Devott Insight: Outsourcing Prospers E-Commerce Enterprises
Source: Chnsourcing View: 2872 Date: 2011-12-23

written by: Wanling Li

translated by: Di Zhang

Reached a business turnover of 450 million Yuan in last year, Chinese E-commerce industry maintains a rapid growth in 2011. Data from IResearch Consulting Group shows that the business scale of Chinese E-Commerce market of the 3rd quarter of 2011 is 180 million Yuan, increased by 47.6% year over year and 9.1% quarter on quarter respectively. “The Guiding Opinion on E-Commerce during the Twelfth Five-Year Plan” specifically indicates that by 2015 there will be more than 80% of the enterprises above designated size utilizing E-commerce to do the business. The business turnover of import and export done by E-commerce will be accounted for 10% above of the aggregate trade amount at current year and the online retailing sales are equivalent to 9% above of total retail sales of social consumer goods. In order to facilitate the development of E-commerce industry and to achieve the strategic goal, the government will focus on improving the E-commerce environment during “the Twelfth Five-Year Plan” and will emphasize on encouraging the development of E-commercial services. Therefore, with the double stimulation, E-commercial enterprises are gradually growing up and establishing their own brands and dominating the market by their distinctive ways.

E-commerce market’s competition has entered into a particularly intensive situation.

According to China E-Commerce Research Center, by June 2011, the business turnover of Chinese E-commerce industry has reached 2950 billion Yuan, increased by 31% year over year, among which B2B business amount is 2600 billion Yuan, increased by 26.8% year over year. The whole industry maintains a stable development trend generally. The online retailing market achieves 349.2 billion Yuan of business scale, raised by 74.6% compared to the same time of last year. The three core power B2B, B2C and C2C are having an increasingly intensive competition in the e-commerce field.

Alibaba dominates the leading position of B2B market with more than 50% of proportion of market share, followed by Globalsources, HC360 and Made-in-China.com. Business model transformation and service upgrade, respectively represented by Alibaba and HC360, are also intensifying the market competition.
 

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In recent years, B2C model came into a rapid growth stage. The relevant data shows that 62.54% of E-commerce websites are occupied by B2C in 2010, the number of which increased from 10.8 thousand to 11.8 thousand at current year, risen by 20.45% that has already exceeded the growth rate of the overall E-commerce industry. B2C companies are all trying to seize the business opportunities and lead business competition to have been becoming fiercely with such events occurred as the Mecoxlane’s landing on NASDAQ, 360buy’s penetration strategy from online shopping to book market, Dangdang’s listing on New York Stock Exchange, Tmall’s initialization of its independent domain name.

Even though the growth of C2C market scale has appeared a slowdown since 2010, the C2C market competition is still a Red Ocean market with the rapid growth of E-commerce industry in China and the increasing online purchasing power.

E-business has been rapidly developing for 3 years. However, with the fast development and increasing intensity of market competition, some negative signs indicate the E-commerce environment is becoming deteriorated.

1. E-commerce companies encounter the layoff dispute. 55tuan was exposed more than 100 layoffs in July 2011. On 18th August, Gaopeng started to downsize the employees at branch in Shanghai and almost 60 staffs were announced layoff. The total layoffs have exceeded 400 employees. At the end of August, the rising company Fancl was disclosed to cut down 5% of staff. 10 days later, it was rumored that DHgate, the foreign trade platform for small-medium enterprises, had a 30% layoffs within the company.


2. The E-commerce platform has difficulties in profitability. The profit model of many different kinds of Chinese E-commerce platforms is gained through joining the member and advertising. Innovation seems to be hardly used by this industry or never to be put into practice even if something innovative is found. The profit models such as joining the member, advertising sales, keyword ranking sales and brand promotion are so outmoded contemporarily. E-commerce is a competition about heavy investment that very few of companies gains profits from this industry, most of which are just competing in capability and rankings for surviving.


3. More and more small E-commerce companies shut down and executives from large corporates resign. According to E-commerce Industry Association of Shenzhen, by the end of 2010, 500 out of 3700 registered E-commerce companies of Shenzhen bankrupted or transformed. The association forecasts that this number will be increasing in 2011. According to statistics, 30% of E-commerce companies registered in Shenzhen go bankrupt at current year. The large warehouses shutdown, Banggo ended in gloom, womai.com of COFCO has a low sale although with good reputation. Manager Linli from Lining e-commerce, Zhaozhi, minister of E-commerce Dept. of Glanz, and the E-commerce manager from Jiuyang Co., Ltd dismissed respectively, while the department managers of traditional e-commerce companies such as Suning or Yigou are also replaced, etc. The robust growth tendency of E-commerce has been encountering a great challenge in the past few years.

