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Outsourced ecommerce: Call it a trend
An attractive option for SMEs and big companies selling on the side...

By Ben King

Published: Tuesday 08 February 2005

Sending ecommerce out of house is an increasingly popular choice for businesses. What are the risks and rewards you can expect from this practice? Ben King reports.

"Outsourcing was a total nightmare and it nearly destroyed our business," says Keith Milsom, managing director of Anything Left-Handed.

When Milsom inherited the Soho shop, which sells pens, scissors, golf clubs and other merchandise tailored to the needs of left-handers, he decided to turn it into an online business. He set up a website using Actinic software, which he maintained and designed himself. The overall budget was around £2,000.

By 2003, the maintenance requirements of the site had become so onerous that he decided to commission an external company to design, build and host the site, in a £30,000 project.

The site they built "halved our orders at once", he said. After a disastrous debut, he decided to take the project back in-house. He designed and built a new site, using a new version of Actinic software, for £4,000.

Despite one small company's bad experience, outsourcing ecommerce is an increasingly popular way to take a business online - from a major brand running ecommerce as a sideline, to a sole trader selling goods on eBay. The number of options for doing so is increasing. So who does it work for and why?

The simplest way to set up and run an outsourced ecommerce business - and one chosen by many small organisations - is to run a stall on one of the web's giant virtual marketplaces, such as Amazon.com or eBay. For a fee or a slice of turnover, all hosting and payment issues are looked after.

Being part of a huge online marketplace guarantees that a large pool of shoppers will walk past your virtual shopfront door every day. All a merchant has to look after is sourcing stock, posting information and fulfilling orders.

This option already counts for a substantial proportion of businesses trading on the web. At the end of 2004, eBay was hosting 254,000 stores worldwide, of which 63 per cent were outside the US.

For the slightly larger business, providers are gearing up to supply the full range of services on an outsourced basis, from fulfilment to site design and hosting. Companies can either use hosted versions of ecommerce software such as Actinic, or hosted suites such as NetSuite, Maginus or Digital River.

Companies are also increasingly exploring the possibility of outsourcing their order fulfilment - either to the suppliers themselves or to a third party logistics provider such as Prolog Logistics.

WStore, a business with 70 UK employees, supplies office products to other small businesses. Their fulfilment and warehousing are all supplied directly from the companies which supply their products. The company then arranges for deliveries to be made straight from their supplier to the customer.

Tony Price, managing director of WStore, says: "We do have a warehouse - but all it's got in it is table football and a pool table.

"This business is all about cost and holding stock is not cost-efficient," he continued. "[Outsourcing] allows us to bring our costs down to eight per cent of turnover, while our competitors are around 12 to13 per cent."

For a hands-on marketer like Anything Left-Handed's Milsom, having the site under his direct control is essential. He is constantly tweaking the design of the site, using data from traffic reports to improve navigation or redesigning the HTML pages to generate more traffic from search engines.

"If you have to get someone else to do it, you're paying them £600 a day and it might take weeks or months to do it," he says.

For a company like Tobar, a multi-channel toy retailer, having the site hosted by an external company, Maginus, does lead to a certain delay in making adjustments to the site but it's something they can live with.

Steve Ham, financial director of Tobar, says: "It's not feasible for us to deal with any program development. We don't have the resources in-house."

Besides lack of control, Milsom also felt having the site looked after and maintained by someone else makes him vulnerable to whatever misfortune hits their business - factors beyond his control. "It was high risk having it on someone else's site. If they lost their chief programmer I would lose everything," he says.

He also doesn't like the idea of outsourcing fulfilment, as he would lose the personal touch, he says. His company publishes a newsletter and products ship with information sheets about left-handedness, such as the problems some children have with handwriting. "We like to see ourselves as a community. To make our customers call an outsourced call centre far away wouldn't fit in with community feeling," he says.

WStore's Price acknowledges a small risk in outsourcing - such as the outsourcer going out of business. "We would be impacted but we can move to another supplier," he said. "And the chance of one of our suppliers going out of business is very remote."

The US has seen significant growth towards outsourcing, driven not by SMEs but by larger companies who are launching ecommerce ventures as a sideline to their main business, such as BMW's branded merchandise store.

Andrew Bartels, vice president of Forrester Research, says: "It's only a rounding error on their income statement but it's about marketing, building a brand and building customer loyalty. They want it to be good quality because they want to reflect their brand."

This is driving investment in increasingly sophisticated outsourcing services. And many SMEs are similarly exploring ecommerce as a sideline to their main business.

"Their goals are ambitious and their marketing budgets are measured in millions of dollars," he says.

One such organisation is Tearfund, a charity which sells fairly traded gifts through its Tearcraft website.

Neil Stevens, head of Tearcraft, says: "We are a relief and development charity. What we are not about is delivering packages to end consumers. It makes sense to let someone like Prolog take care of all that for us."

For the growing band of companies for whom ecommerce is a secondary activity, the attractions of outsourcing are obvious. For small specialist ecommerce companies, it's a delicate balance. Outsourcing has its attractions but if you want something really done properly, sometimes it's best to do it yourself.