The Momentum of IP

The overlap between Product Revenues and Outsourcing Billing is a very interesting one. In my previous post, I mentioned an entrepreneur, D, who got a services company to build a prototype of his product cheaply. Now, this was cheap for him not only because the billing rates were lower - but also because, once the prototype was ready, the team was simply disbanded. He had his prototype, and he would now need coders only when he wanted to build something more, so why bother paying the outsourcee company?

Suppose now that our D does find a customer, and possibly the customer wants a few minor changes to the product. D would probably come back his favourite outsourcee company, pay billing for a couple of months for a small team, get his changes, and go back happy. He'd earn good revenue from his first customer, possibly sell the same product to several dozens of others, and come back to the outsourcee only when he wants grunt work done.

See anything interesting? The outsourcee company gets money - through billing - only when actual coding or testing is going on. It gets the same money whether the product is a failure or a bestseller. And, it has usually no stake in the IP created. If the product does spectacularly, the customer - the guy who owns the product - can pretty much take it easy until his clientele dries up. The outsourcee company, once the coding is done, must IMMEDIATELY assign the coders to a new project so that their billing goes on. They gain no long term benefit from creating IP for their customers.

Again, if D has a team of 10 people, these 10 people can generate astronomical revenues for the company if the product sells well. The revenues of the outsourcee company are strictly proportional to the number of people billed that month.

I'd like to coin a phrase for this : IP has momentum. If you own IP, if you create IP, you can basically coast along on your created IP as long as a market for it exists. As you accumulate it, a small company can earn bigger and bigger revenues without growing in manpower. You can build on your older IP, like momentum, to push through newer products and (what else) sell new IP.
Outsourcee companies have no IP momentum. At the most, they have reputations that bring new customers. But regardless of whether they built the next Windows last month, if they don't have billing flowing in for this month, their bottom line dips.

One more reason for outsourcee companies to move towards products. If nothing else, having a products division would help the company in the long run.