Even though subcontracting is common in the software industry, it is not much talked about and it is underrated. In this article, I will discuss how software companies can use subcontracting as a tactical tool – successfully and ethically while avoiding general pitfalls.
Right and wrong starting points for subcontracting
As I have worked to advance subcontracting as part of the healthy activities of software companies, I have often through about where the reputation of subcontracting comes from. Perhaps motivation factors are the root cause.
The starting points of subcontracting define whether subcontracting is good or bad.
Three ways to fail in subcontracting at the very beginning are:
- If you are acquiring something you do not understand or know, the problem will remain a problem, even if it is outsourced.
- If you are acquiring something you do not want to do, not even a partner can turn it into gold.
- If you are looking for the lowest price, remember that if you pay peanuts, you get monkeys.
A software company helping its customers to keep up with the leaders of the digitalisation race should only have one reason to use subcontracting: to find the right talent to meet the right need at the right time. Only in this way can subcontracting be successful.
What is the difference between subcontracting and employee leasing?
- Subcontracting means that work results or services are purchased from another company.
- Employee leasing means that employees are acquired to work under the acquiring company’s supervisors by leasing them from another company instead of using employment contracts.
In practice, the distinction is not always this simple. In agile software development, subcontracting is typically similar to employee leasing, for that reason alone that fixed-price project deliveries with inflexible requirements specifications are starting to become extinct.
As a result, work is carried out alongside permanent employees, guided by the customer’s product owner, in the customer’s premises, in the employee’s own name, relying on personal strengths and skills, independent of the project and its specified results. The business model and quality control are straightforward and transparent: the customer pays for the hours that it approves to be productive.
For this reason, it is apparent that requirements set for subcontractor training, competence, work quality, presentation skills, commitment and permanence do not, in any way, differ from those set for regular employees. Companies want to hold on to good subcontractors similarly to their own good employees, and they want to provide them with new challenging projects whenever the last one has ended.
Subcontracting from abroad – legal restrictions and attitudes for cooperation
Software companies purchase either results or service capacity from abroad.
In practice, it is recommended that services companies deliver from their own country and offices are only purchased from abroad. Because even a fairly small role of a foreign subcontractor is interpreted as the use of a posted worker in Finland, I would recommend companies to avoid their use due to the various conditions set out in the legislation.
Posted workers have raised much discussion recently, as many larger corporations have brought many IT employees of their subcontractors to Finland, for example, from India and Pakistan based on the assumed lack of workforce. However, I believe that the payment of lower wages, which quickly became the central theme of this discussion, is no indication of success stories.
The EU General Data Protection Regulation (GDPR) has strongly made me think that the easiest way to acquire foreign subcontractors is to focus on the EU. In this way, there are no unnecessary problems related, for example, to the processing of personal data.
When foreign subcontractors are used, individuals behind services are more distant, both physically and in terms of culture. This calls for better management, quality control, sales responsibilities, meetings, routines and training. Profitable partnerships are not built with an eye on individual projects or hourly rates. Instead, they focus on sustainable and confidential long-term cooperation, from the very beginning.
Therefore, subcontracting does not comprise assistance during emergencies or any secondary assignment. It is equally valuable as work carried out under employment contracts, with the same objectives. When people feel themselves appreciated, they can practically make miracles.
Why do software companies use subcontracting?
There are many misconceptions related to subcontracting. People imagine that, when using subcontractors, someone always loses and the stronger always takes advantage of the weaker, that projects are more expensive for customers as everyone takes their cut, or that suppliers should always try to replace subcontractors with regular employees.
I have tried to overcome these misconceptions by openly explaining why software companies should use subcontractors.
Reason 1: Immediate response. Of course, software companies also want to acquire the skills they do not possess. However, a large part of subcontracting focuses on each supplier’s key competence areas based on demand. The software industry is a growing area where organic growth is enabled strategically by recruitment and tactically by subcontracting. The ability to respond immediately speeds up the growth and success of customer companies, which in turn feeds the software industry. As a result, subcontracting does not take anything away from permanent employees in key competence areas.
Reason 2: Relying on the sales capacity of larger partners. Software companies are rarely in a similar competitive situation or development stage. For example, smaller companies can fairly easily obtain annual growth of, say, 30% through recruitment, while this would require investments on a completely different scale in larger companies. Instead, acquiring the customers required for growth can be difficult for smaller companies: recruiting a new full-time salesperson can require massive costs. What is more, larger customers are not often within reach to smaller companies, not even considering their sales capacity, as these customers are looking for continuity by purchasing from established suppliers that are able to bear their responsibilities in all situations and to keep their promises.
This is why relying heavily on the sales capacity of larger partners is highly effective, particularly before a company reaches the 100-employee mark. In this way, additional costs paid to subcontractors only come from completed sales, and both parties can focus on growing in a way that feels natural to them.
Reason 3: Evening out any changes in demand. If all software companies needed to prepare for maximal customer demand at the same time, all the time and in the same competence areas, the price of effective work would become intolerable. This idea is also otherwise absurd. After all, who would spend any longer time in any company if there was nothing meaningful to do.
Companies of similar sizes and with similar technical profiles may focus on different customer segments, fields or application areas. Then, demand may fluctuate following different rhythms, and a company may have a reserve of exactly the talents another company urgently needs.
The workforce-driven software industry demands a high efficiency rate in order to maintain even a reasonable operating margin. This is why subcontracting is sensible, also considering the national economy. It produces savings, evens out any shortages of demand and speeds up everyone’s growth – growth that does not reduce anyone’s cut, but produces benefits for all.
