May 01, 2017
by Heather Martin
What Strategic Partnerships Provide for Our Channel
Even if you run your own factory, manage your own warehouse and clean your own break room, chances are you’re still outsourcing something.
Think about it, says Ed Jarrin, President and Co-Founder of Dallas-based Exigo, a cloud-based provider of an open source platform as a service for e-commerce. You don’t operate your own internet service. You likely pay for online storage and backup. You probably use a third-party database. “You’re already using someone else’s stuff,” he says.
Outsourcing has become a best practice in direct selling. While there aren’t a lot of hard numbers to show how prevalent such partnerships are in the channel, the Direct Selling Association (DSA) 2016 Growth & Outlook Report said that nearly 70 percent of direct selling companies in the United States outsource manufacturing, assembly and generation of products and services to domestic vendors. And according to a DSA spokesman, “this undercounts the full amount of outsourcing, as it doesn’t capture outsourcing of things like payroll, legal work and logistics.”
Direct sellers who talked to us about their outsourcing experiences say that partnering with experts in everything from manufacturing to marketing has been critical to their success. Strategic relationships with product and service providers free direct sellers to focus on their core competencies without the investment in and daily responsibility for such things as factories and fulfillment centers. Direct sellers rely on outsource partners to stay on top of regulatory requirements and changes, monitor consumer trends and navigate shipping and customs standards, among other market forces. This allows them to grow more quickly and cost effectively than they would if they had to spend the capital and time to develop and manage these pieces of their business.
Take shirts, for example. Angela Loehr Chrysler, President and CEO of Florida-based Team National, says that for a long time her company designed and managed the production of branded apparel for its independent marketing directors. But Team National specializes in membership savings programs, not fashion. So when Chrysler started outsourcing with a company that provides marketing consulting and products to direct sellers—to design and produce Team National apparel—clothing sales increased significantly.
“Even though we’re getting a small percentage of the sale of each item,” she says, “[They] sell more and market it better. They have buyers who purchase the latest trends in clothing. We didn’t have anyone on staff as a buyer. Our outsource partner has sold more at every show than we ever sold at any time.” Chrysler says this is just one example of why she appreciates working with suppliers who go beyond filling orders. “When we’ve made a decision that was based on Team National working in its strength zone and allowing the outsource partner to work in its strength zone, it’s been beneficial.”
Let Someone Else Build It
As DSA research shows, few direct sellers want the expense of their own manufacturing plants, warehouses or fulfillment centers. Operating such massive, complex facilities diverts cash—and attention—from targeted business development efforts.
When it comes to warehousing, in particular, direct sellers can’t be competitive with only one facility. Shipping from multiple, strategically located fulfillment centers has become the way to meet consumer expectations that have been transformed by “the Amazon effect,” says Mich Bayley, President of Arizona-based SP Express. Bayley’s company serves direct sellers who send product all over the world, and he speaks to industry groups regularly about how the giant online retailer has set a new product delivery precedent: “fast and free.” So unless you are prepared to invest in and skilled enough to manage multiple warehouses that can drop product at doorsteps within two days of an order, for little or no delivery cost to the customer, it makes sense to outsource to a shipping expert. Outsourcing warehousing and shipping not only decreases your overhead, allowing you to pass along savings to customers, it can streamline your processes by shortening time from production to delivery.
Speed and efficiency are the major reasons North Carolina-based Touchstone Essentials outsources fulfillment of its organic supplements, says Chief Operating Officer David Isserman. Leveraging the locations and expertise of its warehousing vendors was a strategic way for Touchstone to fill an operational gap. “That’s the key component to outsourcing,” Isserman says. “To find out where vendors have that competitive advantage and that core competency that you, as a multilevel marketer, just don’t have the ability to capture.”
Roger Morgan, CEO of Texas-based pet food startup pawTree, says outsourcing production is the only way his company has been able to double sales every year since it was launched in 2014. It would have taken an enormous amount of capital to build and operate a food manufacturing plant—something that didn’t make sense for his startup, which has aggressive growth plans. “I can’t think of any other way to do it,” Morgan says. “There’s not a chance I would take that on.”
Share Vision and Track Results
Trusting a third party with a critical operational component of your business is a big deal. Direct sellers and outsource providers agree that such trust comes from ongoing, clear communication and explicit accountability standards. As a direct seller, you need to help your provider understand your vision and values. Make sure your provider speaks your language so that it becomes a seamless extension of your company. “Our vendors are really representing us by the way that they handle the service they’re providing us,” Isserman says.
