Many multichannel merchants focus on how they can lower operating costs when they consider outsourcing certain tasks. But when you outsource your productions, you are also outsourcing 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 you are outsourcing your investment, you do not need to put money in those upgrades as your company changes and grows. Let’s look at some examples that show the size of these investments.

* Order-management systems. Software as a service can make available up to a possible investment of $25,000 for an start-up 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 install and implement an management system for your ordering process and with it contact 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. Big businesses invest many millions of dollars.

* Replacing an e-commerce site. SaaS business models can help get rid of an investment of $750,000 to $1.2.1 million for a multi-channel catalog business with sales in excess of $95 million. With the e-commerce that growing companies experience, there’s also often a need for an e-mail management or chat-system investment.

* Contact 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. Other Call Center Strategies.

* 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. Warehouse cost saving ideas.

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. Therefore a lot of compaines are trying very hard to make the first and current investments because of the heavy competition for resources, especially those that are financial.

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. Will the provider you outsource to have the capital and the money to enlarge and grow? 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. Is it possilbe that a major production actiivty be outsourced and not have the end result of a total and complete los 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., catalog management systems, e-commerce, etc.)?

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

8. Think about how vulnerable this may leave you if the performance of the provider is not 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 will mean relinquishing some of your 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 seen many businesses use offshore contact-center and domestic facilities both with great success. We’ve had one client outsource all call-center and fulfillment operations for its $25 million apparel catalog and e-commerce business since 1988.

by Curtis Barry, President F. Curtis Barry & Company