Reason 4: Many supertalents are self-employed. Independent entrepreneurs, self-employed talents and light entrepreneurs are a special case in terms of subcontracting. These form the largest group of subcontractors.
In the software industry, employees have not been forced to become entrepreneurs due to the lack of work in a long time. Mostly, these entrepreneurs are supertalents who, above all, rely on their skills and ability to find suitable projects. These supertalents are highly motivated and effective, and the quality of their work is exceptional. To counterbalance the risks they are taking, their earnings are often very high due to their light cost structure.
For companies using subcontractors, problems come from the availability and scaling of these supertalents. This calls for long-term networks and builds a market for special network companies and services that transmit supply and demand.
Reason 5: Prices paid by customers. What about prices paid by customers? After all, customers possess the highest negotiating power. Customers have the need and the money, and they decide who to pay and for what. However, there are options – these are called markets, where market prices are paid. When using subcontractors, market prices are divided between several parties. Parts of these prices are used to cover sales and customer relationship management, while other parts are used to cover work expenses. Customers receive the same service more quickly and at a lower cost than without any subcontracting.
In fact, unit prices have dropped for nearly twenty years in the software industry, while salary costs have increased at an annual rate of a few per cent. It has been necessary to make significant leaps forward in productivity. However, the industry is doing well and employees are in good health: the sensible use of networks, alongside developing methods, technologies and training opportunities, is a key productivity factor, which does not decrease anyone’s salaries or increase anyone’s workloads.
Subcontracting during good times – responding to a shortage of talent
In recent years, we have been able to enjoy rapid economic growth and, in certain technology segments and, at least locally in the Helsinki region, in particular, there has been a serious shortage of talent. High demand has attracted talents to establish their own companies and increased the supply of subcontracting relative to the steady availability of experienced workforce. This in turn has had an impact not so much on average salaries, but slightly on the salary structure: entrepreneurial risk-sharing salary models have increased alongside conventional models and entrepreneurship.
The shortage of talent is a practical reality, even though part of it is related to the mismatch problem. Agile methods have replaced more conventional methods, for good reason. However, while they get their strength from true presence, they make it difficult to make full use, for example, of the Oulu, Tampere and Turku regions in subcontracting.
Either way, demand remains high. There is more than enough work for both subcontractors and regular employees, and has been for several years without anyone needing to struggle in any diminishing markets.
Subcontracting during bad times – major changes and challenges
A rise will inevitably even out, eventually turning into a descent. This is when many things change. However, I dare to assume cautiously that the software industry will not crash any time soon. Digitalisation is a megatrend that is unlikely to stop, unless the whole world comes to a halt. AI and robotics will irrevocably become a reality, algorithms and codes will be present everywhere, bringing about a new industrial revolution, and codes will continue to be written by flesh-and-blood app developers.
Changing salary models and the increasing use of subcontractors add flexibility to demand and, when the truly bad times come, subcontracting enables rapid downward scaling.
However, cooperation and networking, above all, stand for efficiency and everyday resilience in the software industry: they quickly reallocate supply and demand and also adapt to economic cycles better than more rigid structures. After all, work is unlikely to decrease in all industries at the same time, and new mismatch problems also arise from changing economic cycles.
What about all the truly major challenges, such as climate change mitigation? This is regarded as a massive cost, while it should be considered to be the largest investment in the future in the history of humankind. How could such a change reduce demand for work?
In my mind, partnerships, networks and subcontracting work as a bridge during transitions that enables supply and demand to meet better in the rapidly changing world – for the best interests of both companies and employees. The software industry, if any, is an area where all the opportunities should already exist.
How to build a good partner network?
Next, I will nail some of my theses to the door of the subcontracting castle. These are not unique or the only wisdoms, but I believe that these principles help software companies to build and grow a good and well-functioning network of partners.
A partnership is analogous to a customer relationship: its ultimate success is built every day during each meeting and in day-to-day activities, and it cannot be copied as such.
Selecting a partner
- Select those you want to be partners with. This can also be called selling, but be careful not to promise too much. Select partners to whom you can actually offer projects.
- Select ethical partners. While actions provide evidence, remember to check the compliance of potential partners with the requirements set out in the Act on the Contractor’s Obligations and Liability when Work is Contracted Out.
- Select long-term partners. Your partners will be parts of your company, business image and services.
- There is always room for more good partners. Supply creates demand and a positive cycle.
Agreements and agreeing
- Focus on having an understandable content and for having the content understood. Simplicity is the key.
- The foundation must be strong, and confidential relationships cannot be built with legal trickery. They are based on trust.
- You do not own the whole world. Offer such terms and conditions that you would accept as a subcontractor.
- Whether your partner is big or small, a well-functioning partnership is always equal.
- Ethics and practice: 1) agree on what you will do, 2) do what you have agreed to do. In exceptional situations, return to step 1.
- Use sufficient margins to keep subcontracting profitable.
- Do not be greedy. Business must always be profitable, also for your partners.
- A partnership is like a customer or employment relationship. Take care of it face to face.
- Remember that all people under employment and partnership contracts are equally valuable – do not label them into separate categories.
- Make sure that everything works in practice, instructions are straightforward and support is available. There is no need for any entertainment.
- Hold on to good partners by finding new projects for them.
- If you are fair and open, you can also be demanding.
Written by Mika Rosslyn
It's not always required to start your own company to become a subcontractor for a software company. Siili One enables an entrepreneur kind of freedom to work for developers – without the pain of having to sell.