someone total compensation that is completely out of range and non-market.

This is just a general framework, and there will always be one-off adjustments to be made.  For example, throughout the year I like management to let us know of any "at-risk" employees that may need some adjustment to their overall compensation numbers.  In addition, we also need to know about which employees we should be proactive about and move their compensation to the higher end of a salary range to further incent them.  Finally, I like to know about any key performers or herculean efforts that should be rewarded with some additional performance-based options.  If you can take care of all of these issues in one fell swoop at the end of the year that is best from a governance perspective.  However, depending on the situation, you may have to act swiftly as circumstances can force you to do otherwise.

Finally, and most importantly, there is more to making your people happy beyond the monetary compensation.  As I wrote in an earlier post, A Players like to work with other A Players.  To the extent that you have a strong team and every hire is better than the next, I can guarantee that you will attract some great talent.  A Players like to learn from other A Players and like to know that when their backs are against the wall, they have other team members with the experience and know-how to persevere.  In an employee’s mind, the more A Players means the more likely that the company will succeed and create some real equity value.  In addition, people like to work on exciting projects in a dynamic, lively atmosphere.  There is a big difference working in an environment with team members who are passionate about the product and success of the company versus employees who are happy to go through the motions.

The bottom line is that you have to take care of your number one asset, your team, and start preparing early in the year to make sure that you have the right plan in place to keep your team motivated and excited to work at your company.  This includes managing compensation proactively but also making sure you hire the right people and create a winning, passionate atmosphere in which your team can thrive.