Outsourcing Your Business

By , December 11, 1999

(December 11, 1999) Nobody actually wants to work for a living any more.

I’m certainly not the first person (or the thousandth) to write about “outsourcing,” but that won’t stop me from throwing in my two cents’ worth.

I am inspired to write because I just noticed that there is actually a Fidelity mutual fund dedicated to investing in public companies that are engaged in “business services and outsourcing.”

I need to follow that statement up by saying that I don’t think investing a mutual fund of publicly-traded companies will really help investors capture the “real” value of outsourcing, which currently is dominated by private companies.

Outsourcing is widely accepted as a way to streamline and accelerate business growth.  Instead of training staff in-house and re-inventing solutions to common business problems, we can turn to an outside company that already has a solution.  In some cases, the outsourced solution will actually be more efficient and less expensive than an in-house solution. Probably more often, the outsourced solution will be less perfected to the organization’s need and will cost a little more in the long-term.  But the outsourced solution is almost always justified in part by the claim that it can more quickly be up and running, and can be expanded or contracted with the business (“scaling”).

I certainly don’t dispute that some functions are logical candidates for outsourcing: payroll administration, for example, or advertising placements left in the hands of experts at ad agencies.  But many internet companies are outsourcing core business functions.

In my recent three-year stint as the editor and publisher of “Adbility’s Web Publishers’ Advertising Guide,” I had contact with many “outsourced solutions.”  One of the hottest business categories in outsourcing right now is the provision of “affiliate marketing solutions,” which means tracking advertising and links from web sites that drive traffic and sales to e-commerce companies, and tracking and crediting a sales commission on those sales to be paid back to the referring site.  There is now a “pure” publicly-traded stock company in this space, thanks to a recent IPO by BeFree. Other companies in this space include LinkShare, Commission Junction, ClickTrade (owned by Microsoft), and affiliateDirect (owned by publicly-traded Qsound).

Another category for “outsourcing” is delivery of advertising on behalf of individual web sites or advertisers.  Although several vendors make and sell software that can be used to serve ads “in-house,” an increasing majority of web site businesses are opting to pay outside companies to deliver and manage their advertising.

In many e-commerce businesses, some “core business functions” are actually outsourced.  Most vendors selling software, books, music CDs, VHS and DVD videos, and sporting goods on the internet rely on wholesalers, distributors, and “drop-shippers” who stock inventory, process payments, and pack and ship orders.  Some of these outsourcing companies are newly invented (or re-invented) for the internet: Global Sports Interactive specializes in sporting goods, and StarBelly.com sells clothing and other merchandise embazoned with your company’s logo, while iconomy.com boasts a “soup to nuts” solution that appears to include every aspect of creating and operating a web business under your name.  Another new company, escalate.com , claims to offer a complete “e-commerce service provider,” including hosting, customer service, product fulfillment, inventory management, and business intelligence. Or you can hire asd systems (or another firm) to design your web site and integrate their call center and fulfillment centers with your less-integrated outsourcing and drop-shipping vendors.  All you need to do, it appears, is drive traffic to the online store managed by your outsourced service provider, and then watch the revenue roll in from sales transactions.

Logically, one would expect that the kind of “soup to nuts” service that iconomy.com offers would be most useful to companies that specialize in development of their own specialized web content.  But you can buy editorial content from companies like iSyndicate.com and InfoSpace.com , too.

In the end, I’m not sure what aspects of a web business actually require any staff or in-house resources.  Indeed, I think I could package together a new e-commerce company with exactly one employee (me), using outsourced solutions for absolutely every task.  Actually, I doubt one person would be enough, since I’d need a Chief Financial Officer and some experienced business people to help me deal with the venture capital firms seeking to invest in the business — and I’d need their money because I don’t expect that the meager profits from the outsourced sales of products would ever cover the cost of the outsourced editorial content and the huge costs of advertising or otherwise driving traffic to the site.  I’d need several rounds of venture capital, and then I’d need to go public, and raise more money through additional rounds of stock offerings, to cover the ever-increasing flow of red ink.

Suddenly, I begin to understand why outsourcing makes sense: it may be the only way to actually earn a profit from internet business.  If you operate the outsourced functions of an internet business, and take steps to avoid collection problems, you will earn a profit from your activities, even though the entire enterprise is losing money.

What I find fascinating is that many internet companies that outsource key functions, pretend to follow the business models outlined in books like Net Gain and Net Worth (both should be “required reading” before you start talking to venture capital firms about your planned internet venture), yet outsourcing denies the company most of the key benefits. Most obvious is the fact that any customer-preference tracking and profiling is being done by outsiders, not your internet business.  In all cases, the outsource company has physical access to most of your most important business data (and despite reassurances from the outsource companies, there are many documented incidents of misuse and theft of that data). In some cases, the outsource company denies its own customers access to key data. While the outsource company may include your “brand” in its “communities,” most often these communities are co-branded with the outsource company, or shared with other clients of the outsource firm.

In the case of affiliate marketing firms, all the key players (BeFree, LinkShare, Commission Junction, ClickTrade) simply demand that you turn over your affiliates to them for cross-promotion purposes. Of these four, only one (Commission Junction), provides even nominal compensation for this diversion (the company has gone further, including stealing and misusing other firms’ customer lists, and sending out false and defamatory mailings to affiliates of companies who choose to terminate their business relationships with Commission Junction).

Any efforts your firm makes to recruit partners (“affiliates”) who were not already participating in these vendors’ programs, will result in these affiliates being presented with many other affiliate relationship opportunities in addition to yours.

Outsource your entire business, outsource all profitable business activities, and outsource all chance of success.  Bad idea.

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