Fred Weiner, CEO of The Connection—a Minnesota-based provider of customer contact services—says “it’s all about the brand” when his company partners with a client. “Everybody from myself to the client service managers will live and breathe the brand and will wind up being experts in the client’s culture,” Weiner says.
It’s not enough to talk the talk of a direct seller, though. Vendors must provide a consistent, measurable level of service. Sometimes the outsource provider will write service guarantees into its contract. Other times, the direct seller will dictate the terms of acceptable performance. Either way, a successful outsource partnership will evaluate its success based, in large part, on quantifiable outcomes.
Isserman says his company is very clear with its warehousing vendors about how its products should be handled and collects data on their performance. “There are a lot of metrics,” he says. “We rely heavily on that data. We have rules in place that are very strict in terms of how things are handled.”
Access to data is critical in an outsourcing relationship, Weiner adds. The Connection’s clients can see real-time reports on the company’s service levels 24 hours a day, seven days a week via an online dashboard. Reporting everything from the average call time to the number of abandoned phone calls, the dashboard provides a clear picture of how The Connection is performing for its direct selling partners, he says.
Aggregate reports also provide valuable insight into a vendor’s deliverables, says Scott Smith, President of InfoTrax, which provides software that manages distributor payments. “We try to hold quarterly business reviews with clients, reviewing everything we accomplished,” he says. “We’re also very transparent about things that went wrong and how can prevent them in the future.”
In general, the most successful outsource providers understand their clients from the inside out. They are focused on so much more than competitive pricing. They know that their clients’ wins are their wins and that their clients’ challenges are their opportunities.
Loss of control. It’s a common fear among direct sellers when they think about outsourcing. But successful outsourcing partnerships are a calculated blend of holding on and letting go, with the direct seller deciding when it will be in the driver’s seat and when it will hand over the wheel.
For example, when it comes to manufacturing, many direct sellers work closely with their factory to determine—or to take ownership of—where ingredients or materials come from. pawTree doesn’t just place an order for kibble and wait for it to be delivered. From providing proprietary recipes to personally inspecting the manufacturing plant, the company is very much in control of what is being produced and how, Morgan says.
Touchstone has specific guidelines not only for the ingredients in its nutritional products but for the materials used in the bottles and boxes that hold them. The company works closely with its warehouse partners to make sure all containers meet strict eco-conscious guidelines, Isserman says. “We control all the specifications for our shipments, down to what type of packaging material is allowed and what type isn’t.”
Another way direct sellers share control with outsource vendors is to build on the product or service that vendor has created.
Exigo develops an open-source platform for customer relationship management, commission calculations and data reporting—a system that a direct seller’s internal IT team can adapt for a proprietary business need or process. Co-founder Ed Jarrin says the benefit of the technology is that it is flexible and quickly scalable. One of Exigo’s largest clients holds flash sales that can generate up to $50 million in sales in six hours. The client doesn’t have to code Exigo’s order processing software but can easily configure it to handle such a spike, Jarrin says.
The bottom line is, you are in charge of what you let another company do for you—which is, itself, a form of control. You decide what your knowledge is and what your competencies are and where there are holes. “If you recognize that there are some gaps in your team’s expertise and experience that can be fulfilled by a third-party provider, then it’s worth researching” an outsource option, Isserman says.
Let Experts Be the Experts
While you’re overseeing ingredient selection and packaging processes, don’t forget that one of the reasons you chose outsourcing to begin with was to clear your plate. If you partner with outsource manufacturers, warehousers or marketers who understand and treat your business like it’s their own, you can confidently step back from certain areas.
You don’t have to specialize in UL safety standards, FDA rules or Asian market labeling requirements, for example. Experienced third-party production and shipping facilities are monitoring the domestic and global regulatory environments, and will make sure your products comply at every step, from assembly line to shipping dock.
Reliable third-party manufacturers will know and follow strict standards in a complex business. They are always looking at safety and quality and health concerns as well as maintaining the integrity of ingredient sourcing, storage, and cleanliness of equipment. pawTree’s Morgan says, working with a proven manufacturer “just gives me so much confidence that our product is going to be good; it’s going to be safe; it’s going to be what we expected it to be.”
