1999 May 01
Internet-Based Outsourcing
David M. Raab
Relationship Marketing Report
May, 1999

If relationship marketing gurus agree on anything, it’s that a company’s interactions with each customer must be coordinated to provide consistent, purposeful treatment. The obvious corollary is that the “touchpoint” systems executing these interactions must be tightly integrated, if not directly then at least by accessing another common system. Achieving this integration seems to require that the touchpoint and coordinating systems all run in-house. So it would appear that the days of vendors who maintain external database marketing systems must be numbered.

But, in fact, the outsourcing business is growing quite nicely, thank you. The key seems to be that most companies lack the internal resources to build the grand integrated systems of their marketers’ dreams. So they continue to use external resources to build non-integrated solutions quickly, with the hope that they will eventually either replace them with a comprehensive internal solution or find ways to link them together. The rapid progress in distributed technologies–which share processing among disparate systems–makes the latter goal seem increasingly plausible.

Nowhere is this trend more obvious than the Internet. Entire Internet companies like Pandesic (888-349-3249; www.pandesic.com) have been founded to sell access to core operational systems, such as complicated enterprise resource planning software, that would traditionally run in-house. The particular advantage of the Internet over traditional outsourcing is that the software can be run with only a Web browser on the user’s computer, so the complicated installation process is eliminated. This speeds implementation and frees companies to focus on the more important challenge of changing their business processes to take advantage of the new systems’ capabilities.

It might still seem that customer-contact systems would be an exception to the Internet-based outsourcing movement. After all, Internet customers are famously demanding about the quality and speed of service. So drawbacks of a non-integrated, external solution should be particularly painful when customer interactions are involved.

But in fact, the outsourcing approach seems especially attractive for Internet customer contact applications. Two of the major specialists in e-mail response software–Kana Communications (650-325-9850, www.kana.com) and eGain (408-737-7400, www.egain.com) both offer such services as an alternative to outright purchase. Similarly, in the fast-growing area of Internet campaign management, Responsys.com (408-919-6695. www.responsys.com) and CMG Direct PermissionPlus (978-657-7000, www.cmgdirect.com) software both run on computers operated by the vendors themselves. Responsys.com does offer to let its clients load the software on their own machines, but even then it expects to manage the system remotely.

What makes Internet-based outsourcing so attractive? Some of the benefits are the same as traditional outsourcing–faster implementation, lower initial investment, less risk of obsolescence, lighter burden on internal resources, and the perception of greater responsiveness from a vendor than in-house IT. But the Internet adds its own particular advantages as well. Installation costs less since access comes through a standard browser. Communications costs are also lower because there are no dedicated phone lines or network circuits.

Lower installation and operating costs make it much more practical to have large numbers of users run a remotely-hosted Internet system than a conventional remote environment. In the case of campaign management systems, the result is that marketers can operate the systems themselves. This is a sharp contrast to the traditional service bureau relationship, where marketers typically gave directions to a service bureau employee who did the actual job setup. As in other self-service situations, letting “customers” do the work themselves yields lower error rates and cost savings. These efficiencies can be passed on to the client in the form of lower prices.

One additional factor supports the pay-as-you-go pricing inherent in an outsourced solution. Traditional software developers often relied on the initial sales of their products to help finance their companies’ early growth. The need for cash led them to set high prices, which slowed their products’ adoption. But today, any Internet start-up worth its URL is funded by venture capitalists who are more than willing to buy market share in the form of initial installations. So vendors are able to forego the initial cash from an outright sale for the longer-term income stream inherent in a subscription model.

But while the cost and convenience of Internet-based outsourcing weigh in its favor, they do not change systems’ isolation from the rest of the enterprise–an obstacle to the tight coordination of interactions that is ultimately a customer management system’s main objective. Companies have several ways of dealing with this problem.

The first, and by far most common so far, is simply to decide that interaction coordination really isn’t that important after all. Businesses just accept that they will have an independent set of business rules in the channels controlled by the outsourced systems. This is far from ideal, but not totally insane, either: companies can argue that the rules governing, say, e-mail customer service are so distinct that they would be defined separately even if the system were tightly integrated with everything else. Certainly it is possible to import basic customer information on a regular basis–maybe even every few minutes–so the treatments applied can match each customer’s actual current status.

The underlying justification for this approach is that the quality of service provided by the outsourced system will be superior to the service that would otherwise be provided, and this itself has considerable benefit. Certainly in most cases, a company’s real choice is not between an integrated and non-integrated system, but between a new non-integrated system and an existing non-integrated system with many other disadvantages–or maybe even no existing system at all.

The opposite extreme is to process all interactions on the same outsourced system, so the integration can take place externally. Whether a truly comprehensive system exists is debatable, although firms like Pivotal (425-455-4230; www.pivotal.com), Silknet (603-625-0070; www.silknet.com) and Portfolio Technologies (510-226-5600; www.ilux.com) are moving in that direction. But, so far as I know, none of these products are currently offered on an outsourced basis.

A third option is to integrate the outsourced system with the company’s internal systems. At a minimum, this requires letting the outsourced product read internal databases to get current information as a transaction progresses–a function that Responsys.com does in fact provide. There are some practical limits to this approach: security and performance considerations will lead most companies to strictly limit the access they give any external system to their internal data. But a company with a proper customer management infrastructure will already have built a common reference database to serve all its touchpoint systems. Allowing an outsourced system to read this database is not much harder than making it available to an internal touchpoint system.

A more intimate degree of integration would share actual processes between the internal and outsourced systems–such as rules to pick cross-sell offers or make credit decisions. Today’s outsourced solutions are not built for this sort of interaction. But it is technically feasible and could probably be done on a custom basis.

Less elegant but still reasonable alternatives to true integration also exist. For example, a screen in an outsourced system could open an internal application–say, an order tracking system–without actually passing any data back and forth. Similarly, Web pages and e-mail messages generated by an outsourced system could point to an internally-maintained Web site without any direct communication between the two. And even if real-time access is not possible, customer data can be sent to an outsourced system in frequent batch updates.

In short, it turns out that coordinated customer management does not require that all touchpoint systems run in-house. Given the practical advantages of outsourcing solutions–particularly in the form of Internet-based remote hosting–many marketers will find outsourcing an attractive alternative for years to come.

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David M. Raab is a Principal at Raab Associates Inc., a consultancy specializing in marketing technology and analytics. He can be reached at draab@raabassociates.com.

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