It's Time for Fulfillment Industry to Grow Up
Only the strong will survive in this sector. E-commerce "Darwinism" will ultimately "thin the herd" of third-party e-fulfillment outsourcers. Just as there will be mergers and consolidation among e-tailers, there will be the same among outsourcers.
Seemingly every company with a warehouse or call center has pursued e-fulfillment contracts, but precious few traditional outsourcers are truly wired for conducting digital business. Most are still cobbling antiquated legacy systems from their catalog and direct mail backgrounds together with client Web sites. As recently as the 1999 holiday season, some resorted to pulling orders off client Web sites, walking them over to the warehouse and manually keying them into their systems. The fourth quarter of 2000 should separate the pretenders from the contenders.
To survive the competition, fulfillment outsourcers will become leaner and meaner. With Wall Street's shift in focus to profitability over market share, the critical back end will receive closer scrutiny, which will fall heavily on outsourcers. This will force price pressures down the pipeline, which we're already seeing.
Early on, outsourcers were looking for an equity stake in their clients in hopes of cashing in on a huge public offering, but now clients are asking outsourcers to take an equity position in return for lowering costs. Fulfillment and, to a lesser extent, customer service, will become commodity-driven services, creating operating and cash flow problems for outsourcers that do not run efficient operations. With fewer stable, profitable clients on the horizon, the outsourcing arena will become even more competitive.
Service offerings will need to expand: E-fulfillers, then, can only differentiate themselves and justify higher pricing by offering enhanced value-added services. As more corporations such as Cisco, Dell and Ford move to become "brand-owning companies," they will continue to look to outsource more of their nonessential business operations. The next generation of e-fulfillers will capitalize on that trend, offering more enhanced supply chain management services, including systems integration, e-commerce development, online procurement, vendor and supplier management, accounts payable and customer relationship management.
Integration will become the key industry benchmark for outsourcers. We're all familiar with the variety of metrics used to assess fulfillment services, order accuracy, on-time shipping, etc. In the future, put integration at the head of the list. Right now, just a handful of fulfillment firms offer the sophisticated integration required to implement successful e-commerce initiatives, but that will have to change.
Organizations can't truly benefit from the potential of e-commerce unless their internal operations are integrated from front to back. The "strategic partnership" approach, creating a double outsourcing relationship, is not the right solution either. Not only does integration enable the seamless transfer of information over multiple channels, but also it allows real-time access to business data critical to forecasting.
Another thing we'll see is that the smart outsourcers will be more selective. The symbiotic e-tailer/outsourcer relationship is best forged for the long term, which allows amortization of costs and improved efficiency based on volume and density. E-fulfillment firms frequently have been left holding the bag when e-commerce sites have failed. Therefore, smart outsourcers will look long and hard at potential partners to determine whether they're financially secure and strategically positioned to stay in business past the buzz of "opening day."
This selection process is already under way at the top level of e-fulfillers. We recently had a representative from a start-up, online division of a large corporation in our office, who joked that even he felt as if he were being "interviewed by his potential partners almost as much" as he was interviewing all of us.
You'll have to pay to play: Outsourcers will have to invest in experienced information technology personnel to keep pace with industry demand for quality e-fulfillment. Traditional outsourcing operations simply don't translate directly to e-commerce; rather, knowledgeable IT managers are required to integrate fulfillment into Web-based operations. And, with a nationwide deficit of skilled IT workers, salaries for these managers will have to be attractive. As the industry matures, "brain capital" eventually will be absorbed into operations, but look for these additional costs to factor into outsourcing rates during the next 18 to 24 months.
Also look for the market's frenzy to distract many. The market shakeout earlier this year not only had a dramatic effect on e-tailers and Internet companies, but on the outsourcing market as well. Several e-fulfillers went public last year to see their stocks initially rise but ultimately fall to levels far below their initial public offering price. A major e-tailer said that one of the reasons he wanted to change outsourcers was that he couldn't get any senior management on the phone during the heavy Christmas retail season. Where were they? Out on "road shows" looking for venture capital money.
This focus on the financial markets rather than on the needs of clients, particularly for a service company, can be very dangerous. Venture capital and public markets provide resources for growth and scalability, but in a fragile market environment they can force a growing organization to lose focus on what really matters.
The bottom line is that e-tailing's growing pains will force the e-fulfillment outsourcing industry to grow up. Increased competitiveness is going to be beneficial for high-quality outsourcers. And, improving the field of players that deliver what is arguably the most important part of e-tailing, the back end, will only improve the overall industry.