Howdy folks! While I realize most of you are still on an Easter break, our business guy Nick wrote a clever article on outsourcing , in-house and administrative costs that I’d like to share with you here. Enjoy ![:)]()
The underlying principle for how to decide what to outsource and what to do in-house is the same for e-commerce as for any other business. The only thing you should decide when making this decision is whether the administrative costs exceed the transaction costs for each action or vice versa. So what are they exactly?
According to R. Coase, the transaction costs are:
- search and information costs
- bargaining and decision costs
- policing and enforcement costs
Administrative costs, on the other hand, are the expenses incurred in controlling the organization. Although IT brings the costs down, the principle will still be true in the foreseeable future. Nothing much has changed here since 1937, when Coase, the Noble Prize winner in Economics, wrote his article “The Nature of the firm”. He explains it this way:
- the costs of organizing additional transactions rise with scale and are equated with the costs of additional market transactions;
- the organization of bigger firms may not reproduce the effects of market conditions.
So let’s go through all the steps, “from sheep to shop”, to see what can be outsourced and what shouldn’t.
Research and development
It was classically believed that research and development is something you should definitely do on your own. Today, the things have changed a little, so, unless you are in Chemical industry, you can start outsourcing at this stage as well. Even if you only have an idea and nothing else, you can still use third party services such as Quirky to help you develop it. It is nearly effortless – just post your thoughts and you’ll get help from designers, marketers and other techy people in exchange for a percentage of your future profits. If they like your idea, of course. We don’t even mention programming here - internet is full of freelance developers, designers and what not who’ll do anything for you and save you the trouble of recruiting, training and motivating your own team. So again – do run this check – if it’s cheaper to do it yourself or to hire someone to do it. Of course you’ll have a dozen other things to think of, including intellectual property rights, the extent of control you have on over the people who do it, etc.
Production
But then, how hard can it be to get your idea to the production stage, have your product ready and placed on Walmart shelves? Again, you can either spend time and effort and do it yourself or use a third-party service like Quirky to help you do it. Alternatively, you can look for contractors in China via Alibaba or a similar resource – no need to build you own production facilities. And if physical goods can be created without your presence, imagine how many opportunities are there for development tasks on services like Freelancer, Odesk and Elance. The rule of thumb for this is: if the IT development has not much to do with providing you with a competitive advantage, transaction approach is advisable.
Sales
This is probably the trickiest function to be outsourced in full. There is no doubt that you can outsource building the infrastructure for selling a lot:
- Outsource SEO – let the qualified people fine-tune your Adwords, add working keywords, etc. Administrative costs are definitely higher per se, let alone unrealized profits because of bad indexing of your store and things like that.
- Design – website design is a task you do not need an in-house team to do. The only exception would be if you already have designers in your team.
- Advertising
- Accounting – you don’t want to hire a one full-time if you’re a small business or do all the tax and legal things yourself.
The main question is however, if you can trust a third party with selling your product. If you are able to judge the sales people by the level of output and leave the emotions beside – you can also outsource it and live with a virtual company.
Our example
Theory is good, but practice is better. I will share our example – the checklist for outsourcing vs in-house.
- Is it a specialized skill we don’t have? Yes – outsource
- Does it require any equipment we don’t have? Yes – outsource
- Is it seasonal or temporary? Yes – outsource
- Is the task limited and non-recurrent? Yes – outsource
- Is it likely that we’ll be doing the task in the long-term? No – outsource
The difficult part in our case is to find the right talent for designing and custom coding. On the other hand, this is true for the whole industry.
Conclusion
There’s no one size fits all when it comes to outsource vs in-house decision. The majority of e-commerce businesses use the hybrid models where some of the tasks are performed by outsourced personnel. The only good tip would be to search the internet properly before hiring a service provider. For instance, there are plenty of free or almost free CRM solutions that bring your customer relation administrative costs to nearly zero. If you’re a small e-commerce venture, think about having fun when running your business. Then the rest of it – that’s not fun or that you can’t do yourself – can be outsourced. Good luck with that!
Have a business story on in-house vs outsourcing at hand? Share it in our comments section ![:)]()
The post E-business: outsourcing vs in-house to get things done appeared first on MultiMerch Marketplace.
