Eli Colner • Don't Outsource Your Core Competency

Don’t Outsource Your Core Competency

Alexia Tsotsis published a post yesterday on TechCrunch calling the SAP/SuccessFactors deal “boring”.  The trolls came out in force.  I encourage you to visit the comments to see how many people are fattened up by enterprise software, and hence are supportive of the deal.  Here’s a fun one from a SAP employee:

Praphul Kumar · Subscribe · Software Development Consultant at SAP

Tech crunch should stay limited to stupid Facebook and Twitter news, because it doesn’t know how to write about other companies. Every other company for them is a boring company. Does the writer even know what SAP does? Has he even heard of In-Memory technology?? Cloud technology is the technology of the past now dude. Go learn about In-Memory tech which SAP invented with HANA. In the years to come it will be just HANA all around. Companies trust SAP.

Others criticized AOL and TechCrunch and Alexia’s reporting.  You know the “I’m leaving and I’m never coming back” type of stuff that’s pretty benign to a well respected blog like TechCrunch.  Hopefully Alexia is used to it, because I think the post is great.  It served its purpose which was to shed light on the deal and how it affects tech in honest, no bullshit ways.  Her job isn’t to celebrate massive deals and to assume they’re a net positive for the community like a lot of other blogs do just to get page views.  Her job is to communicate her ideas, her interpretations, in ways that get us thinking about what might be relevant in the future.  She definitely succeeded.

The post got me thinking about the company that nobody’s ever heard of behind this story: SuccessFactors.  What do they do and why are they valued at $3.4B as the deal would suggest.  That’s pretty major.  Go to their website and judge for yourself.  SPOILER ALERT: It’s pathetic.  Here’s a page I found really interesting (translation ‘sad’) Recruiting Management The bullet points are:

• Built for business execution.
• Right for everyone.
• Social and collaborative.

And then there’s a section on

Mobile Recruiting

I don’t know about you, but none of that sounds remotely relevant to future technology in the cloud.  This is marketing speak on top of applications.  They look like very boring, run of the mill applications also, as Alexia sort of noted indirectly by linking to the announcement.

Let’s assume for a moment that these are mission critical business activities and these applications are really important to the future of most businesses.  Fair enough.  If that’s true, please open up Tony Hsieh’s Delivering Happiness to learn why at its core supporting this type of enterprise software is a bad idea.  If it’s really that important to your business, you shouldn’t let SAP or anybody else manage that.  It could be the death of your company.

Zappos started business as a drop shipment company.  For those unfamiliar with the model: you set up a web shop, take orders, and then fulfill the orders by essentially calling up a local distributor who warehouses the merchandise and they drop it in the mail for your customers.  It’s still pretty popular today because it’s low risk and cheap since you don’t have to invest large amounts of money stocking and managing product.  All good things when you’re trying to survive as a young startup, but there wasn’t anything innovative about Zappos in those early days at all.  I think Tony would admit that.

So, Zappos figured out pretty quickly and after making some pretty big mistakes that if they wanted to innovate, despite struggles they’d face they needed to go away from the drop ship model.  The genesis was a simple question: “What do we want to be when we grow up?”  By deciding they wanted to change the industry by being best in customer service they lost money and Tony sold all of his winnings from the sale of LinkExchange to do it.  But he and most of the early employees knew it was the entire future of the company.  So to them there was no other choice.  If they wanted to innovate, they all had to do the work and make sacrifices.

As I sat at Mel’s eating my turkey melt, I thought about what to do about Zappos.  We had about a month of cash left before we were out of business.  While I was in Africa, an offer for the party loft had indeed come through, but then the buyer backed out at the last minute because a fortune-teller had told her that the feng shui of the place would not be good for her.

I couldn’t help but laugh when my real estate agent told me the story.  I couldn’t believe that the fate of the entire company rested on the advise of a fortune-teller.

I told my real estate agent to lower the price again.

As the company grew, Tony and his executive team decided that brand relationships that were hard, if not impossible to foster as a drop ship company, would be key to their long term vision.  Drop shipment accuracy, or lack thereof, was ruining the customer experience also, so they started investing in inventory.  They bought thousands of shoes and worked hard to expand their brand relationships so that they could carry more of what their customers wanted.

During this initial expansion of their inventory, and another one of these cash crunches at Zappos, they decided they needed a partner to help manage all the shoes that were piling up in their office space.  At the time, inventory management wasn’t seen as one of their core competencies.  In fact, Tony doesn’t come out and say it, but I think it’s clear that handling fulfillment on their own was considered a threat to their mission since they had so little expertise in how to do it well.  They didn’t want their customers to suffer from their inexperience. So, to get closer to their east coast customers and to adapt to the needs of the business quickly, they picked a “partner” in eLogistics, an inventory management company located in Kentucky.  They outsourced the entire inventory side of the business.  They transported thousands of shoes across country from California to Kentucky in order to make it work.  It was a decision that they’d quickly learn to regret.

eLogistics had even less experience in managing thousands of shoes of varying sizes and styles than Zappos had running their own warehouse out of the corporate offices.  Literally, cubicles were filled with shoe boxes in the early days and that proved to be more effective than outsourcing.  It was a complete disaster and Zappos lost customers as a result of it.  So within six months Zappos set up a competing warehouse in Kentucky and they phased out of the eLogistics facility 10,000 pairs at a time.  eLogistics went out of business some time later.

It was a valuable lession.  We learned that we should never outsource our core competency.  As an e-commerce company, we should have considered warehousing to be our core copetency from the beginning.  Outsourcing that to a third party and trusting that they would care about our customers as much as we would was one of our biggest mistakes.  If we hadn’t reacted quickly, it would have eventually destroyed Zappos.

SuccessFactors, as it’s described on their own website, reminds me a lot of eLogistics.  Their mission is to manage your business better than you know how… I don’t know SAP, but maybe people are so enraged by Alexia’s post because that’s SAP’s mission as well?  At the very least, the deal is a signal that they might become more like eLogistics in the future rather than less like it.

My point is that Alexia’s post is not just a rant.  It’s a wake up call to the industry.  That’s pretty courageous and it’s pretty bold, and that’s what we love about TechCrunch isn’t it?  It’s also sympatico with Chris Dixon’s post Why is enterprise tech so far behind consumer tech?  Because it can be.  where he’s supportive of this cloud strategy that the SAP deal alludes to, but is also very critical of the quality of what enterprise software companies promise versus what they actually deliver.

Whichever side you come out in this argument it doesn’t excuse the behavior of trolls on TechCrunch from calling into question AOL, TechCrunch, and Alexia’s integrity.  Unfortunately, for the trolls, Alexia is not part of the enterprise, nor does it sound like she’d want to be.  She did her job well.  Trolls, go back to your cube and do yours.

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