When is outsourcing right for a business?

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12 Sep 2013
Read time: 3 MIN
When is outsourcing right for a business?
Written By
MOF Team
MOF Team

In 2001, following 3 years of scrambling for online revenue to put their accounts back in the black, Borders Group Inc. relinquished control of their e-Commerce book, CD and DVD sales to digital marketplace giant Amazon, in a bid to increase both online revenue and profile for the company.

International book and music retailer Borders was founded by brothers Tom and Louis Borders in Ann Arbor, Michigan in 1971, using a tailored inventory approach to align each store’s offering to its corresponding region and community. This personalised approach, teamed with rare new and used books, provided an attractive and accessible retail model for both seller and buyer, and just twenty-one years later in 1992, the Borders Group had expanded to 21 stores.

Over the following years, the chain was purchased, renamed and sold by the KMart brand. KMart acquired the 21 Borders stores for roughly $190m, and subsequently combined the company with Waldenbooks, another Michigan based book retailer, to create the Borders-Walden Group, only to revert back to the Borders name and resell it to the original team in 1995.

In the late 1990s, as depicted in the widely popular 1998 Warner Bros. film ‘You’ve Got Mail,’ book superstores were on the rise, and Borders worked their way up in the industry to become the 2nd largest US book retailer, competing with book giants Barnes & Nobles for the top spot. In 2001, in order to focus their attention and budgets on maintaining and expanding their bricks-and-mortar megastore concept, Borders made the decision to outsource their floundering online offering to rival retail force Amazon.

This ill-fated business decision was the largest contributing factor to the demise and ultimate bankruptcy of Borders Group Inc.

Seattle based Amazon took control of Borders’ web operations, including inventory, customer service, shipping and revenue, releasing a commission per-sale fee to the Michigan book firm. Making the e-Commerce deal to keep up with the progress and profits of Barnes & Noble, Borders predicted that their new, near 100% focus on bricks-and-mortar retailing sites would result in higher revenue and sales. Unfortunately, Borders relinquished all control of their online offerings just as the digital marketplace for books and music was gaining momentum, and by 2009 sales of physical books, CDs and DVDs across the Borders chain had dropped by 38%, owing to the increased popularity of downloading and streaming services offered by iTunes, Netflix and more.

Borders reclaimed and relaunched their e-Commerce book selling platform as late as 2008, 13 years after Amazon had sold its first book online, and just 3 years before the Michigan based company filed for bankruptcy. At the time of its final demise in 2011, Borders had not made a profit since 2006, having not been able to compete with the personalised e-Commerce service provided by Amazon - ironically the very ethos that had made Borders so profitable and popular at its launch.

Borders’ fundamental lack of understanding and business acumen in relation to online selling strategy and planning, made the decision to outsource its most important modern retail arm to its biggest competitor the ultimate nail in the coffin of its book selling service, and the loss of 10,700 jobs and $900m.

Outsourcing beyond Borders

If outsourcing one of its core competencies ended in tragedy for America’s 2nd largest book retailer, should other business and industries take note and restructure their business plans to bring every arm of their strategy in-house? The travel and hotel sphere - for example - have been outsourcing their booking and review systems for years, but no leading companies to the scale of Borders have been irreversibly damaged in the same way.

Outsourcing IT systems and services has affected huge names including Virgin Blue and Qantas Hotels, who have left customers stranded in airports or without beds for the night as a result of external booking problems. In 2010, airline Virgin Blue - known as Virgin Australia Airlines from the following year - faced a 21 hour outsourced IT meltdown that left thousands of customers stranded after being affected by a reservation system failure. CEO John Borghetti immediately threatened to end the airline’s contract with their IT supplier, in order to restrict the lasting damage of past and future outsourcing failures.

In contrast, one travel company who is successfully capitalising on the global potential of outsourcing is user-generated content review giant TripAdvisor. Founded in 2000, the American site spun off from Expedia Inc. in 2011 and has grown, since its launch, into the world’s largest and most popular online travel community. The success of TripAdvisor is a result of crowdsourcing its content coupled with other relevant industry sites outsourcing their offerings to the travel giant, in a move managed by Vice President of Partnerships Severine Philardeau.

By controlling the review process in collaboration with hotels and airline carriers, TripAdvisor can monitor and oversee the content of reviews, and past criticisms of review practices can be avoided. With 63% of travelers reading online reviews before committing to a holiday booking, clarity and authenticity of user-generated content on these sites is of optimum importance. One site who are on board with this co-verified review system is Amsterdam based, Expedia Inc. owned, EasyToBook, who have outsourced their experience harvesting to the dual-branded customisable form offered by TripAdvisor.

Outsourcing sales is made possible for travel and hotel businesses by utilising a system known as ‘wholly-owned outsourcing.’ This is the notion that a big brand will create a smaller, dedicated team within its own company, to handle the sales and booking processes in an economically viable and manageable way. Every minute that an administrator is dealing with a booking query that should technically lie outside their remit, revenue is being lost. By outsourcing to a company owned, but departmentally separate team, sales can be completed for a lower cost, but at the same company wide level of quality.

In the travel industry, this means that brands such as Expedia Inc. can outsource their bookings to subsidaries of their main site Expedia.com - including Hotels.com and Hotwire.com - to maximise sales and revenue, whilst minimising external expenditure. By outsourcing bookings to regional providers (Expedia Inc. operates in 60 countries worldwide,) a more thorough customer experience can be gained by users, allowing hotels to gain more of an ownership over their immediate locality and services.

Unlike Borders, who cannibalised their online sales by handing over responsibility to the website with the biggest share of their chosen market, outsourcing to subsidaries - not rivals - in the travel industry is more important than ever in order to maintain a manageable balance between low costs and high quality. It is key for both emerging and established brands to confidently find their niche and voice within their industry, and strive to ‘own' both their destination and demographic through creative marketing and sales strategies. Just as large offline retail and travel chains now face a rise in boutique appeal, the brands that will truly succeed will be ready, with relevant and well-managed outsourcing in their arsenal, as larger aggregators become neutered by their own success.

MOF Team

Published by MOF Team

We are a London-based Brand & Experience Design Agency delivering second-to-none experiences for forward-thinking luxury brands with something to say.