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Reverse outsourcing

205 Comments · Business outsourcing

Another interesting twist on the outsourcing revolution is the conversion of a business competence into a revenue-generating business service, a process we call reverse outsourcing.

This is not new, of course. Companies have developed new revenue lines out at business competencies developed from within for generations.

What is new is that businesses are able to generate outsourcing revenue on an increasingly mundane set at back-office business competencies.

From simple customized software sales to call center operations, firms that develop world-class competencies in a business process can now look beyond the competitive advantages those competencies provide to their potential for incremental revenue generation.

As outsourcing noncore business competencies has become more common, two things have occurred to increase the opportunities for organizations to seek revenue from business processes they execute at a high level:

1. The “fear factor” about outsourcing has diminished.
2. The opportunities for outsourcing-even in highly specialized processes and business competencies-has greatly increased.

The outsourcing tear factor has been reduced as a result at some at the major business process outsourcing (BPO) drivers. The improvement in Internet security has eased concern about data loss or theft.

The fear factor has also been reduced as a result of the mind shift that has occurred among managers regarding the nature of the organization.

Formerly, most managers believed in vertical integration and tight control at all business processes.

Today, the prevailing wisdom is to focus on core competencies, while trusting market mechanisms and carefully crafted contracts to motivate business service providers to take care at noncore activities.

As the tear of outsourcing has diminished, the opportunities for outsourcing have increased, even in technical or nearly one-of-a-kind business processes.

Many companies are now leveraging their best-in-class capacity in noncore business processes to earn additional revenue.

For instance, in June 2003, Amazon.com, the online retailer known mainly for discount books, announced the formation at Amazon Services, Inc., a provider of outsourced e-business solutions.

The new outsourcing subsidiary offers hosting services using Amazon’s existing storefront and shopping technology, but with complete branding control going to the retailer. It also includes fulfillment and customer support services.

The formation of the business unit was not the beginning at Amazon’s outsourcing business. Bonders, the second largest U.S. bookseller, decided to abandon its online book sales effort in 2001, choosing instead to outsource its operations to Amazon. In turn, Amazon simply adopted its already well-established e-business infrastructure to generate additional revenue.

Amazon took over the Web operations of Borders Online and relaunched it as a co-branded site.

The online retailer also handled inventory, customer service, and shipping services ton book, music, and video sales. Ann Arbor, Michigan-based Borders Group Inc. receives a commission on each sale.

Based on the success of the Borders deal, Amazon has sought additional opportunities to outsource its application infrastructure to other Web-based retailers.

Amazon has built its e-commerce outsourcing business with customers such as America Online, Target, and Virgin MegaStores.

For example, visitors to Target.com will sec the familiar Target bull’s-eye logo, but Amazon is making it work.

Overall, the company has more than 30 such partnerships. It is interesting to note that when it comes to selling goods or selling online know-how and services, the services bring greater profit margins.

In its formal shift into outsourcing services, Amazon furthers its role as a technology innovator first and retailer second.

The online retailer/outsourcer is reported to have spent $1 billion to date and spends $200 million annually on technology.

This places its IT budget in a class with the largest firms in the world and rivals what any firm spends specifically an Web commerce capabilities.

Neither Amazon nor its clients say much about how the deals are structured, but so far, Amazon seems to have made customers like Borders happy.

In April 2003, its parent company, Borders Inc., extended its deal with Amazon, allowing customers to pick up Web purchases in Bonders stores. Borders also said that Amazon.com would take over the site for its Walden Books subsidiary.

In addition to being an outsourcing provider, Amazon also uses outsourcing to manage an increasingly complex IT infrastructure. In 2003 the company announced that it was outsourcing a new data center to Equinix Inc, a provider of data center and co-location services.

Amazon already operates data centers in Seattle, Washington, and Chantilly, Virginia, but it decided to outsource the additional data center to Equinix.

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