Retail is about selling products, so outsourcing non-core business functions can make sense for retailers. Anna Richardson Taylor examines the issue.

In an increasingly complex retail environment, where multichannel commerce complicates the supply chain and multiplies customer touch points, the debate over outsourcing versus in-house is equally multi-layered.

According to consultancy AT Kearney, the market for outsourcing services is maturing and estimated to grow 27% between 2010 and 2015.

In retail, anything from fulfilment and logistics to finance, marketing, HR, IT and customer service can be partly, or entirely, outsourced. However, retailers need to weigh up the options carefully – and cost should not be the only consideration.

Whether to outsource or not needs to be a strategic decision, says John Bovill, commercial director of Jacques Vert.

“In every strategic decision we look at whether it is appropriate and fit for purpose,” he adds. “Both of those are underpinned by [whether it improves] the customer experience.”

Focusing efforts

Retailers need to look at their entire value chain and what parts of that they should and shouldn’t be focusing their efforts on, says AT Kearney senior consultant Karina van den Oever. The decision whether to outsource or not “starts with being very clear with your vision and understanding what you’re really good at and what you want to be known for in the business”.

Fellow AT Kearney consultant Ramyani Basu says retailers should balance skills in-house with outsourcing to gain competitive advantage. “This is very contextual and depends on what extent a retailer can or should build in-house capabilities,” she says.

Basu suggests the key questions a retailer should think about are alignment to strategy – how core a certain skillset is to fulfil business strategy; how quickly skillsets can be developed in-house; and cost – whether it would be more cost-effective to have a function in-house.

Outsourcing works best when it fulfils a service that is not one of the retailer’s core competencies, says Alan Morris, executive chairman of IT services provider Retail Assist, which counts retailers such as Selfridges, Whistles and World Duty Free Group among its clients. Bovill agrees: “We’re a fashion business. What makes us sink or swim is our products. We’re not a technology business. So if you [can outsource to] a technology business, that for us is a real win-win situation.”

Jacques Vert started working with Retail Assist following a substantial systems change in February and opted for the provider’s Merret merchandising and warehousing as well as store package, which is now rolled out across its 1,000 retail shops. However, Jacques Vert hasn’t outsourced its IT completely, Bovill explains, as a small IT team still manages infrastructure and other functions in-house.

The decision to outsource to Retail Assist was “driven by strategy, not by cost”, stresses Bovill. “We’re doing it because we haven’t got the internal competence. We needed the expertise and best practice to underpin what we do, and ultimately what the brands do in engagement with our customers.”

Developing the expertise in-house would have raised questions of succession planning within a relatively small team, especially in light of the integration of the Irisa business effectively doubling the size of the group, whereas Retail Assist can provide economies of scale, Bovill adds.

Delivering value

Considering the expertise in-house as well as the need for state-of-the art technology was a key part of Cath Kidston’s decision to outsource its logistics. The retailer started the tender process a year ago and over the past month has been transferring services such as distribution centre operations to iForce.

“The problem with a mid- or smaller-sized company is that if you decide to insource your logistics, it’s difficult to attract the better quality management and to be able to afford the best systems,” says Cath Kidston supply chain director Brian Gaunt. “By the end of this year we expect our warehouse fulfilment cost to be something like 60% [of what it is now],” he adds.

As new technologies emerge, access to skills becomes an issue, so a third party provider can be invaluable, says Shankar Narayanan, head of UK and Ireland, Tata Consultancy Services.

Gaunt believes the most difficult aspect of choosing third-party suppliers is “getting value”. He says: “You can get a contractor to deliver against budgets, but how can they help the business do new things?” For example, iForce’s systems now allows Cath Kidston to consider offering a click-and-collect service to customers.

While third-party suppliers can help retailers develop strategy and keep up to speed with multichannel developments, other retailers are responding to digital challenges with a focus on in-house capability.

Marks & Spencer, for example, plans to insource future development of its multichannel business, according to M&S IT and logistics director Darrell Stein. “This previously would be outsourced, but as we are looking to improve innovation and speed to market, we believe insourcing will help us deliver this.”

As a result, the retailer is creating a team of around 50 software engineers, based in London, to work on new channel applications and creative add-ons to M&S’s core platform. “For areas such as strategy and innovation, the benefits of insourcing outweigh any cost advantage of looking outside the organisation,” adds Stein.

Service first

Customer service is another area where the drawbacks of outsourcing might outweigh cost benefits. Debenhams and Shop Direct have both recently decided to outsource their customer service, but Bovill believes that customer services should ideally remain in-house.

He says: “Our business is about delivering what a customer wants. Why would you not manage [customer services] yourself when it’s the critical relationship. It just seems wrong to me.” What could make the retailer consider outsourcing customer services would be wider global expansion, Bovill concedes. “If we had critical mass, we’d probably look at whether it was sustainable to have an in-house customer services team, but that’s not on our radar for the next five years.”

Marketing is becoming a core competency for retailers, and therefore a function that might be best maintained in-house, believes Morris. “As a result of multichannel commerce, marketing has become a far more important resource to retailers. Marketers are involved in maintaining direct selling channels such as ecommerce sites.”

No matter what area retailers are looking to outsource, choosing the correct supplier and building a relationship with them is key. Bovill says that Jacques Vert and Retail Assist have a partnership approach that works “from a cultural perspective”.

Gaunt agrees that a partnership mindset is crucial. It’s about working together, and Cath Kidston has built incentives into its contractual agreement with iForce to encourage it to add value.

Often retailer and supplier relationships can be defined as either a marriage or a transactional relationship, Basu points out. The former can be too heavily dependent on flexibility, while the latter focuses too much on cost reduction.

A retailer should strive for a coalition approach. “Outsourcing should be an alliance for mutual benefit which creates value,” she explains. “It should be treated as a strategic vehicle to achieve the larger business strategy rather than just a procurement initiative – this is where many companies get it wrong.”

Avoiding failure when outsourcing

At Kearney consultant Ramyani Basu says: “Outsourcing is a very complex business arrangement, hence it needs to be defined and crafted carefully to create value for both parties.” According to research by the consultancy, around 30% to 40% of outsourcing deals fail every year, and a combination of 12 drivers are cited in most outsourcing failures:

Stage 1 – laying the groundwork

  • Unclear or unrealistic ambition
  • Unclear scope

Stage 2 – formulating the deal

  • Lack of leadership involvement
  • Lack of business acumen
  • Misalignment of requirements
  • Lack of process management skills

Stage 3 – managing the alliance

  • Insufficient retained organisation
  • Insufficient governance model
  • Inability to meet demand for services
  • Targets not well established
  • Lack of innovation capacity
  • Cultural clash between the parties