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Thursday, March 25, 2010

Common Startup Misconceptions and Mistakes - Dependence On Contractors

I have started and worked with a number of startup companies. My personal experience growing businesses from early stage development to sale, IPO and closure has taught me that there are common mistakes that entrepreneurs make and misconceptions they hold that frequently impact the long term success of their businesses. These misconceptions and mistakes are the result of the entrepreneurs being new to the process of organization building. The use of contractors is very common for startups. Contractors are a great resource if used properly and a real challenge if not managed properly.

In the early stages of a startup temporary contract workers are commonly used to bootstrap a company. Contractors are used because funds are limited, the business is not organized in a way to bring on full time employees or the business is not sure how long it will take and what effort is required to accomplish tasks. Initially, using contractors to get a prototype completed or to explore what it will take to build a company may be the only option. Despite these objectives and constraints entrepreneur also need to realize the consequences of using a temporary work force to bootstrap a company.

C0-Dependency - In the long run relying too heavily on contractors without planning for a transition to a more permanent workforce could have a detrimental impact on a startup. Many entrepreneurs do not think about the consequences of building a company based on temporary workers. In many ways they treat temporary workers as permanent employees relying heavily on their expertise, allow contractors to be the knowledge depository for the business and build organizational structure and communication channels around a contracting staff. When a company is required to transition to a more permanent structure the processes created using contractors may be inadequate for the long term growth of the company.

Transition Planning - Frequently contractors can only commit to so many hours or for a fixed duration of time. People become contractors to allow them to float between projects and to control the amount of hours that they dedicate to each project. Startup's can quickly evolve from a temporary worker need level to full time commitment levels. If the contractors cannot transition to full time roles the business will have to start the hunt again for other individuals to full their role. The search for resources takes time, energy and money resulting in lost productivity for the company and a distraction for the management team. The best advice for a startup is to create a transition plan to a full time staff in the early phases of company growth. This will help to constrain the work contractors are expected to achieve and put in place processes that assure that the work contractors have done is optimized and the new staff is capable of picking up where the contractors left off.

Knowledge Loss - In most cases contractors are temporary. This means that all of the knowledge and processes that they acquire or create from a technical, operational or business relationship perspective could be lost when they depart. This loss of knowledge can have a detrimental impact on an organization causing it to take two steps backwards before it can move forward again. In some cases the loss of a technical contractor could require a future redesign of a product or platform because the contractor did not document or communicate the architecture of the system to anyone in the company. Also, even if the design was document the new technical resource may not understand the design or agree with it. An entrepreneur should make sure that all contractors adequately document their work, save their code is a source control system and are contractually obligated to spend time with new contractors or permanent employees. Operational processes, marketing arrangements and business relationships should also be held to the same standards making sure that all parts of the organization are protected from knowledge loss and to avoid misunderstandings with external entities when the temporary workers depart the company.

Explicitly Establish Tasks To Be Completed - Frequently a business owner will give general direction to a contractor to achieve a task. A contractor can easily interpret a goal and task in a way that is very different then the business owners understanding. To avoid this the business manager or owner should draft a document that explicitly outlines the task to be completed, the hours to be expended on the task and the desired results. This could be in the form of a specification, ways of measuring completion of the task or expectation of how much time it will take to complete.

Quality - Most startups place an emphasis on speed to market with an implied and assumed but not stated emphasis on quality. The assumption that a contractor understands the assumed value of quality in their work could be an incorrect assumption. Contractors are frequently expected to "get it done" and to "code faster" to show results quickly. There is an inherent trade off of getting something done fast and the quality of the output. If the quality component is not explicitly communicated the contractor will get it done quickly and then go off to another task causing the process to spiral into a constant feedback loop addressing output quality issues with previously developed products and processes. Eventually, this could result in a expensive reset for the company. The best way to deal with this is to articulate quality exceptions and to have a way to measure the quality of output.

Cost - There is a common misconception that contractors are less expensive then full time employees. This is usually not the case unless the entrepreneur is constraining the contractor's hours. In my experience when a business gets going the hour constraint goes out the window potentially resulting in sky rocketing labor costs or the lack of completion of key components of the business because the funds are not available to complete tasks. To avoid this from happening businesses should establish fixed budgets for all items and contractually hold contractors to adhere to those budgets. This may require some work on the part of the entrepreneurs to budget and work with the contractor to determine the actual cost of a project. Even with a contract in hand situations may occur that require a contractor to invest more time and effort into a project then originally estimated. Despite this the business should stick to its overall budget potentially taking funds away from one project to fund another. The worse possible scenario is that no projects are adequately completed. A prioritization or projects is required to assure that only the highest priority projects will be addressed with the available funds.

Conversion To Employees -There will be a time when the company is in a position to take on permanent employees. In general, contractors have good reasons not to become full time employees. There rates may be high enough to exceed a salaried job, they prefer to be independent and not tied to any one company or they may have other interests outside of their contracting duties. For these reasons it should not be assumed that existing contractors will automatically convert to full time employees. When a contractor is hired determine if they will be willing to transition to a permanent position. Work out the proposed compensation and details of the transition with the contractor making sure everyone agrees on the details of the transition. This will help mitigate the ransom effect where a company becomes dependent on a contractor allowing the contractor to negotiate a deal that is disadvantageous to the company. If a contractor will not be able to transition to a permanent employee start planning and searching for potential employees early in the company's development. Finding good employees takes time and effort.

Team Building - Team building is part of the process of building any company. Team building includes the creation of a "culture", communication processes, knowledge retention mechanisms, ethical guidelines with the goal of creating common goals and vested interest in making the company successful. Team building is difficult to accomplish with a staff of temporary consultants. This is not the fault of the consulting staff. Some business owners can become frustrated by the fact that a company built around temporary workers is not generating the culture and attitude they desire. Certainly the business owners should articulate the desired company culture, goals and long term objectives of the company. Most contractors will respect this. However, if a company is predominantly staffed by temporary workers the company culture will reflect the values of the temporary workforce.

Conclusion - Inevitably startups will use contracted resources in the early phase of the company's formation. There is nothing inherently wrong with using contractors as long as the business owners understand the implications of this decision, adjust accordingly, maintain the proper expectations for the contractors and plan for the future transition from a temporary workforce to a permanent staff.

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