Devott deems that the reasons why E-commerce industry facing such various problems are: 1) the intensifying conflicts between the continuously rising labor and operating costs and price war of the E-commerce market; 2) the traditional companies lack of professional knowledge and practical experience after they embark on E-commerce industry due to the boom of E-commerce industry and great business opportunities. 3) The E-commerce industry is still in the embryonic stage in China. The industrial chain and market structure’s instability is a great challenge to E-commerce companies.

Confronting with the deteriorating industrial climate, how do E-commerce companies and traditional companies avoid risks and ensure the companies’ successful rate to engage in E-commerce industry and their profitability? The answer is given through the collaboration between the global reputable brands Casio, St. Martin and the national famous e-commerce outsourcing provider ec3s.

The Prominent role of E-commerce outsourcing

At first, the value of e-commerce outsourcing effectively helps to decrease the cost.

1. At the beginning of the traditional company to develop e-commerce, the investment costs are heavy, which include hardware, technical personnel, network marketing management and human resource capital. Choosing e-commerce outsourcing enables to dramatically decrease the investment cost. The company could be serviced professionally as long as making a less investment in e-commerce outsourcing.

2. Talents. The companies need to recruit the marketing veterans in e-commerce field which is considered as great investment expenditure. However, it is a good alternative to outsource e-commerce activity to companies with lots of experienced professionals in e-commerce field.

3. Daily operations. As the representative industry, service outsourcing has an essential feature—customer-oriented, focuses on customer experience and upgrades and optimizes the products regarding to customer’s requirements. By collaboration, the outsourcing company transmits this development philosophy and operation model intentionally or imperceptibly to e-commerce enterprises that just meeting e-commerce industry upgrading evolution which transforming the business positioning from “what I can do for customer” to “what customers need”.

Secondly, the value of e-commerce outsourcing improves the efficiency of traditional e-commerce company.

1. Professional management. E-commerce platform management is so complicated which involves in website construction, operations, maintenance, marketing, warehousing, logistics and customer relationships that all of them must be managed intelligently by virtual platform so as to finally achieves the networking of traditional sales. The third-party e-commerce outsourcing companies possess abundant management experience, which is a good complementary for traditional companies to do e-business.

2. Abundant practical experience. The most important reason for e-commerce companies to make the strategies is to absorb professional skills and practical experience from outsourcing companies to make up the shortcomings so as to provide the technical basis and security for regular operation. The outsourcing companies can accurately understand the technical requirements raised by the industry and provide professional services and resolutions for the industry and end-user’s needs. Furthermore, by convergent practice, e-commerce companies can be enriched and improved by convergent thinking and consequently gain a wealth of experience. 3. Sufficient industrial resources. Since offshore business, Chinese service outsourcing industry has opened up the channel of industrial overseas communication and information and philosophy inflow. E-commerce enterprises can achieve the resource and channel sharing with service providers through e-commerce outsourcing that contribute to introduce the advanced operations and development concept from foreign e-commerce industry, thereby providing intelligent support for Chinese e-commerce’s upgrading and development.

Lastly, the value helps e-commerce companies to decrease the operations costs, especially at industrial initial stage or recession stage. E-commerce outsourcing companies can help e-commerce enterprises smoothly get through the industrial initial or recession stage with its professional services. Although some of the companies without too much professional experience could be successful at the rapid growth stage of e-commerce industry, the probability of success turns to be lower in the recession stage. This shows that the value and effect of e-commerce outsourcing is particularly important in the deteriorating industrial environment. E-commerce outsourcing will become the only path for traditional enterprises to embark on e-commerce industry.

Be aware of the potential risks of e-commerce outsourcing

Even though e-commerce outsourcing effectively decreases costs and improves work efficiency and profitability for enterprises, it brings many potential risks as well.

1) Information risk

Many of the information could be gained inevitably by partners in the collaboration. With the corporate information’s spreading, the corporate’s information resources and commercial confidentiality will be disclosed once the crack appears between the e-commerce company and service provider which consequently resulting in cooperation failure. In addition, the communication or information distortion between two parties increases the difficulties of outsourcing during the cooperation process. Moreover, some of the companies just establish such a short-term partnership with the provider that they are unwilling to share the information with their partners and finally resulting in cooperation stagnation. It will also lead to obstacles to cooperation when information asymmetry, or unable to be fully understood by e-commerce company and service provider.

