The outsourcers have got Dermot McCormack's number. And they all want to sell him Web-based services for Flooz, a 70-employee dot-com in New York that sells gift currency for online purchases. "I get three calls a day from service providers of e-mail, data centers, Internet hosting, T-1 lines, financial-management programs, firewalls--you name it," says McCormack, the company's chief technology officer. "There are so many popping up, it's mind-boggling." Not that he's boggled. In fact, Flooz outsources its data facility, call center, customer-service relations, and e-mail--all to online vendors.
In today's tight labor market, outsourcing can be a matter of survival. "It gives you access to expertise that you could not afford or attract normally," says Gary Venner, a senior vice-president and director of consulting at Technology & Business Integrators in Woodcliff Lake, N.J. For startups, in particular, outsourcing is a way to ramp up fast, says Frank J. Casale, president of The Outsourcing Institute, a trade group. That's the case for Matthew Coffin, the CEO of 25-employee LowerMyBills.-com, which helps consumers find low-cost insurance, mortgages, and other services. "We're trying to build a brand and be the first to market," says Coffin. "We don't have time to hire people in-house."
While you can still outsource the old-fashioned way, the Net's 24-7 environment can produce bigger savings in time and cost--plus give you instant access to your records on the outsourcers' computers. The market for Web-based services is expected to explode from a mere $890 million in sales last year to a projected $22.7 billion by 2003, according to market researcher Gartner Group Inc. Many of these services are free or charge just a minimal fee. "Typically there's no up-front cost--just month-to-month contracts," says Amy B. Levy, an analyst with Summit Strategies.
The trade-off: When outsourcing to a Web vendor, you may feel less secure. For instance, one of the most important steps when evaluating any outsourcer--checking references--may not be possible in the online world. "A lot of times, they don't have a track record, and you don't know anything about them," says McCormack.
While new online services are sprouting up daily, some categories have gained a strong following among entrepreneurs and outsourcing analysts.
Human Resources The outsourcers will manage your benefits, payroll processing, and more. It's one of the most mature Web categories, and you can also readily find a company, such as Administaff, the $2.3 billion human-resources outsourcer in Kingwood, Tex., with a long track record in the brick-and-mortar world.
Information Technology A natural for the Web, you can get a range of services from outsourcers, from Web hosting to e-mail management. NetDocuments.com, for instance, lets users share files online with others, a powerful program that Ed R. Maxwell of Eastern States Associates Inc. in Palmer, Mass., finds critical for his far-flung operation. Many providers are so-called application service providers that rent out back-office administration, e-commerce, and other expensive software applications.
Finance/Accounting These services can take the place of in-house accounting departments. Companies such as ReSourcePhoenix.com process accounts payable, send invoices to customers, and generate reports. Another benefit, says Rob Krolik, chief financial officer of karna, a 14-employee technology startup in San Francisco, is that he gets access to Oracle Corp. software. "It costs $500,000 to $750,000, and another $1 million to implement. I'm getting it for a bargain."
Office Supplies If you want to rein in spending and simplify the ordering process, Web-based procurement might help. David King, administrator of the Birmingham (Ala.) accounting firm Barfield, Murphy, Shank & Smith, buys about $30,000 in supplies annually on works.com. He saves up to 30% off the sites's regular price through its cooperative buying plan and appreciates the e-mail authorization system: If anyone else at the firm puts in an order, King is notified and can approve--or veto--the purchase.
Marketing If you do a lot of e-commerce, there are services such as SmartAge.com that have free tools for creating banner ads and setting up an online store. If you prefer direct mail, consider ELetter.com, which prints letters and flyers, and even stuffs, sorts, and sends envelopes. David Gest, president of Phase 2 Services, a carpet cleaner in Midlothian, Ill., says he saves $1,000 a month on direct mail by using the service.
Fees for outsourced services vary widely, depending on whether they take over a major chunk of operations or just one function. Many are even free. But watch out. Some vendors lure you in with freebies, hoping you'll buy specialized services--but they may still be working out the kinks in their systems. So, you'll need to know what questions to ask, such as whether the outsourcer carries independent certification, and what the terms are in your "service level agreement," which details the vendors' obligations and your recourse if anything goes wrong. ("Vetting Your Vendors," F.36) "Some vendors are overconfident and are launching Web services before they're ready," says Michael Rice, CEO of TargetMarket Interactive Inc., a 21-person marketing company in Los Angeles. "They over-promise and under-deliver."
That certainly was the case with McCormack's e-mail outsourcer. The service crashed frequently, paralyzing office activities. Because McCormack couldn't get out of the old agreement immediately, he hired a second service, United Messaging Inc., and for several weeks paid for two. Now he makes sure his service-level agreements have a three-strikes-and-you're-out clause, and he checks his vendors' references thoroughly.
Equally troubling, some of the new Web vendors are bound to go under as competition increases. "Web-based services are young and still have VC funding," says Fern Halper, vice-president for electronic business strategies at market researcher Hurwitz Group Inc. That's small comfort if it's your vendor that runs out of money. For greater security, choose an established vendor that has branched out into online services. If there is none, consider Web outsourcers bundled with other services at vertical communities or business portals, says Summit Strategies' Levy. Typically, these outsourcers have already been vetted by the sponsoring site. For instance, small-business portal DigitalWork.com has checked out its 30 services by evaluating their management teams, funding, and ability to deliver top-notch service. Another search strategy: Use a free matchmaking service such as bSource.com, which draws from its list of 20,400 vendors. "We get a lot of vendors through association partnerships, so there's an initial source that is dependable," says Michael Olch, vice-president for marketing at bSource. "Then we make sure the information they give us from past clients and past products is correct. If it looks overstated or inflated, we follow up."
Before comparing vendors, make sure your own requirements are well defined. "If you don't do that, then six months later, everyone will be unhappy," says Venner. Then do your due diligence through references and networking. If the vendor is too new to provide references, ask for a trial period. Finally, get competitive bids.
No matter how careful you are, be prepared for hiccups in service. "Data tracking is a continuous problem," says Coffin. For instance, he uses Be Free (www.befree.com) to manage his affiliate marketing program. "When we upload information to our vendor at our affiliate program," he says, "it doesn't exactly match when they receive it. You are constantly double-checking things." Be Free admits there can be discrepancies between the data that it tracks and the client's data. "We're changing the process of how we report commissions, so that fewer misunderstandings occur," says Ellen M. Brezniak, Be Free's vice-president for product marketing. Remember, these outsourcers are still in their infancy. Analysts say a whole new generation of "Internet business service providers" is on the way--offering customized software and more complete packages. What's next? Virtual janitors?
To learn more about outsourced services on the Web, click on Online Extras at frontier.businessweek.com