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Outsourcing e-tail: the commercial and legal considerations

23 Jul 2007 12:00 AM | Anonymous

Most e-tailers appear to manage their own website operations while a few have chosen to outsource this aspect of the business. In the US, Amazon.com runs e–commerce sites for a number of retailers and in April 2005 Marks & Spencer announced that Amazon Services Europe would look after the technical side of the Marks & Spencer website and link in-store, telephone and online ordering systems.

Outsourcing of these functions is becoming increasingly common but it is important to consider the high level issues before e-commerce operations are contracted out, in order for the relationship to succeed.

Understanding and clarifying objectives

The most important first step in any outsourcing arrangement is to analyse and identify the key drivers for taking such a step, and to have a clear understanding of its outcomes and benefits. The most obvious advantages for the retailer are time and money savings but there a range of other advantages. In particular, the retailer may hope to benefit from the latest technology without having to invest manpower and money developing its own systems.

The retailer will also hope to benefit from the outsourcing service provider's expertise, allowing it to improve its consumer service levels leaving the retailer to concentrate on its core competencies of marketing and growing the business. For example, outsourcing critical back end functions such as customer service and e-fulfilment enables retailers to get their e-commerce initiatives up and running much more quickly than if they have to build the entire infrastructure. Marks & Spencer believed that taking advantage of Amazon's established technology would allow its website to reach its full potential in 2006 and allows the in-house marketing and sales teams to focus on their core values.

There are potential pitfalls in any outsourcing relationship and these need to be managed carefully. For example retailers need to manage their reputations carefully and avoid any brand damage that a supplier could inadvertently inflict. It is important that retailers consider the following:

• What its internal drivers for outsourcing are; the commercial consideration over the venture; and its defined objectives

• Clarifying its overall e-strategy and considering how outsourcing will support such strategy

• Which outsourcing model is best, for example: indirect, tied, direct or joint venture.

E-Tail Issues

E-tail is a very specific function to outsource and the retailer must consider specific e-commerce issues. If a traditional bricks and mortar retailer is moving into e-commerce for the first time then this will be the first time some of these issues have been considered. Roles and responsibilities can be split between the retailer and the outsourcing service provider if this is clearly agreed and understood in advance. For example, consideration given to points such as: electronic stock control, security (e.g. information and e-tail loss reduction), order fulfilment, warehousing and distribution, helpdesk and consumer support, integration with multi-channel and payment processing.

Managing the negotiations and meeting objectives

Prior to agreeing the deal with Amazon, as would be advisable, Marks & Spencer reportedly talked to a number of interested parties. This is a sensible move. It is crucial to source the services carefully and once a short list is selected, to perform sound due diligence on suppliers before a final selection is made. In order to ensure the supplier is financially stable and therefore able to commit to a long-term outsourcing contract, the retailer should insist the supplier makes financial information available to them. It is not simply a question of who can perform the service most cheaply; issues of capability, culture, relationship and other factors can be as important to long-term success as price and finding a supplier that ticks all the boxes rather than just the cost efficiency box is the key to success.

The outsourcing contract must include the details of the arrangements including how the provider will be paid. This may sound simple but there are different payment models, such as the service provider taking a slice of the online revenue. Parties should be very clear about who is responsible for legal and regulatory compliance. Other negotiation and contractual considerations include:

• Sole-vendor or multi-vendor tendering (consider the RFP objectives and process)

• Negotiation strategies & negotiation process (will there be parallel negotiations and will negotiation strategy include specific session goals)

• Negotiation problems and escalation

• Service Level Agreements and contract issues, e.g.

- Service level agreement (SLA): key performance indicators (KPI) and remedies.

- Contract: provisions for enforcement of obligations, continuity of services, exit provisions, term, tax issues

- Front-end legal and regulatory issues: e-commerce, distance selling, data protection, online marketing laws and regulations

- Back-end arrangements: website hosting, design and development, and content.

Balancing / managing expectations during negotiations and through service term

It is of paramount importance to update and evaluate an outsourcing relationship to find out exactly what works and what doesn’t and to identify and rectify any problems whilst they are in their infancy. Outsourcing relationships are often regarded as partnerships. It is important that the outsourcing contract and the relationship must be developed to anticipate and accommodate change factors.

For example, this may include considerations for:

• Retailers – In an instance where high cost savings are not realised a retailer will need to audit and evaluate to ensure this is rectified immediately. It can also be the case that a retailers needs change, for example if they grow or shrink in size or change focus, a supplier relationship and subsequent contact needs to be able to accommodate for this. Supplier financial difficulties are another factor that needs to be considered. If a supplier goes bankrupt leaving you out of pocket and with no service, how you tackle this needs to be taken into consideration. Overall, the best approach to take is to aim to minimise costs whilst maximising protection (and therefore minimising retailers risk).

• Suppliers - Need to be wary of unclear obligations and unanticipated costs. Meticulous preparation and planning is required to ensure that nothing catches you by surprise. Adding on costs or arguing over obligations can leave a bad taste in a retailer’s mouth and may sour a relationship. Maximising profits has to stay at the front of a suppliers mind in order for the company to remain profitable. Allocating risk to retailer can help a supplier protect themselves if the project does fail. There should always be joint responsibility as an outsourcing project is not a case of out of sight out of mind and should consist of a partnership.

Online retail is thriving: many reports indicate that online shopping over Christmas set new records across all sectors from sales of groceries to gadgets. Many retailers now adopt the multi–channel model, with customer reach not only through stores, catalogues, telephone but also through websites. Retailers that take their website operations into an outsourced relationship should consider the issues very carefully to ensure that the arrangement is based on a solid legal and commercial framework.

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