This post is by James Thomson, Partner of Buybox Experts, a consultancy supporting brands selling on Amazon and other marketplaces. James is also president of PROSPER Show, a continuing education conference focused on developing training and best-practice materials for early-stage online sellers.
First, the good news: Your ecommerce business continues to grow at a rapid pace.
Now, the bad news: Every month, you find yourself busier and busier managing operational issues like office staffing, your warehouse, customer inquiries, and product returns. With each passing month, you have less time to spend on building your catalog of desirable products, and on absorbing and integrating customer feedback into your new product development.
For large sellers that have hit the point in their daily grind that they are so busy working in their business that they don’t have time to work on their business, it’s definitely time to re-evaluate.
There will be a trigger point soon – maybe a new entrant eats away at a profitable segment of your customer base, or your warehouse gets so busy that orders start falling behind, or your family life is starting to suffer so much that you realize you must make a change! Now what?!
What parts of your ecommerce business can be outsourced? How do you make that transition smoothly so you can keep growing, and focusing your time on what you love – finding and developing new products and business opportunities?
Imagine a world where 80% of your time today is freed up to do what you love most about being an entrepreneur. Now the power of scaling becomes much more apparent, and you have enabled yourself to be positioned for much faster growth of your business.
Peter Drucker said “Do what you do best and outsource the rest” – online sellers should be best at sourcing profitable products… not the other stuff they have to handle just to run their businesses.
While outsourcing is being more common in many industries, we have seen a general lack of awareness within the online seller community of what sorts of outsourcing opportunities are available for this audience. Hence, this document provides an overview of how outsourcing ideally works, the types of risks involved, and the range of companies providing outsourcing services suitable for online sellers.
- What is outsourcing?
- Why outsource? When are you ready to consider outsourcing?
- Trade-offs of outsourcing
- Common forms of outsourcing for online sellers
- How to get started
- In Closing
What is outsourcing?
“Outsourcing” represents the delegating of responsibility of critical processes in your business to other organizations that specialize in those types of processes. You, as the company doing the outsourcing (client), seeks another person or organization (provider) to take on specific business-critical processes or intrinsic tasks that would otherwise be handled internally within your own company.
The elements of physical distance and specialization are usually relevant to such working relationships – the service provider is located in a different location as your company – sometimes a few miles away, and sometimes on the other side of the planet. The services offered by any individual provider are usually specific to certain aspects of running a business – through specialization, the provider has developed a level of expertise that the online seller is never likely to or should develop.
For the client that pieces together the right collection of providers, that online seller is much more likely to have best practices applied to each of these outsourcing processes than if the online seller tried to develop the skills in-house and handle all of these processes itself.
While the politically-charged term “offshoring” may be applied to certain types of outsourcing, the primary consideration of any outsourcing decision should be whether the online seller is best positioned itself to handle the management of a key process or task, or whether it is best handled by someone external to the online seller. Once that decision has been made, then we get into the question of where the provider of this service might be located, whether domestically or internationally.
As we have seen all too often, ecommerce businesses put important projects on the back burner too long because they don’t have the time to do these projects themselves, or they believe that they don’t have the money or margin to hire the right person locally to handle the project. Hence, we take the view that if an online seller can get critical work done externally, it matters less where the work is done, and more about whether the work is high-quality and timely to the needs of the seller.
Why outsource? When are you ready to consider outsourcing?
Keeping focus and remaining competitive are the two primary reasons why a seller is likely to outsource key processes to external providers.
Being a successful online seller shouldn’t require any entrepreneur to be a jack-of-all trades.
We have seen far too many sellers that have prided themselves on growing the size of their warehouses and internal staff, only to realize that they aren’t approaching expertise in warehousing or internal operations. Rather, by reducing the amount of time spent running the daily activities of the business, the entrepreneur develops more time to source products and built its business.
Today, some online sellers are actually based overseas, where the cost of labor may be lower. Those very sellers are able to keep their costs lower, improving their ability to offer lower prices to sellers. For any online seller that has had to compete with another company that has a lower cost structure, that seller knows the struggles of remaining profitable.
So what is it going to take to make sure all of the major processes of the online business are properly handled, yet keep costs low, drive expertise high, and maintain enough time to grow the business? We turn to outsourcing.
Trade-offs of outsourcing
Before jumping into outsourcing, it is best to have “eyes wide open” about the trade-offs that are usually required.