2) Financial risk

The hidden cost of outsourcing project leads to financial risk. Distinguished from manufacturing industry, the hidden cost of the service industry takes a larger proportion. The hidden transaction and management cost that including reallocation of resources cost, organizational adjustment cost and the labor cost of outsourcing management are probably incurred by hidden information, hidden behavior, market failure, moral hazard, information interception and incomplete contract, which will lead to an increase in management cost and finally impact on the implementation of outsourcing project. Therefore, the hidden cost has to be controlled tightly.

3) Management risk

Unlike traditional transaction, what service outsourcing provides with is service, which is intangible and non-unified measurement standard and difficult to evaluate by quantitative results. Additionally, the duration of service sustains very long and the relationship between the outsourcer and vendor are more likely the strategic partnership but buyer-seller relationship. The outsourcing contract could last for ten years. The management risk could be incurred due to the differences of the management models of the two companies after one company outsources the business to a service provider. The main reason firstly is the corporate’s manager is incapable of taking care of the relationship with the service provider and coordinating the problems with them. Secondly is the enterprise is out of control against the service provider. The enterprise is always gaming between choosing one service provider or multiple. Lastly, the difference in corporate culture is another reason that possibly bringing about management risk.

4) Market risk

The business process outsourcing of the market risk is formed due to domestic economic environment and related policies change, which leads to market price fluctuations so that the corporate is compelled to outsource their business to service provider and consequently resulting in the decrease in innovative capability of a company. Furthermore, there is bound to be one more client to contact for either side after outsourcing. It inevitably has the conflicts in the communication process that resulting in difficulties in regular business operation. This not only negatively impacts on the product sales to clients, but also concedes the market share to the competitors and discourages the corporate’s core business.

Strengthen the management and reduce the risk

The e-commerce company’s outsourcing behavior may both increase and decrease the risk, mainly depends on how enterprise to operate. Devott deems that the nature of the enterprise’s business outsourcing is the “trustor-agent” relationship in the contract form between the enterprise and service provider. Therefore, the company should develop a risk prevention-based management strategy and establish an outsourcing risk prevention mechanism for the entire outsourcing management process.

1) Develop a scientific outsourcing strategy

The specific strategic planning of business outsourcing is divided into three levels as follows:

a) Generally, e-commerce enterprises should identify their core competencies and strategic goal in accordance with development direction, specifically research and analyze the outsourcing businesses and establish a specific department and team to take charge of its operation and management.

b) Strategically, e-commerce enterprises need to analyze on the feasibility of the business to be outsourced in order to provide a reference for business outsourcing selection and outsourcing processing formulation.

c) Profitably, the e-commerce enterprises should emphasize on analyzing the differences in cost, efficiency, quality and technical skill between the company’s businesses and outsourcing as well as the great impact on integrating resource advantage, enhancing the flexibility and improving internal management that brought about by business outsourcing.
In conclusion, the e-commerce enterprises must analyze comprehensively on each factor of business outsourcing before making strategies and ensure to be consistent with overall corporate development strategy.

2) Select the right service provider and establish the strategic partnership

To select the right service provider enables to effectively reduce the risks in the process of e-commerce outsourcing and significantly decrease the uncertainty of business outsourcing. To select the right service provider not only concentrate on developing the core competencies, but also effectively reduce the potential risks such as strategic disclosure of confidential in the outsourcing process. The company can choose a reputable service provider and establish a long-term strategic partnership.

The process of service provider’s selection mainly includes:

a) Establish the contractor inventory

This is an easily executive and operational process, during which primarily is to minify, classify, evaluate and select the contractors.


b) Evaluate the comprehensive capability of the candidate contractors

This process comprehensively evaluates the contractors that screened at last step. The major evaluation criteria includes: if the technical solutions are satisfied; if the development progress is accepted; how the performance/price ratio is; if the good service / maintenance could be provided with; whether having the experience of developing similar products; how the product quality that the contractor has developed is; how the development and management capability are; whether the resources (labor, finance, materials, etc.) are sufficient; how the reputation is; how the geographical location is; how the evaluation is from the outside world; whether being granted the certificates (ISO quality certification, CMM2, etc.) by the industry.

c) Determine the final contractor

The competitiveness ranking of the candidate contractors is given in this procedure. The risks to establish the outsourcing partnership with each contractor are analyzed one by one and the most appropriate contractor will be determined. In addition, in the practicing process of outsourcing project, it is usually to retain one alternative service provider to react the potential unexpected incidents such as termination of the contract without expectation and incapability in order to decrease the outsourcing risks.

