Make Versus Buy

I was chatting recently with Doug Rose, VP of Business Development at CMGI, the fast-growing Internet conglomerate, and Doug shared with me an amazing observation.

Doug has for years been buying and selling direct marketing companies, hundreds of them, and he says that, almost without exception, the companies who outsource large parts of their businesses are consistently more profitable than those who do everything in house.

Wow. I have always known in my gut that outsourcing makes sense. But this is the first time I’ve heard a real validation over time, and over a large number of companies, specific to our industry.

So what does this mean for dot coms and others? The question of “make versus buy” is one that every business, large or small, new or established, has to face.

In the Internet world, the issue is especially critical. Internet startups usually focus on either a new technology or a new marketing idea (aka “business model”), and they want to take it to market as fast as they can, before the competition beats them to it. For reasons of speedy growth alone, outsourcing can be a compelling alternative to building infrastructure in house.

There are several arguments in support of outsourcing. In fact, you can check in with any vendor and you’ll get all the reasons, and the statistics, you can use.

Here are the usual points to consider:

1. Defer technology risk. Leave the challenge of keeping up with the latest technology to the vendor who can amortize the expense over many clients.

2. Maintain management focus. We’re all busy enough. And the single biggest constraint on dot com growth is talent. Successful managers focus on the core business, the customers, the value proposition.

3. Cash flow flexibility. Building a big infrastructure ties up your cash and your credit. And as seasonality or business cycles wax and wane, a vendor will be more flexible on pricing to variability in your needs.

4. Competing for talent. Let the vendor cope with the critically tight job market of today.

5. Speed to market and speed to scale. Outsourcing is faster, period.

But the tough part is deciding what pieces of the business to outsource. The arguments for “building” can be powerful. Here are some of the typical ones:

1. Cost savings. Truly, in a high demand period, variable costs will be much lower in house.

2. Control. Why take the risk of ceding to others responsibility for processes that are critically important to your business. (This can be a compelling argument, but one frequently abused by empire builders and egomaniacs.)

3. Scalability. Ironically, the very argument in favor of outsourcing can be used against it when you plan to grow faster than a vendor’s ability to keep up.

So how do you decide? Consider the question with a view to business strategy. Marketers need to do the tough homework first, and develop a clear answer to this strategic question: What business am I in?

Once they’ve established that, it’s much easier to make the outsourcing decision. The elements that are critical to their business strategy should be built, maintained and controlled in house.

If I’m a dot com doing most of my business on the Web, then I will certainly want my developers and designers in house. This is my key communications vehicle with my customers. Its features, navigation, look and feel are critical to a positive customer experience. But I’d be happy to outsource my marketing database, and my after marketing e-mail campaign execution, because excellent state-of-the-art vendors are falling all over themselves to give me great functionality and service on these pieces of my business.

The emergence of the ASP (Application Service Provider) is a case in point. Who would have ever thought we’d be willing to outsource our business software? Enough companies today have decided that software infrastructure is not something that is critical to manage in house, giving rise to an entirely new line of business.

If I am an old-line company with legacy systems and a traditional business model, and I am seeking to get into the dot com world, I might outsource everything, even the business strategy, because I don’t have the right brainpower in house.

So first define your business, decide what is at its core, and stick to your knitting around those pieces. And keep that discipline in mind when you face the make-versus-buy decision every day.

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