Control vs. expertise
For most business owners considering outsourcing for the first time, the issue of giving up control can be very scary. And yet, having an experienced outsourcing provider handle a particular process will more likely provide you with the opportunity to bring state-of-the-art expertise to that process, as no entrepreneur will ever develop industry-leading expertise across all major business processes.
The person or team to which you outsource a process will most likely spend all of its time doing just that process for multiple clients, thereby creating superior skills and familiarity with the issues that affect that process. And an outsourced team is much more likely to make you aware of emerging trends or tools that affect a particular process.
Physical proximity vs. offsite
How close to you does your inventory have to be? How close do the people that handle your accounting or data cleanup need to be?
For some entrepreneurs, they want to be able to walk down the hall to see these people or assets immediately. But if the same entrepreneur develops strong communication skills and properly trains the outsourcing teams, this need for proximity will lessen.
Most companies we know that effectively use outsourcing teams have told us that their overall communication skills with direct reports has improved as they have learned to work with outsourcing teams through email, phone calls and video calls, as needed.
For those using 3PL services, we see the benefit of the 3PL facility being reasonably close to your location so you can visit the 3PL facility periodically to check in, rather than having to jump on a plane across the country.
Capital expenses vs. operating expenses
If you own infrastructure including your warehouse, equipment and office space, you most likely have a lot of cash tied up in capital expenses. It’s hard to upgrade/downgrade any of these quickly without a substantial impact on your cash.
Outsourcing frees up a lot of the up-front investment, as outsourcing companies typically charge a very small amount each transaction to cover their own infrastructure costs, which is much easier to consume in this pay-as-you-go model. By eliminating assets, your business’ balance sheet improves and you will have better cash flow that can be used to buy inventory you would very much like to have.
While each of these aforementioned trade-offs has to be carefully evaluated for what makes most sense to your business, the most important criteria regarding outsourcing is how much time you are spending working in your business, versus time working on your business.
If each year, you find that you are spending more and more time working in your business, that almost certainly means you have less and less time available to work on building your business, and creating new business opportunities that will help your business evolve from year to year.
While you may want to stay abreast of all key operational issues affecting your business, staying abreast remains critically different from actually running of all of the operations yourself. Whether you have outsourced nothing, a little, or a lot of processes, it is worth re-evaluating every six months to see if you are using your own time in the most valuable way only you can, given the array of outsourcing options available. Part of the beauty of outsourcing is that you can be flexible in what get outsourced at any point.
Common forms of outsourcing for online sellers
So where does an online seller typically start with looking for outsourcing opportunities? The most common places to look include:
Read the case study about CrucialVacuum.com’s selection of a 3PL provider (opens a pop-up).
Operations and office management
Read the case study about Dazadi.com’s selection of an operations and office management provider (opens a pop-up).
Read the case study about AFP.Archway’s selection of a product research provider (opens a pop-up).
Accounting and bookkeeping
Read the case study about Mack Weldon’s selection of an accounting and bookkeeping provider (opens a pop-up).
Read the case study about Kaliber Global’s selection of virtual assistants (opens a pop-up).
Read the case study about TechArmor’s selection of a call center provider (opens a pop-up).
While one might look at the use of any ecommerce solution provider as a form of outsourcing (e.g., repricing, feedback/product review collection, inventory/order management software), we have chosen to focus primarily on those processes of an online seller’s business which are most likely to require extensive, dedicated staff and/or physical assets today. If these processes are outsourced, the online seller is able to simplify its corporate structure and assets significantly.
How to get started
If the idea of outsourcing is starting to resonate with you, how do you get started?
While this guide includes examples of commonly-used outsourcing companies, it’s important to go slow with outsourcing and get comfortable not only with the outsourcing company you use, but also with what it takes in terms of interviewing/identifying the right company, then training that company, and building the right communication cadence to ensure you are both on the same page throughout.
For many an entrepreneur that hasn’t always been the best “people manager”, moving to an outsourcing relationship will highlight any shortcomings around clear expectations and regular two-way communications.
We encourage sellers to start with outsourcing help in the areas of booking/accounting or listings management/catalog cleanup – both are areas that can be very time-intensive, and rarely are skills that an entrepreneur wants to develop to expert levels.
For listings management or catalog cleanup, you can even start with project-specific activities where you want to tackle some back-burner catalog projects (adding new listings, cleaning up existing projects) to see if your outsourcing partner meets your expectations. And if, after some period of time, you need to pull back from the outsourcing company you are using, you can rather easily go back to whatever means you had of managing that process before initially trying an outsourcing company.
