Outsourcing

views updated

OUTSOURCING

In the 1990s and into the beginning of the twenty-first century, technological advancements continued to develop at breakneck pace. This was especially true of the Internet technologies used during e-commerce. Keeping up with all these developments and making solid, informed decisions about them became difficult or impossible for many companies, who needed to focus most of their resources on core business competencies to be successful. For this reason, it was common for organizations to outsource, or have other vendors handle, different aspects of their e-commerce initiatives.

Even leading international companies with large departments devoted to information technology (IT) often find it more cost-effective to outsource certain aspects of e-commerce rather than develop the expertise themselves, which can require hiring scarce workers and investing large sums to train and retain them. Accordingly, it's not surprising that a survey from CommerceNet found nearly 75 percent of e-commerce firms outsourced parts of their work in early 2001, or had plans to do so. Eighty-seven percent of the companies surveyed viewed outsourcing as an effective way to scale their business offerings based on fluctuating revenue streams.

OUTSOURCING EXAMPLES

While it's possible for a company to outsource virtually any kind of service, in the early 2000s several were especially common in the e-commerce arena. Among them were IT management; logistics and order fulfillment; Internet video production, management, and distribution; customer relationship management; and Web site development and hosting. The ease and cost efficiency of handling different aspects of e-commerce in-house was easier and more cost-effective for some companies than it was for others, so companies outsourced services differently.

Many companies looked to outside parties to handle online order fulfillment (filling and shipping orders they received via the Internet) instead of building or renting their own warehouse operations, which required special expertise for e-commerce. This freed them to focus on core competencies like creating new products and services, and marketing. Logistics & Distribution Report indicated that many Fortune 500 companies were outsourcing transportation, warehouse management, and inventory management by the late 1990s. In 1999, third-party logistics contracts grew by 16.5 percent, and revenues totaled $46 billion. According to the publication, growth rates were expected to reach 15 to 20 percent by 2003.

When companies rely on third-party fulfillment providers, they normally manage the front end of e-commerce (the content and appearance of their Web site) and leave the rest to the third party. In other words, the third party receives orders from customers, manages the inventory of available products in its warehouse, and coordinates shipping. Some also provide value-added extras like customer service.

Another example of outsourcing involves application service providers (APSs), third parties who manage business applications for companies so they can focus more on their core business. These applications often involve things like payroll, billing, and customer service. The software systems offered by the ASP are sometimes Web-based, so that client companies do not have to host the software and devote resources to maintaining and updating them. Although ASPs held the potential to simplify things for client companies, they also moved long-held control over internal systems and data to outside parties, which made some organizations uncomfortable.

THE FUTURE OF OUTSOURCING

According to a March 2001 survey conducted by Merril Lynch, chief information officers in the United States and Europe were planning to scale back IT spending on outsourcing, among other areas of IT. However, despite this indication of possible cutbacks, the market for outsourcing was substantial. IT Outsourcing Market Forecast, a study from market research firm Input, projected that the information technology outsourcing market would grow 22 percent annually between 1998 and 2003, reaching $110 billion.

However, as with any kind of business practice, the use of outsourcing as an approach will vary depending on the service involved. For example, the future of outsourcing looked especially positive in the area of customer relationship management (CRM)—database systems companies use to maintain details about their customers, including their contact information and preferences for products and services. A July 2001 Harte-Hanks survey found more than 80 percent of companies in North American were outsourcing the task of building and maintaining their CRM systems. On the other hand, Frontline Solutions cited results from an Aberdeen Group survey that indicated outsourcing business-to-business software applications was not as promising. Although more and more software applications were available from ASPs, Aberdeen's survey of the Oracle Applications Users Group found that less than five percent were using ASPs, and 82 percent were not planning a strategy involving them.