Outsourced eCommerce? For Tier 1 and Tier 2 Retailers there are benefits and risks...

In the array of eCommerce solutions that retailers can choose from, one sticks out as more of a business model than a solution.  For this reason (and others) many retailers were, and still are, drawn to this approach as it addresses many of the challenges they were (or are) not ready to face.  These are the types of challenges that software doesn't necessarily solve. 

I am talking about the outsourced eCommerce model.  Note that I didn't use the term "hosted".  I make this distinction for good reason.  In my definition, the outsourced model takes many (if not all) of the business processes associated to eCommerce and shifts them to a third party.  In some examples, the "outsourcer" even takes on supply chain and fulfillment responsibilities. 

A hosted model is more of a technical relationship, where a retailer moves much of the Web infrastructure off premises but may still have a good level of interaction with their Web properties.  This interaction typically enables business users to perform limited marketing and merchandising functions using hosted, Web-based tools. 

What makes the outsourced model attractive?  There are a number of things.  From a technical perspective, much if not all of the technology required to transact business on the Web can be handled by a third party.  This includes software, network infrastructure, etc.  From a people and process perspective, the outsourced model promises to run a retailers eCommerce business and tailor itself to the needs of the retailer. 

What are some challenges with the outsourced model?

• Cost
• While many outsourcers present creative cost models, the long-term costs of these solutions are significant.  Many outsourcers take a percentage of top-line eCommerce revenue to fund the model.  This ranges from 3-10% on average.  This was particularly attractive to retailers several years ago, when the true business value of the Web was unpredictable and the barriers to entry and maintenance were high.  With eCommerce revenues skyrocketing for many retailers, the impact to top-line revenue has now become a significant dollar value.  Also, with many retailers growing eCommerce revenues 15-30% per year, the level of investment to support an eCommerce presence has become exorbitant.  Outsourcers also typically lock retailers down to contracts of significant length (several years) and make the terms of the contracts very clear:  all eCommerce should run through their services (thus be subject to the % of revenue cost model). 
• A somewhat hidden cost of the outsourced model is the "change request".  That is to say, the need to periodically modify the online capability in terms of features, approaches, content, etc.  This is an additive cost for the retailer and typically not covered by the top-line percentage.   
• Agility/Flexibility
• For a retailer where eCommerce was not part of their core strategy, allowing a third party to deliver an eCommerce presence was very attractive.  This strategy had minimal impact to core operations: the store.  Because many retailers have since seen the value to revenue growth and customer relationships that can be found with a Web strategy, most have now evangelized the impact of a multi-channel approach to retailing.  Delivering a multi-channel experience for a customer however requires control of all channels.  With the Web channel outsourced, it becomes very difficult to align core systems and processes to deliver a seamless experience across channels. 
• If the Web is now a part of core retail strategy - key to driving revenue growth and building lasting brand loyalty and customer relationships - what opportunity costs might also be incurred in this model? 
• Imagine a new campaign that seeks to drive foot traffic to the store leveraging a single view of the customer.  In an outsourced eCommerce model, modifications to site capabilities, collection and use of multi-channel data is now very much dependent on the 3rd party.  To execute this in a 3rd party model, changes will need to be written up and paid for.  Worse, if the campaign or approach needs to be modified, it will be time for new change request write-ups and new dollars for the modifications.  That assumes of course that the outsourcer is willing and capable to perform the work.

Make no mistake, the outsourced model can be a good choice for certain retailers.  However, in an era where retailers are working hard to deliver multi-channel experiences to their customers, the outsourced model presents a host of challenges.