The Outsourcing Dilemma

When should an online publisher use a third party service? It’s a question that comes up a lot in our space. I’ve been on both sides of the fence so I’ll have a go.

When I co-started a web services company the business model was relatively simple – partner with large online media players and their sales force sells your service for a recurring monthly fee. As they grow, you grow with them, achieving economies of scale along the way and carving out a nice business.

“There was one notable exception from that list – carsales. We just couldn’t get business with carsales…”

Before too long, my company supplied web based services to the majority of the big players in the Australian market in all forms of classifieds – Pacific Access/Sensis (Cars), News Digital Media (Carsguide, Careerone, Homesite, Gofish), Ninemsn/Trader (Carpoint), Fairfax (Mycareer), Seek, REA – all of which gave access to thousands of SME’s.

There was one notable exception from that list – carsales. DMi just couldn’t get business with carsales in the 10 years I was there as carsales has always been different to all other publishers in the use of third party providers in that they didn’t use them; they have always had the technology (or built it) in-house be it to aggregate inventory, manage inventory, manage leads, inventory search engines, web sites, etc, all the usual third party offerings used by their competitors.
Pros and Cons
Before I share a Case Study where carsales made the decision to outsource to a third party service provider, I want to share my Pros and Cons.

The Pros for outsourcing to a third party service provider:

  1. These services are usually not a publishers core business so it makes sense to have your people concentrating on getting your core as best it can be.
  2. Time to market should be quicker

The Cons against outsourcing to a third party service provider:

  1. Recurring cost that increases as your services increase.
  2. Not being in control of the whole ecosystem around your core service.

Case Study
A few years ago a new feature to accompany listing vehicle inventory online took off in the US and made it’s way into Australia. carsales‘ competitors were starting to use this new feature so there was an opportunity for carsales to also add the feature to the website as well as provide it to dealers for their own websites. The question was to build or license a third party service.

“carsales sought to lock in a monthly fee for the service”

carsales had always been one to build but had reached a stage where there was so much happening in technology that it made sense to license a third party service to leave the tech teams to do more important developments and to get time to market efficiencies (the two Pros).

In order to offset the first argument against using third party service providers, carsales sought to lock in a monthly fee for the service to use it across the business. The downside to this is that if carsales fail to sell the service to its dealers, carsales loses as it still has to pay the monthly fee. The upside is that the more dealers carsales adds to the service, the cost of the third party service doesn’t just keep rising, it is capped. The challenge was to find a flat fee that suits carsales and the third party provider.
Once a third party service provider was found and terms were agreed to, carsales very quickly was able to start selling the new service, giving the website a new feature and forming a new revenue line. Using a third party service provider had worked.

“In the end this has ended up being a positive move for carsales”

The service was working well until the third party service provider informed carsales that the terms of the agreement would change after the initial term. This wasn’t acceptable to carsales so it did what it had to; put together a tech team to build the technology to seamlessly replace the third party service when the term was up.

In the end this has ended up being a positive move for carsales. The service and its features remained pretty much the same yet the cost of supplying the service was reduced by over 50% (which includes amortising the development effort over a number of years) and hence, the two Cons were adequately covered off.

My View
I think there is a time when it makes sense to outsource to a third party service provider and a time when not to. The two Pros stand up; as do the Cons. It all comes down to a business decision at the time that fits the business in the best way.

The most important thing though is to not be afraid of changing that decision. It’s ok to change your mind to get the right outcome.

Leave a Reply

Your email address will not be published. Required fields are marked *