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Learning from the Past

The Rise of Progressive Sourcing

Speed is a major player for computer game competitors. For speed demons, the computer mouse can't scurry fast enough.

Kärna LLC plans to change that. The San Francisco high tech start-up specializes in encoder precision. (An encoder is a device that measures movement.) Kärna, which means seed or core in Swedish, has targeted gamers as its initial market. Its team of developers is applying the company's encoder precision technology to build a better mouse.

Currently, today's mouse has a dot per inch (DPI) of 400. Kärna's two gaming models register DPIs of 1,000 and 2,000 respectively. "Our models are faster and more precise than anything in the marketplace at their price point," explains Rob Krolik, kärna's CFO.

Speed to market is important to this manufacturer. The partners realized if they were going to have their product ready at the speed of a double click, they would have to concentrate totally on building a better mouse trap. That meant not worrying about paying bills, mailing invoices or making FICA deposits. They decided to outsource all their non-core processes – accounting, human resources and manufacturing -- from the day they opened their doors in February 1999. "We think of our outsourcing suppliers as business partners. Their goal is to help us to get to market quicker," says Krolik.

Outsourcing also helped the company raise working capital. "Venture capitalists like it when you tell them you have the 'blocking and tackling' handled," says Krolik, referring to the non-core but necessary processes. Because they could prove they had the time to be monomaniacal about their design mission, the CFO reports kärna found it easier to raise money from angels (interested individual investors.)

Deciding Who to Pay Via Email

Kärna looked for suppliers who had the capacity to grow with them. This scalability allowed the partners to know they could suddenly be flooded with orders and their suppliers could handle the volume. "Scalability gives us the freedom to do whatever we want to do," says the financial executive.

Scalability was also important in the human resources area, too. Currently kärna employees 14 people. But Krolik expects the company will grow exponentially when its mice start multiplying in the marketplace.

Administaff in Houston, Texas is kärna's HR provider. Krolik is a big believer in HR outsourcing because he has to "commit very little time to these administrative hassles."

Kärna uses ReSourcePhoenix.com, a San Rafael, California provider, as its accounting supplier. Krolik likes the ease of the outsourcer's communications system. All of kärna's accounts payable arrive at ReSourcePhoenix's office, where they are entered into its database. The outsourcer then sends an email to the appropriate person at kärna for payment approval. One list then appears in Krolik's email box daily. With a click of a mouse he can determine who to pay and how much. He emails his choices back to ReSourcePhoenix, who cuts the checks and takes care of all the accompanying paperwork.

Six Figure Savings

Krolik estimates outsourcing the accounts payable function keeps two staffers off his payroll. In addition, he doesn't have to have the computer space to store all the invoice data. Outsourcing saves time as well as money. "I like the fact that everything comes to me on my desktop. I don't even have to go down the hall to get the information I need. This is a huge time savings," he explains.

On the accounts receivable end, he sends the supplier one email detailing all the customer invoices that need to be mailed. The rest is up to them. All Krolik sees is an aging report that appears in his email queue. The CFO says this system cuts his headcount by one.

Payroll savings are only one place where outsourcing is preserving capital. Outsourcing is allowing kärna to spend money on mice instead of on hardware. Krolik says he would have to spend $500,000 a year to have a functional in-house accounting department. Instead, he spends only $200,000 a year plus an implementation cost.

An additional expense he doesn't have is purchasing the Oracle Financial System which ReSourcePhoenix uses to process his accounting. Kärna would have had to spend over $1 million of its seed capital to purchase the program.

Currently the two companies are determining how kärna can improve its e-commerce performance. At the moment a third party is doing the fulfillment and accounting from kärna's Web site. However, kärna would like ReSourcePhoenix to handle the Web accounting, too. Krolik's vision is to have a customer purchase a product at the site and the credit card transaction would end up in the company's accounting system with no human intervention.

Gaining More Control With Outsourcing

Kärna wrote strict service level requirements into its outsourcing agreement. So far, there have been no disputes. ReSourcePhoenix assigned one of its managers to act as kärna's controller. This manager visits Krolik every two months "to make sure my needs are met."

Krolik says people tell him they are afraid to outsource because they fear losing control. But he believes SLAs give a buyer more control. Since ReSourcePhoenix has a more sophisticated computer system, he receives better information quicker.  "In today's business environment, receiving information almost instantaneously is really important. It can be a big advantage over your competitors," says Krolik.

Krolik first encountered outsourcing at a previous company; it outsourced the payroll function. He noticed that "outsourcing was an effective way to solve that problem." The partners of this start-up decided to expand their outsourcing experience by outsourcing every non-core function.

"The most compelling argument for outsourcing is it narrows my focus. I would rather be doing deals to make the company grow than following up on invoices," sums up Krolik. As for his predictions of the future, he says in 10 years most companies "will be doing what we're doing."

Lessons from the Outsourcing Primer:

• Outsourcing non-core processes allows start-up companies to bring their products to market faster.
• It's easier to raise money from angels and venture capitalists if you can prove you can concentrate your focus on your core business.
• Outsourcing saves significant dollars by cutting payroll costs and hardware and software acquisition fees.
• Email from the outsourcer cuts time and makes it easier for CFOs to do their jobs.
• Outsourcing provides a competitive edge because information arrives faster.

Publish Date: April 2000

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Copyright © 2000 - Everest Partners, L.P.

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