In the process of outsourcing, the outsourcer and vendor are two different individuals with different goals. Forced by business or economic pressure, some vendors sometimes simply satisfy with every kind of requirement and expectation of the outsourcers during the communication process even though they are not qualified so as to obtain the project. To avoid such scenario, it is an inevitable step to explicitly communicate with each other on business strategies and goals and achieve the mutual understanding and recognition at the initial selection stage.

3) Strengthen the cooperation and regulate the contract management


E-commerce outsourcing is naturally a responsibility and obligation relationship between the partners with the constraint of the contract that has signed in advance. The partners regulate the content of the contract, draw up the terms of the contract and clear the responsibilities and obligations of contracting parties through legitimately using the contract so as to restraint service provider’s behavior and prevent the company’s benefits from being damaged, thereby decrease the risks of outsourcing process. Different from the traditional industry, more importantly is to set up a service standard and sign a “Service Level Agreement” (SLA) besides “Project Cooperation Agreement”.

In this process, the following points need to be noted: a) Formulate a clear SLA. Make sure that all the potential problems and solutions you may encounter are written on the paper, even though the simplest problems. b) Make SLA predictable. It is easy to make a quantitative assessment for the hardware and related service level of the facilities provided by the service provider, but difficult to hold the service of operational management. Accordingly, it is required to categorize the “sub-service” of the professional service and make a clear definition, quantize and standardize the service acceptance program for the sub-service.

4) Establish the specific risk management team

Having achieved the agreement on outsourcing strategy, the selection of the service provider and the SLA specification just laid a good foundation for realizing the benefits. Later, the outsourcer needs to take a good care of management on the vendor and continuously track and control the entire outsourcing process so as to avoid possible risks and gain the real interests. a) Outsourcing risk prevention is a systematic engineering, so the enterprises should establish the specific outsourcing risk management team to manage it systematically. The main assignment of the team is to have the risk identification, analysis, assessment, supervision, prevention and disposal and organize the enterprise’s resources to formulate the relative plan and preventive measures. b) Establish barrier-free communication mechanism. Both parties can establish a stable communication mechanism regarding communication frequency, content, goal, bilateral responsibilities and improved measures. Both parties specify the person in charge of the project, continuously promote and improve the operational level of the project and satisfy the outsourcer’s requirements.

It requires a superb art of management regarding supervising, coordinating and controlling the behavior of the outsourcing service providers. The outsourcer not only must strictly adhere to the term of the contract, but also provide sufficient flexibility and always emphasizing on cooperation. It requires the outsourcer to establish the strategic partnership with the vendor in the long-term cooperation and keep on cooperating in the basis of mutual trust.

In this process, the maturity of the partnership with the vendors determines the level of control of the outsourcer’s business. A new outsourcing business requires a higher level of control. The level of control will decrease with the maturity of the cooperation.

5) the impact assessment and improvement

Having finished a project, it is generally required to check and accept the outsourcing project and conducts a comprehensive assessment on overall impact, which helps to appropriately judge the outsourcing impact and understand whether the project will have achieved the goals and requirements.

In the process of inspection, if the inspector finds out the defect of the outcome, the outsourcing management team should figure out the appropriate solutions with the vendor regarding seriousness of the problem. If the loss is caused by the inspection side, the vendor should be punished in the light of the terms of the contract. If the slight defect exists in the work outcome, the vendor will offer the solution and decide whether the secondary inspection is needed after a bilateral discussion.

In conclusion, outsourcing is the joint behavior of mutual trust and intensive collaboration for both outsourcer and vendor. The outsourcing company should formulate proper outsourcing strategy, segment and filter the outsourced business, determine the specific outsourcing mode, select appropriate vendor, regulate outsourcing implementation process, actively manage the outsourcing project, realize the comprehensive control of the outsourcing process and minimize the outsourcing risks.

E-commerce outsourcing is playing an essential promoting role for e-commerce development. In the process of the industrial development, the business fields that e-commerce contains will expand broadly, the business categories are continuing enriching and the product and service are constantly optimizing and upgrading. All of these have a significant impact on integration and innovation of the entire e-commerce industry. How to lead e-commerce industry to develop in the future is what we are expecting to see. Meanwhile, the e-commercial outsourcing companies have a long way to go.
 


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