08 Mar Outsourcing or Insourcing: which is the best e-commerce strategy?
Outsourcing or Insourcing e-commerce? Launching an e-commerce is a complex project that requires specialized personnel, the optimization of certain business processes and an initial investment budget. The first step in approaching this business decision is to analyze the pros and cons of managing an internal vs. an external e-commerce solution.
In the case of an external solution, commonly referred to as “e-commerce in full outsourcing”, the development and management of the online shop is entrusted to a unique external service provider who deal with web design, digital production, web marketing, customer service, orders and returns management, payments, warehousing and logistics, merchandising. In the case of an internal solution or insourcing e-commerce, most of activities are all handled by “in house” personnel, while some of them are delegated to various specialized external partners. Then, as in everything, there is also a third way or “hybrid-solution”, in which some activities are “handled in house” while other services are outsourced to a single partner. The process in which this is done is out-tasking, where single tasks are outsourced to the same partner.
In order to decide which business model best suits its needs, a company must first evaluate the impact that an e-commerce has on the internal organization, both on management and operational aspects. In fact, every solution has implications that should not be overlooked. Let us therefore analyze the pros and cons of one and the other.
The Full Outsourcing Model
The Full Outsourcing model allows the online sales channel to be quickly activated by totally delegating all activities to a specialized company with expertise and experience in the field, but above all with a ready-made organization.
Centralized services: the company does not need to have an internal management team to coordinate multiple suppliers, but an e-commerce manager will be sufficient to act as an interface between the company and the external partner. The latter will then coordinate the various suppliers and areas.
Cost reduction and time saving: companies typically save from 10% to 15% because many fixed costs, such as personnel and equipment, become variable costs as they are totally borne by the provider. Moreover, outsourced suppliers are specialized in the field, have specific equipment and technical skills, so they are able to complete their activities efficiently and quickly, achieving better results.
Improvement of service level: thanks to the use of specialized personnel of third-party companies, the company becomes more competitive in the field and being able to draw on a knowledge base, it can innovate faster in the technological field and make its organization more efficient.
Loss of direct control: lack of proper communication with the provider or slow response times can create lengthy procedures and increase costs. The key to face this risk is to understand that the outsourcing project should be equally managed by the company, improving communication with the external provider and ensuring that the internal team understands how to manage the project.
Difficulty in measuring service quality: it is not easy to evaluate the supplier’s performance, the metrics and a measurement system must be established, as well as personnel with the necessary skills. If you are unable to measure ROI (return on investment), you have less control over costs.
Loss of expertise: in the long term, the company risks losing specialized skills and know-how and thus becoming less competitive. If the company wanted to resume the activities previously under contract in outsourcing, it could take years to reach the level of performance it was used to.
The Insourcing Model
In the Insourcing model, the company has control over the entire supply chain, the strategic and management aspects, and maintains direct contact with the end customer. Eventually only some activities are delegated to specialized third-party companies, such as web design or digital marketing.
Greater control: one of the main advantages of insourcing is control. Maintaining the management of e-commerce in house, the internal staff will have total control of the entire supply chain, the total mastery of information and tools, greater visibility on operating costs.
Growth opportunities: an often underestimated benefit of insourcing is that it can give employees opportunities to develop and refine new skills. Although managing certain projects in house may require an investment in training insourcing can help a company create a team of competent people that will reduce the need to outsource in the future. Employees who participate in insourcing projects get more than just training. They continually reinforce that training through practical experience.
Increased costs: the use of existing employees, resources and equipment could be apparently less expensive than outsourcing. This is true if the company already has all the know-how and skills to carry out the new activities internally. Otherwise, insourcing could be more expensive than outsourcing because startup operating costs could be significantly higher.
Loss in competitiveness: among the risks of insourcing there is the loss of skills in the long term if staff training is not continuous, the burden of technological updating and consequently a loss in competitiveness on the market. For a company that does not use full-time resources it may be difficult to stand up to competitors in a rapidly changing and evolving field. The internal team, in fact, will have to spend time and energy to managing extra activities that go beyond the core business, with the risk of becoming less efficient due to new responsibilities that are added to the existing ones.
Outsourcing or Insourcing?
Managing e-commerce “in house” means re-structuring the company hiring specialized staff or training internal staff to implement a new mentality and new business processes in the company. These options, however, can be very expensive, especially for a start-up or small/medium business.
This is why the “hybrid solution” is very often the one preferred by most companies that decide to outsource only some of the business processes, in particular those that would impact more in organizational terms, while maintaining control of the strategic ones that they create competitive advantage and thus determine the success of the organization. This is just the first step towards full outsourcing.