For similar reasons, Touchstone prefers to work with outside logistics partners because they understand the intricacies of the shipping business—from maximizing freight space to choosing the most effective delivery service (FedEx, UPS and DHL, among others) for a certain overseas market. Touchstone’s outsource providers have allowed the company to take advantage of shipping channels “that wouldn’t necessarily be as easy to tap into,” Isserman says.
A strategic outsource partner also should have enough experience in your corner of the direct selling market that it can leverage lessons learned from serving customers with similar goals and challenges. They can make you aware of trends to embrace and fads to avoid.
Progressive Labs, a Texas-based third-party manufacturer of nutritional products, will provide as little or as much input as a direct seller wants, says David Daniel, Director of Contract Packaging Sales. Many Progressive customers “are pretty schooled,” he says. “A lot of them have done their research and development themselves; others come in and say, ‘We kind of have a formula. Can you help us round it out?’ ”
See Through Their Eyes
From data collection and analysis to process improvement strategies, outsource partners have a collection of tools that can help refine a direct seller’s focus and fuel its growth. Your partners are behind the scenes making sure you have the support you need to create new products and services and develop innovative ways for your representatives to build their businesses.
InfoTrax provides software that manages distributor payments—but it does more than that, says President Scott Smith. It also monitors commission data to make sure distributors aren’t unnecessarily plateauing at a certain compensation level because of gaps or glitches in the payment system. A direct seller might hear rumors of frustration among distributors who feel stuck in an earnings bracket, but “being able to see it in the data” is much more valuable, Smith says.
When an outsource vendor also provides valuable consulting, it can help you make smart investments as you grow, says The Connection’s Weiner, who helps his clients minimize the number of contact center staff they need as they grow, which controls their overhead costs. “If you double in revenue, you’re not going to have to double the size of your contact center,” he says, because a company can address many customer issues through web chat, social media and other digital tools. “When they’re taking off,” he says, “they’re chasing all sorts of infrastructure issues, and the last thing they want to be chasing is a contact center process to scale from five people to 150 people.”
Daniel agrees. In a strategic outsource partnership, a vendor can help a direct seller avoid unnecessary expenses, which frees capital and cash for growth initiatives. To minimize its clients’ costs, Progressive provides turnkey manufacturing—meaning it has the materials for each stage of the process on hand and in the proper quantities when it needs them, which is critical to meeting shipping and distribution deadlines. Daniel says clients appreciate and will see a larger return on investment if they have a production partner who can manage this process well, allowing clients to put their energy toward growing their business. “That’s the stuff we deal with every day,” he says. “I’ve always believed that direct sellers should spend their time marketing their product or program.”
Bringing in the Best
Outsourcing is a massive global business. According to smartceo.com, the outsource market reached as much as $136 billion in 2014, funding more than 900,000 jobs at 162,000 companies. It has become sophisticated, strategic and standard.
Because you have a million moving parts to manage every day, maybe just the thought of adding one more cog to your wheelhouse feels overwhelming. The decision to outsource is not an easy one—nor should you take it lightly. Your business is your baby, and it makes sense to be deliberate about allowing someone else to help you care for it.
Make a pros and cons list. Ask yourself, and potential outsourcers, hard questions. Choose a vendor you can trust with the kind of information and responsibilities that successful strategic partners need to contribute to your success. Team National’s Chrysler advises you to get recommendations. Ask your peers, “Who are you using? How are they helping you?”
Jarrin likes to point to Apple as an example of a company for which outsourcing is a major factor in the company’s ability to remain innovative. “Does it become the best glass company?” he asks. “The best chip manufacturer? The best fulfillment facility? Or does it pick and choose what it can do and pick the best outsource partners to become
Paul Adams, Senior Vice President of Strategic Marketing at Success Partners, a marketing and branding consultancy as well as a provider of direct selling product material, says larger direct sellers sometimes are less open to outsourcing because they believe they should bring certain functions in house if they have the capacity. “In some cases it’s smart,” he says. “Outsourcing may be a distraction.” In other cases, he continues, “when companies have built an entire organization and can do everything there is to do, there’s a point where they get stagnated. They quit seeing things with fresh eyes, stop trying to solve problems.”
Think of outsourcing as a way to expand your vision and your team, to leverage external talent and experience to help you achieve your goals. But think of it also as a way to set the bar higher, to be a leader in your field. There are valuable sources out there. Bring them in.