Balancing Your Budget and Investment: When is the Right Time to Outsource?

Many multichannel merchants focus on how they can lower operating costs when they consider outsourcing certain tasks. But when you outsource operations, you also outsource the investment. Sounds obvious, but maybe the magnitude isn’t all that clear until you’re faced with replacing an order-management system, moving into a new fulfillment space or upgrading your Web site.

When outsourcing your investment, you don’t have to invest in those upgrades as your business grows and changes. Let’s look at some examples that show the size of these investments.

* Order-management systems. Software as a service (SaaS) can free up a potential investment of $25,000 for an emerging company. If you’re a $500 million company — with several hundred users adopting a SaaS model — it eliminates an $8 million to $10 million investment. For a $20 million cataloger, the spend runs $280,000 to $400,000 to license and buy hardware. Then you implement an order-management system with call center and warehousing functions.

* Specialized forecasting and inventory management system (working in conjunction with your fulfillment system). Here, investment and implementation costs for a 10-user system will cost, on the low end, $150,000. Larger companies invest several million dollars.

* Replacing an e-commerce site. SaaS business models can eliminate an investment of $750,000 to $1.2 million for a multichannel cataloger with sales in excess of $100 million. With the e-commerce that growing companies experience, there’s also often a need for an e-mail management or chat-system investment.

* Call-center operations. Outsourcing eliminates investment in the required space, telecom terminals, headsets, ACD, scheduling software, call-monitoring hardware and software, e-mail management, chat systems, etc.

* Fulfillment center. You avoid investing in the construction and/or build-out costs, as well as the racking, conveyors, material handling, warehouse management systems, shipping systems, furniture and fixtures. Plus, you avoid a long-term lease.

It should be pointed out that when looking at these investments on a five- to seven-year basis, many would have been amortized and depreciated over that time. But many companies are struggling to make the initial and ongoing investments because of the competition for financial resources.

Here are some of the questions you need to answer as you look at outsourcing and the business investment:

1. Are you keeping pace with investment in the infrastructure required?

2. What alternatives for capital use does your business have rather than investing in physical assets?

3. Does the outsource provider have the finances to grow and expand? What’s its track record of doing this for clients?

4. How will those costs be passed onto your business as it grows and changes?

5. Can a major activity be outsourced and not result in a total loss of control (e.g., call-center overflow, peaks and weekends)?

6. Which provider best understands your category of product (e.g., apparel with its high SKU storage needs, returns, etc.) and mode of operation (e.g., e-commerce, catalog management systems, etc.)?

7. Which provider will be the best long-term partner?

8. How vulnerable will this leave you if the provider’s performance isn’t up to par?

9. If you wish to sell your business and don’t own major assets, does this help you (the prospective owners aren’t paying for assets) or hurt you (you may need to remain operationally independent of the other businesses a prospective owner has invested in)?

The Issue of Control
So why isn’t outsourcing more commonplace? Most managers want to control their own destiny. Outsourcing means giving up some control.

Also in certain cases, the outsource industry providers have a less than stellar record of long-term, reliable and cost-effective service. Many, including myself, believe that SaaS business models will change much of this. I’ve also seen many companies successfully use both domestic and offshore call-center facilities. We’ve had one client outsource all call-center and fulfillment operations for its $25 million apparel catalog and e-commerce business since 1988.