Out-of-Nowhere Companies Start Up Rapidly

Starting up a company is the ultimate transformation. It means creating a substantial going concern where nothing existed beforehand. Theoretically, every start-up, from a pizza shop to a dry cleaner, could be considered a transformation of sorts. I want to be a little more selective. For our purposes, I want to limit our discussion to start-ups that make big change fast. These are organizations that need to launch and scale rapidly in order to succeed. They have big appetites. They want to get an innovative new model to market first, set an industry standard or take on entrenched industry leaders. If they move slowly, they fear they will be overtaken by larger companies with more market power.^[2]

For example, TiVo, a start-up television service provider, used outsourcing to get access to business capabilities that were gassed up and ready to fly. Its goal? To take a new market by storm. In 1999, start-up TiVo launched a wholly new type of television solution. It provided an easy-to-use system it called a personal video recorder. Without the muss and fuss of digital storage media or arcane VCR programming codes, a fan could record up to 80 hours of TV and replay it at his or her convenience. The system could even track down favorite shows despite schedule or even network changes.

At the outset, TiVo realized that its success would depend on creating a market where none existed. With strong partners in Sony, Hughes, and Philips Electronics, and a technology lead, TiVo set out to both establish and dominate the market before competitors could get traction. TiVo’s leadership believed that speed would be essential, so they turned to outsourcing. The company outsourced distribution, manufacturing, the process of setting up retailers, public relations, advertising, and customer support.

The way it outsourced customer support is particularly telling. TiVo’s unique product had unusual needs. Since it was an entirely new concept, TiVo knew it had to invest in helping each customer understand, install, and use the new product in a way that specifically suited them. Ordinary call-center scripts and routine approaches wouldn’t do the job. TiVo needed distinctive customer support in force from the start.

TiVo turned to ClientLogic for flexibility and a cooperative commitment to help TiVo improve the process over time. TiVo’s provider worked closely to jointly establish processes and develop innovative training materials and incentives to enable the agents to ‘‘think like a TiVo’’ customer. In addition, TiVo gave agents the product to use in their own homes. As a result, TiVo’s outsourced staff have mastered the open-ended dialogues and investigative problem solving they need to provide real customer solutions. Using TiVo’s CRM application, they’re able to feed a rich description of customer problems back to TiVo’s product development and marketing organizations. Over time, they have cut the initial cost of support per subscriber by 94 percent.

The jury is still out about whether TiVo’s bid to take over the personal video recording market will work. The company is not profitable, and competitors like Microsoft are salivating at the opportunity to join the feast. Whether or not TiVo will benefit from its first-mover lead is a question for its strategists. But it could never have executed its chosen strategy without relying on outsourcing.

Out-of-nowhere start-ups use outsourcing to put well-oiled operations in place quickly and to pay for them by the drink. In this way, a small but growing organization gets the mature capabilities it needs to take on bigger, stronger competitors without spending scarce seed capital and scarcer management time building an organization from scratch. If the company takes off, it also has access to the outsourcing provider’s bench strength to support its growth. These advantages, however, come at a price. Most start-ups would find it cheaper to grow organically. But it does take longer. So the start-up would only opt to outsource if speed to market were pivotal to its strategy. When its growth trajectory slowed, it would consider bringing outsourced operations in-house to cut costs.

In Polaroid’s early days, for example, it relied on contract manufacturers like Timex—yes, the watch people—to manufacture many of its high-end cameras for all the reasons outlined above. When the company’s spectacular growth slowed in the mid-1970s, it brought manufacturing in- house. (It actually contracted hardware manufacturing out again in the late 1990s as it struggled to trim its high cost structure.)

^[2]Jane Linder, Susan Cantrell, and Scott Crist, ‘‘Business Process Outsourcing Big Bang: Creating Value in an Expanding Universe,’’ Accenture Institute for Strategic Change research report, July 2002.