As you get more comfortable with outsourcing, only then would we suggest you explore moving to a 3PL outsourcing partner – this sort of outsourcing decision has major ramifications to how you run your overall business, and you won’t easily be able to double-back if you don’t like what you see. See our section on names of well-established 3PL companies that know the online seller space.
How to be an informed, responsible consumer of outsourcing services
1. Benchmark from referrals
Never is the relationship perfect, so understand what works and doesn’t work from other companies that have used the outsourcing organizations you are evaluating. Do your research first-hand (don’t outsource this!).
2. Conduct small initial tests
It’s all about figuring out the capabilities of outsourcing companies. Ask lots of questions, possibly pay for a small project to see quality of work, quality of communications, ability to ask good clarifying questions, ability to meet deadlines.
3. Invest heavily in training the outsourcing company
You will likely find that by having to document key steps in the process to share with your outsourcing company, you will find that there are obvious gaps in your own processes, or that you start questioning whether you are doing things as efficiently as they could be.
Working even with the best outsourcing companies, you can’t expect them to understand magically what you want – it takes hard work, lots of communications and better yet, proper documentation that they can use as reference.
As you go through the training, ask a lot of questions of your outsourcing partner – you will likely find they have a lot of suggestions on ways to improve – remember, they are much more likely to have expertise in that one process than you will have.
Best Practices To Build a Strong Relationship with Outsourcing Providers
1. Effective Communication
To be effective in your communication with your outsourcing provider, you will need to have adequately trained the provider on your desired method of working, your desired outcomes, as well as desired approach for tackling variances in the process. This should be coupled with regular conversations to review progress as well as to identify what is needed from you to improve the provider’s effectiveness.
If done properly, you will not lose control of management decision-making, as your outsourced provider will remain an aligned agent and partner of yours. Furthermore, if the provider is not competent in a specific area, open dialogue will vet that out, and allow you to pursue additional training for the provider to close that gap.
2. Confidential information
Any key process to be turned over to an outsourcing provider is likely to involve the sharing of confidential information, whether your credit card information, your bank account information, or business strategy and tactics that you would not want shared with your competitors.
At a minimum, use common sense to protect your accounts – mechanisms like prepaid credit cards and non-admin credentials to access only certain parts of your marketplace accounts are appropriate.
But your regular review and care to review is most critical. While you try to protect yourself with legal contracts, remember that the best long-term way to protect yourself is to work hard to involve the outsourced provider in key decisions, and make them feel involved, valuable and knowledgeable about their part of the business.
3. Share risks and rewards
As an outsourcing provider most likely works with multiple clients, there is likely to be a lack of dedicated focus on your business. So it becomes relevant to consider sharing certain risks and rewards with the provider, again to create closer ties to your account.
If there is meant to be upside in working with an outsourcing provider, share some of that upside by setting tough but achievable goals to keep the provider motivated and focused on your business.
Many an online seller business started with a single entrepreneur running all aspects of the business: supplier identification, product sourcing, order fulfillment, inventory management, returns, accounting/taxes, and so on.
Next, the entrepreneur makes the big decision to hire someone to help out. Then someone else, and so on. Sales grow to the point that the entrepreneur can no longer house all of the inventory in his garage or basement, so they find a storage unit or small warehouse.
As sales grow, the amount of time spent on human resources and operational issues also grows. And the proportion of capital available for product sourcing and inventory (rather than direct costs and overhead) shrinks. Within a couple of years, the entrepreneur wakes up frustrated by the complexity that has been created. No longer is there the same excitement about being a small business owner.
Yes, the smart entrepreneur figures out which processes can be outsourced, and works through the transition period of making those changes. While overall costs may not be that different from before, the entrepreneur is now spending much more time working on their core business, rather than working in their business.
That way, the entrepreneur’s enthusiasm for the business remains strong, as they are spending their time doing the sorts of activities that got them excited about starting their business in the first place.
In previous roles, James was the former head of Amazon Services (a division of Amazon that recruits 100,000 new sellers to the Amazon marketplace each year), the first FBA account manager, a banker and management consultant. He earned a Ph.D. in Marketing from the Kellogg School at Northwestern University.
Parts of this paper were included in an e-book published by Feedvisor in 2015: The Amazon Seller’s Guide to Outsourcing.