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Offshore Outsourcing: If It Sounds Too Good to Be True, Try a Little Due Diligence

Jan 17, 2008
Like many Silicon Valley entrepreneurs Joe had a dream. Joe's dream had been incubating for a decade and he was finally ready to move. He had his infrastructure set, his marketing plan complete and he had done his homework. Joe's dream was a plan ready to be executed.

Like many others, Joe's dream involved selling his products by e-commerce on the Internet. As we mapped out Joe's strategy we also did some preliminary budgeting, especially for the e-commerce site. I knew a good site could run $5,000 up if designed from the ground up. Many e-commerce services, such as those offered by Yahoo, run from about $30 a month up. Not bad but not much flash. Since Joe was in the design industry, flash was important.

We had even whiteboarded out how he could sell online and each transaction would be automated into QuickBooks and his profit and loss reports. As his profits rose exponentially his biggest concern was how to keep track of his profits. I cautioned Joe about reality but did not want to dampen his dream. It was his passion.

Joe's current business would support him through this transition but his available working capital was limited since he rented a rather large office and production floor. His high overhead was one reason he wanted to sell online. But with limited capital he had to make every dollar he spent work.

When I last spoke with Joe we had pretty much nailed it all down for his new online e-commerce venture and except for some of the marketing collateral, he had a viable plan. I left for another project, Joe to his good fortune and did not hear back from him for several months.

When he called he apologized for not having been up and running. I laughed and said it's his business, not mine so no need to apologize. He said he had the bright idea of going offshore to India to get a cheaper deal on an e-commerce website design. He did contract with an Indian firm for a little less than half what a Silicon Valley e-commerce designer would charge.

Joe paid the full amount by credit card before the work had begun. Mistake number one but for Joe it was 'cheap'; it wasn't even for him a matter of price vs. cost. For almost two months they strung him along but in the end produced nothing and refused to return his money.

What could Joe do? He could file a fraud complaint with his credit card company and they could pursue it through the credit card system. But if in fact the web design company was simply a front, then they will scam all they can and when the law gets too close just shut their scam down and reopen under another name and another merchant account. For Joe to pursue his case in India would probably cost him more than the fraudulent web design fees he paid.

Eventually Joe may get his credit card company to shut down the fraudulent merchant account but these scams are set up to shut down and restart. How do you go after a non-existent company in another country with lax laws? Unfortunately it's a bit late after the fraudulent transaction has occurred.

Joe will recover. He will work extra hard to replace his working capital but the whole scam will prove a costly one. It will set his project back two or three months and in e-commerce time is money.

Joe clearly made several mistakes in trying to save money. Had he only made just an initial payment his loss would not have been so much. Joe was impressed with a fancy website and fancy fake demos. Had he done a bit more research on his scam outsourcer he would have seen the light quicker.

But Joe was a bit greedy and felt he could leverage his investment and get more Return on Investment (ROI). He learned the hard way. There are probably several hundred companies within 20 miles of Joe's factory that could have done the job for him. True, at two or three times the price but the actual cost would be less. Joe's mistake was not taking a little more time and examining a good development plan with a reputable company. This process is commonly known as 'due diligence'.

Joe learned that a great scam is not only too good to be true but a 100% loss.
About the Author
Jack D. Deal is the owner of Deal Business Consulting in Santa Cruz,California. He can be contacted at jddeal@jddeal.com Related articles may be found at http://www.jddeal.com and http://www.freeandinquiringmind.typepad.com
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